One question left unanswered in our post from last week on cross-border investment trends during recessions is this: where do bets typically get made during recessions? Will investments flow away from developed economies (as was the case with Dow) and toward emerging economies as better growth opportunities? Yes and no. Let’s look at some charts: the inbound foreign direct investment numbers (i.e., where the money was going) during the past three recessions for developed and developing economies.
What the charts make clear is that there has been an unmistakable evolution in the relationship between cross-border investments into developed and developing economies. In the 1980s, when global FDI was relatively low, investments in developed and developing economies were completely counter-cyclical: as investments flowed away from developed economies, they flowed toward developing economies. By the early 1990s, however, investment in developing economies was accelerating, and the recession didn’t register with the developing world – no retraction as developed economies rebounded. By 2001, the developing world had for the most part “coupled” with the developed world, although the intensity of the investment slowdown was much lighter in the developing world, and the rebound, as noted in our last post, was faster coming there.
A couple of reactions to these trends:
1. Emerging markets will likely not provide a safe haven either as investment sources, or as investment opportunities, during this downturn. Based on the evolution over the past 20 years, we should expect a strong dip in investment flowing to developed economies in the current downturn, and an intensification of the coupling trend, with a similarly strong dip in investments to developing economies. The Dow/Kuwait case we discussed in our earlier post to some extent plays this out, since one of the reasons behind the failure of the deal was the pain being felt in Kuwait from the financial crisis and fall in the price of oil. However, as we mentioned in our last post, the good news is that emerging markets will likely show the first signs of rebound.
2. Successful companies will still look for opportunities during the downturn, but they will be targeted to longer-term strategic objectives. We highlighted for our members a few months ago efforts undertaken by an IT company to build models for country-level analysis. What makes their country evaluation process so instructive is how deeply contextualized their investigation is to (1) their long-term objectives, and (2) the viability of those markets to produce a substantial customer base. Key to this is making sure country analysis is tightly focused on the characteristics of the local market that matter to the company, with models built around those characteristics in ways that don’t become invalidated by relatively short-term fluctuations. As always, CEB members who would like more on this example can send me an email, and we'll get it out to you.
