Structured interviews were undertaken with 22 multi-national enterprises
(MNEs) spread across 11 countries and 13 of the 39 sectors defined in
the fDi Markets database. They were conducted at parent company level
with MNEs based in Western Europe or North America (OECD investors) or
India, South Africa, Singapore and Malaysia (Non-OECD investors). Some
interesting perspectives on differences between OECD and non-OECD
investors are discussed at various points.
The small sample size (22 interviews) and the spread of companies and
head office locations implied that the outcome would be a series of
qualitative case studies rather than a statistically valid quantitative
study. However, the insights generated are likely to be of interest to
DFID and other parties; they address how executives responsible for
foreign investments perceive investments in fragile states and emerging
markets, what risks they encounter, how they manage those risks, what
information sources they deem relevant and whether they use specific
models and approaches to limit risks. Detailed extracts are summarised
in the Appendices.
Interviews revealed a high degree of consensus among both OECD and
non-OECD MNEs on “knock-out” factors which would block consideration of
investment in a new country: sanctions; high levels of political
instability and civil unrest; poor security situations; extreme
corruption; and a track record of poor behaviour by governments,
including poor investor protection, breach of contract, unreliable legal
systems and unreasonable changes in taxation.
They also confirmed that MNEs in the extractive industry have a very
different position on investments in Fragile and Conflict-Affected
States (FCAS), linked directly to their need to identify and develop raw
materials from lowest-cost sources. The choice of geographical markets
and diversification of production is limited, since few countries have
the natural resources which MNEs require. The investment risks
associated with these markets must be managed and limited, but cannot be
avoided by choosing another location.
For Market-seeking investments a similar process applies; here the size
of market in terms of population size and growth, disposable income, GDP
growth etc., serves as the “natural” endowments of a market. In
contrast, Efficiency-seeking investments have a wider range of available
locations and the process of identifying the most cost-competitive and
low-risk location can be seen as a pre-investment risk management
process in which multiple risks are evaluated and quantified.
In all cases, it is only when potentially profitable investments (i.e.
those that generate additional revenues and/or reduce operating costs)
are identified that the issue of risk moves into focus. If profit
potential is high, MNEs are likely to accept higher risks; conversely,
if profit potential is low or non-existent, even the most positive
investment climate will not attract an MNE’s attention. Our view is that
this factor is a major reason for the discrepancy between the indicated
favourability of certain investment environments and the absence of
increases in investment flows.
GBRW Ltd; Investment Consulting Associates (ICA). Investor Perspectives On Emerging Market Investments: Stage 2 Report. DFID, London, UK (2013) 56 pp.
Investor Perspectives On Emerging Market Investments: Stage 2 Report