Even Sherlock Holmes would struggle to unravel how major companies make FDI decisions. Some want to keep the process secret, others simply don’t have a process. Charles Piggott takes his magnifying glass to the case.

Certain management committees do not appear on any organisational chart. They do not feature in annual reports and are seldom mentioned in the business press. Using secure passwords and encrypted e-mail, these secret committees can at times wield as much power as the chief executive’s office or the board of directors. Their decisions can affect not just the companies’ bottom line, but entire national economies.

Companies are a bit sensitive about discussing FDI, particularly where projects involve transferring jobs and investment overseas. “Companies like to keep a lid on foreign investment decisions,” says Barry Bright, who heads a location and strategy consultancy department at Ernst & Young. “Very often, discussions take place on a non-disclosed basis. Invest-ment agencies will sometimes not even know until a much later stage which companies they are dealing with.”

With several thousand foreign direct investments made each year, worth tens of billions of dollars, location planning is a huge, but largely secret business. Unbeknown to employees, companies will have completed extensive research, planning and due diligence long before they close an investment deal.

Companies’ methods

Companies that make multiple foreign investments each year are likely to have permanent teams charged with identifying potential foreign locations – monitoring everything from global real estate prices to tax rates to government grant schemes.

Other companies rely more on ad hoc executive committees created and disbanded each time the company is thinking of locating overseas. The team will usually include finance, human resource, IT and divisional business chiefs who report back to the chief executive and the board.

Most large multinationals will have created a secret executive team to investigate a particular investment location at least once in the past few years. Yet when asked the simple question, “how do you decide where to invest”, few companies can give an answer.

FDI planning is a difficult subject not just because foreign investment can be a politically sensitive area for companies, but also because the answers are seldom straightforward.

An executive at one of the 10 largest overseas investors admits: “Asking us to describe the process by which we make FDI decisions is like asking us to plot the route a tennis ball travels during the Wimbledon tournament. It is not straightforward. Decisions go back and forth between any number of departments before they are ready for board approval. This is not something for which you can create a flow diagram or organisation chart.”

Of the top 10 companies that invest most overseas, only IBM, TotalFinaElf and General Motors agreed to discuss in any detail how foreign investment decisions are made. Most other companies refused, deferred or failed to answer any of fDI’s questions.

Requests to General Electric for information were initially referred to publicly available information in its annual report and quarterly earnings report. GE did finally agree to discuss its foreign investment strategy, however.

Most of the other leading companies either stalled until it was too late or stated that it was not company policy to discuss internal affairs.

ExxonMobil refuses to discuss its internal decision-making process, citing the “limits of time”. The Royal Dutch/Shell Group referred most requests for information to its corporate website. Weeks after the first request was made a spokesperson for the company e-mailed fDI saying: “We are not going to be able to provide you with an interview as all of the relevant people are unavailable.” By way of apology, Shell did forward an acronym-laden article from its internal magazine, mentioning its strategy department and quoting its former head of strategy.

PR problems

Gaining any information out of one company took nine e-mails and seven telephone calls. And in the case of Ford Motor Company, fDI gave up on their public relations departments in the US, the UK and Germany after six telephone calls and four detailed e-mails requesting information. By this stage, Ford had yet to convey any meaningful information about the way it makes investment decisions.

DaimlerChrysler’s spokesperson did at least respond to repeated requests for information with a brief written refusal: “We have decided not to go into details about our investment strategy, organisation and processes and therefore do not want to contribute to your article.”

BP tried to find answers to fDI’s questions but, by the time of going to press, had failed to reply to our initial request for an interview or provide any significant insight into the way the company makes its foreign investment decisions.

The short answer to the question “how do companies make investment decisions” is that they decide in as many different ways as there are companies. For many companies, there is no formulaic decision-making

apparatus at all, so asking companies to discuss their decision-making process is a somewhat awkward affair.

AT Kearney vice-president Paul Laudicina suspects some companies are reluctant to discuss investment decisions “partly because they don’t have formal answers to questions about how they decide where to invest”. Mr Laudicina, who is also managing director of AT Kearney’s global business policy council, says: “I think they should have an answer to the question ‘how do companies choose between investment locations?’ but, for many companies, investment strategy is a work in progress and they haven’t been asked this question before. This might be a tell-tale sign that a fundamental rethink is needed.”

Who’s who?

Broaching the issue with companies is not easy. Because the committees that make investment decisions seldom appear on organisational charts, identifying executives involved is difficult. DaimlerChrysler’s website, for example, lists the biography of its senior executives back to their school days, but does not detail executives’ responsibilities beyond giving their business titles.

Management consultants such as Mr Laudicina think it is time for a more rational approach to strategic FDI. During the boom years of the 1990s, companies often made investment decisions on the hoof, using created select committees of senior executives. Meetings took place in corridors, and few records of conversations were kept. But, in the current climate of global belt tightening and transparency, companies are coming under increasing pressure to centralise and scrutinise investment decisions from the top down.

Mr Laudicina has already noticed a move towards better investment husbandry. He says: “The days are gone when companies simply threw down as many chips to cover as many squares as they could. Tighter investment conditions have brought greater scrutiny from senior management and more care is being taken allocating investments now capital is more scarce.”

Some companies have gone much further than others to ensure every aspect of every deal is scrutinised from the top down. TotalFinaElf, for example, has created an exhaustive decision-making infrastructure involving the strictest guidelines to ensure each investment is rigorously tested.

Central planning

In 1995, TotalFinaElf’s current chairman Thierry Desmarest decided to rationalise the investment process by creating a dedicated risk committee to evaluate every investment proposal against a list of potential risks. In addition, each investment proposal is rigorously benchmarked against past, current and alternative investments.

TotalFinaElf chief financial officer Robert Castaigne says: “We have a checklist and we review everything, risk by risk. It is very important to have this discipline to ensure all risks are properly reviewed by executives who are not directly involved with the particular investment under consideration.

“Risk assessment is a necessary discipline, particularly for us since 60% of our upstream businesses are based in non-OECD countries,” he adds. “It is very important to know what the implications may be for changes in everything from oil prices to the environment. Then there are political risks, legal risks, financial risks and safety risks. Monitoring them all is very important.”

AT Kearney’s Mr Laudicina thinks the more rigid controls being employed by companies such as TotalFinaElf are all part of a “discernable move back towards central planning”. He says: “In response to the economic downturn and uncertainty that followed the attacks of September 11, many companies have increased centralised control and risk management mechanisms.”

He recalls oil companies decommissioning their centralised strategy committees in the 1970s. At that time he was working for Mobil, analysing the country risks of oil-rich countries. Mr Laudicina says: “After, the oil shock in 1973 and the following recession and the revolution in Iran, multinational companies moved away from highly centralised planning units, preferring to rely on the business intuition of their local management. But before that, strategy departments had been very powerful within organisations.” Mr Laudicina believes good risk assessment has been largely neglected since then, most worryingly during the boom years of the 1990s. He says: “Companies need to commission people to look at the acute pressure points in the global system. Without this they do not get a whole view of the beast. Risks need to be offset at a high level and this cannot be left to executives on the ground.

The bigger picture

After September 11, corporate executives want to get the big picture, rather than relying entirely on the view from the ground. Mr Laudicina says: “Where information is not shared between business lines, the powers of good decision making are diminished. I am not advocating a return to the centralised planning of the 1970s, however. With hindsight the decommissioning of strategy units in the 1970s did leave companies vulnerable.”

Some companies have been quicker than others to move back towards powerful centralised strategy committees, particularly in the automotive sector. Both General Motors and DaimlerChrysler, for example, have created powerful strategy committees that deliberate issues such as their global investment programmes. In both cases, these strategy teams form an active management layer between the divisional business leaders and the board of directors. Executive boards are not just supervising investment decisions made from below, but creating and implementing them.

General Motors’ plan

GM’s strategy board was created by Jack Smith when he became CEO in the early 1990s. GM spokeswoman Toni Simonetti says: “The role of the automotive strategy board (ASB) is not just supervisory. This working group creates and executes strategy. It is the place where all the implications of a decision get heard before it goes forward for board approval.”

GM’s strategy board responsible for making investment decisions is staffed by executives from other areas of the company. In addition to GM’s president and CEO Rick Wagoner and CFO John Devine, the strategy board includes three regional presidents and the companies nine divisional heads.

Underneath GM’s ASB, each subdivision of the company also has its own strategy board that reports upwards to the ASB. The ASB then deliberates on competing investment proposals before forwarding them for board approval.

The success of Mr Smith’s idea of streamlining the decision-making process has been widely recognised and copied by other companies. DaimlerChrysler has recently tried a similar approach. Last year, under the joint leadership of Jürgen Schrempp and Jürgen Hubbert, DaimlerChrysler formed a management group to co-ordinate the company’s global businesses. Known as the executive automotive committee, this board forms a management layer between the divisional chiefs and the group’s management board. During 2001, this executive committee examined 45 projects among them foreign investment proposals.

Like the car companies, TotalFinaElf also has a centralised approach to making investment decisions. TotalFinaElf’s strong corporate centre revolves around a powerful executive committee known internally as Comex which meets every second Tuesday.

TotalFinaElf’s central strategy committee is made up of the company’s chairman, Thierry Desmarest, the CFO Robert Castaigne, and the general managers of the company’s main business divisions. Each member of Comex receives a dossier on Friday evening. “Each member is expected to have read this fully and carefully before the meeting,” explains Mr Castaigne.

Risks assessed

Even before Comex receives a proposal, projects must have been passed by the divisional management board and by the company’s various risk committees that assess political, insurance, legal, environmental, safety and other risks.

TotalFinaElf is unusual in being able to identify a formal decision making process behind its foreign investments involving clear rules or “reference ratios” as the company’s CFO Robert Castaigne prefers to call them. Any investment proposed by TotalFinaElf above a certain level – between e5m and e20m depending on the type of project under consideration – must go before the executive committee.

Risk ratios

Other complex ratios identifying the potential profitability and risks must also be met. These include the internal rate of return and the net present value at a 0% return divided by the maximum financial exposure. Other factors used to model the risks include capital expenditure forecasts, oil prices and known and potential reserves.

To be passed to the executive committee, investments must meet the specified ratios. Each country and each type of investment activity has a predetermined minimum level of profitability based on its perceived risk. Mr Castaigne says: “The company is also not allowed to exceed a cumulative financial exposure to non-OECD countries of more than 50% of its average annual profits.”

Once all the preconditions for an investment have been met, Comex usually has the final word on whether or not to proceed. “This usually comes down to profitability, though there are other factors such as the short-term impact on the company’s cash flow that must be taken into consideration,” says Mr Castaigne.

Once a decision has been passed by Comex, it is unusual for a decision to go higher up the company to the board. Says Mr Castaigne: “Under French law, the board of directors has more of a supervisory role than in other countries such as the UK and is less involved in decisions.” Only major decisions such as the 1999 merger of TotalFina and Elf Aquitaine have gone to board level.

Other oil companies have also recognised the importance of central planning and strategy departments in overseeing multiple foreign investments. Although Shell’s investment strategy is largely determined by divisional business executives, investment decisions are supported and co-ordinated by the corporate centre’s planning, environment and external affairs department.

Three years ago, when Shell split its businesses into five separate entities, it also created what it calls a strategic management system to align business interests throughout the group. While Shell did not agree to a formal interview, a company spokesman explained: “The idea of the strategic management process is to test business strategies against the external world. For example if there has been a change in the competitive environment, we would want to make sure that this is reflected in the operating plan.”

Rival oil company BP is less centralised. Although it has a corporate centre, its four business streams and 120 or so business units are run largely as “autonomous units” according to a corporate spokesman. “Our businesses operate with minimal interference from the corporate centre. Strategy and investment are prime responsibilities of the business stream chief executives who are also on the board. It would be impossible to have one centralised team looking for investment opportunities due to the diverse factors involved in each business,” says the spokesman.

IBM’s expansion

In the technology sector, IBM requires investment decisions to be decided at corporate HQ rather than in the field. According to David Johnson, IBM vice-president responsible for corporate development, decision making at IBM is centralised, but ideas come from every part of the organisation.

To date, IBM has built manufacturing plants in Canada, Mexico, Ireland, France, Scotland, Germany, Hungary, Japan, China, India, Thailand and Singapore. It also has research laboratories in China, Israel, Japan, Switzerland and India. In addition, the company has also acquired substantial assets, including staff, IT, equipment and offices as part of major outsourcing deals such as those made with Japan Airlines and Kobe Steel last year.

Mr Johnson says: “We also make investments in emerging areas of technology which mesh with the long-term strategic interests of IBM, like life sciences for instance. We do this through an active program of direct, minority investment in companies and also through investments in non-US venture capital funds, including emerging markets such as China.

“Decision-making is centralised but ideas, sponsorship and investment management are decentralised and very local. Ideas and sponsorship are frequently generated, not only here at headquarters in the corporate development unit, but also from the business units and from IBM staff in markets around the world.

“Our corporate development unit has executives in Europe, the Middle East and Africa and and Asia-Pacific to help facilitate the process. Final approval is centralised here at headquarters; however oversight and management of investments are frequently a local responsibility.”

Keeping it together

At General Electric, however, the process of co-ordinating global investment decisions is more complex. GE is one of the best examples of the difficulties involved for large multinational, multi-business companies to co-ordinate their investments from the centre.

GE controls some $180bn of overseas assets and has said in public that it is going to dramatically expand its overseas operations. Speaking in May to announce the company’s ambitions to grow its businesses in China, Mexico, India and Europe, GE CEO Jeff Immelt told shareholders somewhat enigmatically: “How do you run GE? GE in every generation is a study of size. Our goal is not to be a big company, but a fast-growth company. The way you become a fast-growth company is you know how to go from big to small to big.”

A GE spokesman says: “Our businesses make their own decisions as to where they are going to invest. There is some co-ordination – the company is not completely balkanised, but neither is it controlled from the centre. That is not possible when you have 30 plus businesses.

“How do we decide between competing investment proposals? Businesses generally have responsibility for sourcing investment decisions but work closely with national executives responsible for business development. The businesses also work with the corporate-level business development group.”

The spokesman continues: “So if you ask whether decisions are made by the businesses, or are they made by the corporate centre, the answer is yes to both. The corporate business development group may identify target markets and acquisitions by region or sector from which the businesses can benefit, but so may the individual business development groups at the business level. A good example of this is China. Our chairman has publicly announced that we will be very active in China and yesterday GE Plastics announced that it is moving its Asian headquarters from Japan to China.”

What companies want

A much easier question for companies to answer than ‘how do you decide where to invest’ is the question ‘what are you looking for’ in a foreign investment location. The answer depends to a great degree on what the company is trying to achieve by locating overseas. The right conditions to exploit natural resources or create an international call centre, distribution hub or manufacturing plant are seldom the same.

Manufacturing companies, concerned as they are with logistics, tend to focus on infrastructure rather than softer issues such as the quality of life found in a particular region. Some companies like to group together in clusters, for example chemical companies and automotive component manufacturers tend to cluster together for the obvious benefits of supply chain integration.

Over and beyond companies’ specific needs, certain general factors time and again decide which countries attract the most foreign investment. The better these are understood, the more investment countries are likely to receive. A survey earlier this year commissioned by CzechInvest and PricewaterhouseCoopers asked companies that had invested in the Czech Republic during 2001 to list their reasons for investing (see graph). The results clearly showed cost and income tax uppermost in investors’ minds when they decided to invest.

The survey also showed that tougher economic conditions have increased the importance of production and labour costs at the expense of almost all other factors involved. Compared to a similar survey in 2000, investors downgraded government incentives, economic and political stability, tax, infrastructure, land availability, telecommunications and bureaucracy.

Soft options

Investment decisions can also come down to softer, less quantifiable, issues. When Ford announced its decision to invest a further $500m in a hi-tech production centre at its existing plant in Dagenham in the UK, the company’s chief operating officer Sir Nicholas Scheele, explained that the UK offered a flexible environment that is not over-regulated. But he also stressed the linguistic and cultural links with the US and the way in which the UK government was positively engaged with industry.

Multinational criticism

Some countries like the Czech Republic and the UK appear to understand their foreign investors needs; other countries come under repeated criticism from investors.

Multinational companies frequently complain that many regional governments have failed to grasp the basic economic necessities of investment by private companies. For example ExxonMobil, which plans to generate international projects worth about $100bn over the decade, recently said its host governments have not been as receptive as the company would like.

Harry Longwell, director and executive vice-president of Exxon Mobil Corporation, said in a recent speech: “Host governments must provide a cooperative policy environment. Not everywhere is the policy support as helpful as we would like, and some governments do not yet understand the importance of accelerating the pace of new projects and of the role of private companies who make the risk investments.”

Perhaps ExxonMobil – which did not have the time to discuss any of these issues with fDI – needs to spend more time explaining and less time complaining.