For decades, investment promotion agencies (IPAs) structured themselves around a supply-driven paradigm. This required catering to companies that sought to maximise production efficiencies in low-cost economies – to make products that would then be sold primarily in developed markets.
IPAs in the developing world emphasised low wages and infrastructure costs, an export-friendly environment, a hardworking, dedicated and educated workforce, and other largely supply-side considerations.
IPAs in the US and other developed countries offered incentives, yet focused primarily on easing entry into their rich, domestic consumer and industrial markets.
This included access, not only to distribution channels, but also to technology, leading educational institutions and the diverse range of business, financial, legal and other services these venues could offer.
Importance of Asia
In recent years, however, there has been a growing realisation that Asia and other emerging markets will increasingly drive global growth in the future. US and western European markets will remain important – but marginal growth will largely occur elsewhere.
In unit terms, many physical markets are already larger in China than the US. This includes steel, televisions, refrigerators, radios, motorcycles and cell phones. One can then add in India, Japan, Korea, the Association of Southeast Asian Nations (Asean), central Asia, Africa, Latin America and the rest of the developing world.
Given these fundamentals – short of some major unforeseen proprietary technological innovation – it is hard to see how US or western European firms will be able to maintain their present level of global market share.
Change of tack
The shift from a supply to a demand paradigm has many implications – both for corporations as well as IPAs. US and western European entities will need to base their competitiveness more on their ability to facilitate international expansion for companies within their venues.
Those in Asia and other emerging markets will need to emphasise opportunities within their domestic or regional economies. Japan might be seen as a special case, given the economic recovery now taking hold. The prospect of postal savings and other financial assets being put to more productive use, its proximity to emerging Asia and movement by Japanese companies to achieve productivity gains through restructuring initiatives are just a few of the many reasons why investors are taking more notice of Japan as a business and financial market.
This is not true of the US, where corporate rationalisation has largely been achieved and consumer debt is at record highs, or western Europe, where companies are perceived to face severe political and social constraints that impinge on their ability to initiate meaningful change. Fundamentally it is a lot easier to deliver growth if one is starting from a relatively small base or can deliver dramatic gains through restructuring efforts.
A ‘demand-oriented’ paradigm requires a radically different orientation from a traditional ‘supply-oriented’ approach. In the supply case, corporate involvement could consist primarily of close relationships with one or two suppliers, occasional buying trips and perhaps over time, establishing a manufacturing and quality control/logistics operation. Market entry, however, is infinitely more complex. It necessitates an ‘outward view’ and ongoing ability to represent oneself in these markets. One must rely on, monitor and manage the activities of greater numbers of offshore employees, business/venture partners and service providers who speak different languages and operate under different laws, customs and business practices.
US tech survey
To understand how US firms are organising themselves to meet this challenge, KWR International (KWR) recently surveyed 165 US technology executives in a report commissioned by CMP Media’s Electronic Engineering group. More than half the people surveyed characterised themselves as CEOs, business owners or having executive level positions at companies with revenues ranging from under $10m (53%) to more than $100m (15%).
The findings clearly recognised the need to expand overseas. Most respondents, however, while characterising international expansion as extremely important to their long-term success, were significantly less willing to characterise it as an immediate priority. Fewer still were pleased with their existing efforts.
This was not due to an inability to recognise the potential or the shift to a demand paradigm. New market/revenue growth was rated as the most important factor to motivate international expansion, at 7.2 (on a scale of 1-10), while reducing costs ranked only 5.5.
On the other hand, 33% of respondents characterised their international planning as primarily motivated by ad hoc activity. Furthermore, when asked about their preferred options to expanding overseas, export sales and marketing trips scored highest at 6.7 and 6.1 respectively. Joint venture/partnership was rated only 5.3 with M&A/strategic investment rated just 3.9 and greenfield investment lower still at 3.2.
Part of the problem seemed to stem from the inability of these companies to develop an adequate understanding of how to approach foreign markets, how to determine viable market entry strategies and how to form the relationships and contacts necessary to ensure the success of their efforts.
Given these difficulties, most found it difficult to evaluate the risks and uncertainties. As a result, they were unable to gain the comfort level necessary to justify the substantial investment in time and resources that is required.
Site visits rated
Interestingly, when asked about the services they would find most helpful, respondents (on a scale of 1-10) rated site visits at 6.34 and local government support at 6.1 most important. On the other hand, conferences and seminars – which are often the favourite tools of IPAs – scored the lowest at 5.1. KWR, having organised numerous site and familiarisation visits (as well as conferences and seminars) for investors, corporate executives and journalists for a range of government agencies, companies and IPAs, can personally attest to the value that these and other focused efforts of this kind can provide.
The bottom line is that over the long term, the pressures of economic globalisation make it highly unlikely the US and other developed economies will be able to achieve the productivity gains they need to sustain a cost structure and standard of living that is so much higher than that of the developing world.
The rebalancing that will result will inevitably require a demand shift to markets that will achieve growth through their emergence from poverty into rapid industrialisation and service development or through corporate restructuring and reorganisation. In particular, this includes the trio of China, Japan and India as well as other tiger economies, and those in Asean, eastern Europe, Latin America and, over time, Africa as well.
Given the difficulties most companies – especially small to medium-sized enterprises which lack the time, infrastructure and focus necessary to devote themselves to international expansion – IPAs can play a vital role in facilitating this process. Those that succeed will help to provide a much-needed service and strengthen the competitiveness of their local economies as well as their attractiveness as a site for both foreign direct and portfolio investment. This will require an acknowledgement of the global changes in demand that are now under way, as well as a reorganisation of the priorities, promotional strategies and activities necessary to meet these emerging challenges.
Keith W. Rabin is president of KWR International, Inc, a consulting firm specialising in the delivery of research, communications and advisory services.