When Goldman Sachs released its report on the 'Next 11' in 2005, it sent investors buzzing. These 11 countries (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam) were expected to rank among the world’s largest economies in the 21st century. In effect, they were the next BRICs (Brazil, Russia, India and China), and investors frantically looked for ways to get involved. According to figures from greenfield investment monitor fDi Markets, FDI into BRIC countries grew between 2004 and 2009, but not at a substantial rate. However, for the Next 11, growth in FDI was off the charts.
The potential for economic growth in these countries is undeniable, but when it comes to FDI, it is a different story. Some of the Next 11, notably South Korea and Bangladesh, have made strides in attracting FDI to various sectors in their economies, while others, such as Iran, have been far less successful. The numbers are even more interesting when calculated over the past four years, which include the start of the financial crisis and its aftermath. Remarkably, some of the Next 11 countries managed to double their FDI totals between 2007 and 2010.
At the moment, there are clear leaders and laggards in the race for FDI among the Next 11, but challengers are emerging and not every leader is maintaining its momentum. In the long term, the race to be the top FDI destination among the Next 11 remains wide open. Each country represents a unique case, but efforts to attract FDI vary immensely, as do the numbers.
Anna Stupnytska is a macro economist at Goldman Sachs and was involved in the report that coined the 'Next 11' term. She has continued to conduct research and publish reports on these countries, and says that there are several factors that are driving FDI trends in these territories. In her view, some of the main factors are the pace of economic development, and to what extent the country is linked to the global cycle and governance. But while these are crucial to attracting FDI, in her opinion, one of the most important factors is the status of the middle class in these countries. Many of the Next 11 have middle classes that are growing exponentially, as is their purchasing power. The consequential growth of the domestic markets and their potential demand and consumption levels are proving to be just as important to foreign investors as other factors such as taxes and ease of doing business.
Ms Stupnytska says: “The Next 11 countries did relatively well during the financial crisis. Indonesia, for example, didn’t slow down, because the links and mechanisms of the crisis were not really that applicable. Some other countries are stimulating their own domestic demand and tried to reduce dependency on exports. They showed that they can achieve good growth from domestic demand, and that’s part of why FDI inflows were good and didn’t contract.”
According to the figures from fDi Markets, the strongest performing Next 11 countries between 2007 to 2010 were South Korea, Indonesia, Bangladesh and to some extent Egypt. The reasons for their success differ greatly, as each country has its own strengths and weaknesses. Yet the successful countries all share a few key elements that will play a part in attracting future FDI inflows.
Some of the fastest growth rates in project numbers came from Bangladesh, which has seen its FDI level soar from only $168.5m in 2007 to $2.45bn in 2010. The country has benefited from an economy that has grown at a healthy rate of close to 5% per year over the past decade, and a blossoming middle class in a country with an enormous population for its relatively small territory. What is remarkable about this growth is that it has happened in a country with some of the worst governance ratings in the world. Regularly ranked among the most corrupt countries in the world by Transparency International, corruption and governance are huge problems for foreign investors.
Ms Stupnytska says: “I recently attended a conference on investment into Bangladesh and it was interesting to see that the government recognises that this is a problem and they are trying to tackle it. But investors also recognise that the economy performed well during the crisis, so the truth is that this is a growth economy.”
South Korea's strength
South Korea is another interesting case, if only for the main reason that it is significantly more economically and politically developed than all of its counterparts in the Next 11. The country is no longer even considered an emerging market and was one of the few developed countries that avoided a recession during the global financial crisis.
Unsurprisingly, its FDI levels grew steadily between 2007 and 2010, with each year receiving more investment projects. Its automobile, chemical, manufacturing, marketing and IT sectors have proved most popular with foreign investors, the largest of which have included Renault, Mitsubishi, Dow Chemicals and Microsoft.
As such, there is plenty for foreign investors to like about South Korea that should keep it well positioned to win FDI in the future. With few natural resources, the country has diversified its export-oriented economy and is now the world’s sixth largest exporter and 10th largest importer. Despite ongoing issues with inflation, the cost of living and worrisome belligerence from North Korea, the country is regularly praised by foreign investors, and the International Monetary Fund has cited South Korea’s economic resilience, low national debt levels and high fiscal reserves as reasons why its success should continue.
Those that succeed
On the other hand, countries such as Pakistan, Mexico, Nigeria and even economic tiger Vietnam suffered during the same period, experiencing lower levels of investment for varying reasons.
Of these, Nigeria is particularly curious. Capital expenditure, according to fDi Markets, went from $4.17bn in 2007 to an astounding $35.72bn in 2008. However, since that year, project numbers have steadily declined and were only $12.49bn in 2010. While the current figures actually represent a solid rebound from an awful 2009 in terms of capital expenditure, the figures are perhaps an example of what can happen when a country becomes overly reliant on one sector and does not adequately diversify its economy. Energy is still undoubtedly the most lucrative sector in Nigeria, with few signs of other sectors coming close to challenging its dominance. Added to that are issues that have also hurt places such as Pakistan and Mexico, which include ongoing conflicts and governance problems.
Yet possibly the biggest surprise of the countries that saw their FDI levels go down according to fDi Markets data was Vietnam. Long praised for its continued economic growth throughout the financial crisis and the entire decade, Vietnam’s FDI has declined steadily since 2008. While it rose between 2007 and 2008, it failed to rebound in the years in which many countries, particularly those in the Next 11, saw their foreign investment bounce back.
In Vietnam’s case, the country’s fundamentals are still attractive. Its economy is still faring well, labour is cheap, and its middle class is growing. However, there have been fears about its economy overheating, and its government remains opaque and authoritarian. Furthermore, FDI into the country has largely been in speculative industries, such as property, and it needs to diversify further.
The reasons behind these results vary tremendously, but Ms Stupnytska says that most of the results, and what will determine future FDI levels, depend on which countries can build domestic consumption levels. As such, she has tipped Indonesia to emerge as one of the top FDI hotspots over the next 30 years because she believes middle-income growth will be dramatic.
Ms Stupnytska says: “Countries that are already relatively rich, such as Mexico and Turkey, are well placed. They already have a large middle-income base and, as these people get richer, they will start spending more. Here we’re talking about switching from buying necessities to discretionary goods to eventually luxury goods. As people cross the class threshold, they demand that their goods and services improve too. So I think this will be a main driver in the future and FDI sectors that are likely to benefit from this are consumer durables, cars, electronics, services, infrastructure, retailing and luxury goods.”
While economically the long-term forward projections for all of the Next 11 are positive, Ms Stupnytska says that there are no guarantees and there are many risks, especially when it comes to attracting FDI. In her mind, one of the biggest concerns is governance. Countries such as Bangladesh and Pakistan have good economic prospects, but political and corruption problems could get in the way.
Ms Stupnytska says: “Some of the Next 11 are ranking well in governance. But on the other side in Bangladesh and Pakistan, the things we have seen are not very impressive. There are lots of weaknesses there and many things have to improve. Investors are very sensitive to political issues. Some countries are doing well in this regard, but if they slip like Russia or even India, then investors will have to be more cautious.”