Nearly 40% of companies worldwide plan to shift some foreign investment from developed to emerging markets within five years, according to the latest Economist Intelligence Unit paper, Canada in a Globalised Economy: An investment perspective, sponsored by Ernst & Young. This trend has important implications not only for Canadian firms as investors, but also for Canada as a destination for investment.
“Emerging markets account for more than half of all global foreign direct investment now, showing a continued upward trend that’s likely to continue,” says Colleen McMorrow, Ernst & Young’s Entrepreneurial Services Leader in Canada, who points to the appeal of a 6% growth forecast for these markets in 2012 compared to only 1.7% in developed ones. “Canadian firms stand to benefit from this trend as investors, but are reluctant to abandon the stability and favourable business environment that domestic and developed markets offer.”
The survey, which polled 195 top Canadian and non-Canadian executives, found that 40% of those already investing in developing markets anticipate a 20% or greater boost in foreign-derived earnings this year. At the same time, it shows that not everyone is leaping to follow the trend; 34% of the companies surveyed have no plans to shift their investment from developing to emerging markets in the next five years.
Although Canadian executives are attracted to larger or growth markets to either outsource production or tap fresh markets, they remain more inclined to invest in developed markets, citing concerns about political and economic instability, skepticism about potential returns and workforce challenges in emerging economies.
McMorrow sees value in a thoughtful approach to the opportunities of developing markets, cautioning that Canadian firms looking to invest abroad shouldn’t just follow the latest trend or the fastest-growing market. “It’s unlikely that Canadian firms will win if they follow the crowd or adopt a ‘me too’ approach. Expansion to a developing market needs a highly tailored strategy and careful evaluation of the best fit between a firm’s unique offerings and product lines and the current and future potential of each market.”
Of Canada’s own position as a favoured investment destination for expansion by non-Canadian firms, McMorrow says Canadians should not worry about losing their favoured position to developing markets. “You would think this shift should sound alarm bells for Canadians hoping to attract investment from non-Canadian companies, but in fact Canada stands to fare well through an accelerated shift in global economic gravity from the developed to the developing world.”
For most survey participants, a favourable business operating environment remains a critical criterion for evaluating targets, giving developed countries like Canada an advantage over developing countries in attracting investors, especially given its ready access through NAFTA to the US market, its stable business environment, its long legacy of welcoming foreign investors, as well as brisker growth than any other G7 country.
To remain competitive, however, McMorrow says, “Canada must continue to be aggressive in branding itself as an attractive investment destination, in actively courting foreign investment, providing a favourable regulatory environment and fostering an entrepreneurial culture.” Only one-third of respondents regard Canada as having superior market-growth prospects, and very few respondents, including Canadians, felt it offers a strong entrepreneurial culture.
In a volatile macroeconomic environment, Canada’s best strategy is to continue to promote its entrepreneurial potential in order to attract investment, and support the growth strategies of its firms, domestically and globally.