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How to Successfully Conduct Global Business During a Time of Geopolitical Instability

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How to Successfully Conduct Global Business During a Time of Geopolitical Instability

The way organizations approach global commerce is undergoing a radical change. Geopolitical instability is slowing growth in a volatile global economy as organizations are forced to adapt their tactics, making complex decisions that increase operational costs and, if mishandled, make them less competitive in an unforgiving business landscape. So, what can organizations do to navigate this ‘new normal’? As an association whose members deal with small- to medium-sized enterprises (SMEs) at the local level on a regular basis, we at the World Trade Centers Association (WTCA) released our second annual WTCA Trade and Investment Report: Navigating Uncertainty, in partnership with FP Analytics. The report focuses on how cities around the world are optimizing trade and investment opportunities despite challenges, both economic and political, and how SMEs benefit from these strategies

The report shows that the majority (83%) of business leaders interviewed believe that global economic uncertainty will stay at its current elevated levels (30%) or get worse (53%) in the coming year. However, 69% of business leaders polled are cautiously optimistic about the coming year, as the report shows that resilient cities—defined as those that outperform their countries during economic downturns—have Foreign Direct Investment (FDI) as a percentage of GDP twice as high as non-resilient cities.

Despite their differences in location and culture, resilient cities have a set of commonalities that allow trade and investment to thrive. These characteristics include diversified economies and strong service sectors. In fact, resilient cities on average saw the share of services in GDP grow by 3.3% over the last five years; more than double the pace of non-resilient cities. Their populations are largely educated, with many inhabitants having college or other advanced degrees, as well as diverse, with higher rates of foreign citizens. On average, foreign citizens represent 11.6% of resilient cities’ populations, which is one-quarter higher than that of non-resilient cities. These cities also tend to have strong transportation infrastructures, including both airports and public transit options. 

Building Resilience 

The report also identified specific tactics used by resilient cities that organizations, including business and civic leaders looking to improve their own city’s resilience, can mirror. 

In resilient cities, key stakeholders are prioritizing direct diplomacy, meeting face-to-face to navigate obstacles created by regional or national governments. By cutting through political red tape, organizations have been able to create new meaningful relationships with each other and strengthen existing ties. The ability to engage in a direct dialogue creates efficient business interactions that are beneficial to all parties. For example, World Trade Center (WTC) Arkansas has organized multiple diplomatic trade missions with Mexico. As a result, its exports to Mexico are growing 3.6 times faster than to any other country. 

Cities are also proactively building programs to attract and retain skilled foreign citizens. For example, Twente, located in the eastern Netherlands, is evolving from a region focused on machine-building and textiles to one with an economy driven by high-tech systems. To retain young, skilled workers from across the globe, WTC Twente created an Expat Center that offers a range of services, including Dutch language courses, visas and work permits, housing, and support for families, as well as social events with the goal of enticing technically-skilled foreign workers and their families to integrate into the community for the long term.

Turning Obstacles into Opportunity

Economic turmoil affects everyone, but not always in the same way. For some, the current geopolitical reality presents opportunity. City leaders are adapting to these geopolitical changes and establishing themselves as cost-efficient and low-risk trade and investment partners to capitalize on the situation. FDI is being redirected towards these agile cities who have recognized the advantages created by this global uncertainty, and supply chains are shifting and realigning based on new benefits. Competition for FDI is escalating (global FDI slowed 27% over the last year, according to the OECD) and the private and public sectors need to work hand-in-hand to create attractive fiscal and tax environments, and institute policies that will attract business. 

Cities are also increasingly investing in both high-tech industries, and SMEs to ensure they are able to attract FDI at a time when this investment comes at a premium. These high-tech industries will lead to future growth and play a central role in the next industrial revolution. Additionally, partnerships with major research institutions are being used to create new technology and modernize existing tech. For instance, in Delaware, private agriculture technology or “ag-tech” companies have partnered with universities to pioneer better technology in seeding, pest management, antibiotic reduction, and biopharmaceuticals. 

SMEs are well suited to adapt quickly in the face of change and evolving economic realities, which enables them to capitalize on changing conditions. However, their size can prevent them from competing on a global scale. To combat this, programs that help SMEs move forward given limited resources can be critical in encouraging and nurturing growth opportunities. As an example, WTC Toronto created the Trade Accelerator Program (TAP), a six-week program that connects SMEs with export and business experts to train them on developing export plans fit for the global market. This program has now been adopted by several other WTC members in Canada, including Vancouver and Winnipeg. 

At the moment the global economy is relatively unpredictable, and increasing risks for businesses have made sound strategic business planning more difficult at a time when it is absolutely vital. Knowledge, preparedness, and agility are key traits cities and businesses need to acquire in order to achieve success and growth. Despite the prevailing conditions, with a strategic approach and tactics proven to increase resilience, organizations can optimize current trade and investment opportunities and set themselves up for success now and in the future.

To review the full 2019 WTCA Trade and Investment Report: Navigating Uncertainty, including commentary from WTCA Members, visit www.WTCAReports.org

U.S.-CHINA FDI GOES COLD WHILE VENTURE CAPITAL HEATS UP

Two-way FDI is plummeting

With trade talks between the United States and China running hot and cold, it’s irresistible to get sucked into daily U.S.-China trade war updates with its unexpected tariff announcements. In the bigger picture, the underlying uncertainty caused by ongoing trade tensions between the United States and China is having a large impact, particularly on two-way foreign direct investment (FDI).

So far this year, combined two-way U.S. and Chinese FDI has totaled just $9.9 billion— its lowest six-month value in five years, according to research firm Rhodium Group. At its peak in 2016, combined FDI totaled over $60 billion a year.

The slow start in 2019 is a continuation of a rough year for FDI in 2018, when flows between the United States and China dropped 60 percent year-over-year. Rhodium Group cites a deteriorating political relationship and regulatory intervention as two big reasons for the sharp decrease in investment.

U.S.-China FDI troubles are part of a bigger trend happening across the world, as global foreign investment flows fell to their lowest levels since the financial crisis in 2018, according to UNCTAD. Global FDI flows totaled $1.2 trillion in 2018 – down 20 percent from 2017.

U.S.-China FDI flows over last 30 years

Invested in each other

With trade tensions rising to a fever pitch, it may be hard to remember that American and Chinese companies have invested a lot in each other’s success over the last 30 years – over $420 billion, to be exact. U.S. FDI in Chinese industries adds up to over $275 billion since 1990. While Chinese investment in the United States is almost half of that at $148 billion, according to Rhodium Group’s U.S.-China investment tracker.

U.S. China FDI totals 420 billion

Beyond the sheer volume of money invested, foreign companies bring much more intangible value to the table. In his book, “Developing China: The Remarkable Impact of Foreign Direct Investment,” Michael Enright used an economic impact analysis to better understand the full impact of FDI in China. Enright estimates that foreign companies have contributed as much as one-third of China’s GDP and 27 percent of China’s employment through the accumulated impact of their investments, operations and supply chains in China. American companies alone contributed 4.2 percent of China’s GDP and nearly three percent of Chinese employment in 2014, according to Enright’s analysis.

Enright also pointed out that foreign companies have helped China develop by creating suppliers and distributors, introducing modern technologies, improving business practices, modernizing management training, improving sustainability performance, and helping to shape China’s legal and regulatory systems.

Chinese companies operating in the United States also bring benefits. As the second-fastest growing source of FDI in the United States in 2016, Chinese-owned firms supported nearly 80,000 U.S. jobs, invested nearly $600 million in innovative R&D, and expanded U.S. exports by $4.7 billion in 2016, according to Select USA.

Growing regulatory hurdles

The ongoing U.S.-China trade war is not entirely to blame for the recent dive in FDI. Both nations have stepped up regulatory oversight of foreign investment in recent years. Following the 2016 peak of global outbound investment by Chinese firms, the Chinese government tightened its grip on outbound capital flows, drastically slowing outbound investment by Chinese firms.

In the United States, the Committee on Foreign Investment in the United States (CFIUS) has stepped up investment screening of Chinese FDI, especially in sectors related to national security like infrastructure and information and communications technologies. Rhodium Group estimates $2.5 billion was left on the table in 2018, as Chinese investors abandoned deals in the United States due to unresolved CFIUS concerns.

The U.S. investment landscape may get more complicated for Chinese companies to navigate in the near future, as investors await the implementation of the new Foreign Investment Risk Review Modernization Act (FIRRMA) and Export Control Reform Act (ECRA), both expected to increase U.S. regulatory oversight of foreign investments.

Foreign direct investment by American companies in China has also decreased, but not as drastically as for its Chinese counterparts. Yet, concerns about technology leakage have led to a cooling in U.S. FDI in China’s technology sectors.

FDI cooling, venture capital heating up

At the same time FDI is slowing, venture capital investment is becoming an increasingly bigger piece of the U.S.-China investment puzzle.

Chinese VC investment in the United States has increased dramatically since 2014, with Chinese-owned VC funds contributing an estimated $3.6 billion to U.S. companies over the course of 270 different funding rounds in 2018. This is just a fraction of what U.S.-owned VC firms have spent in China, but an important trend. U.S. VC firms invested a record $19 billion in Chinese start-up companies last year, according to Rhodium Group.

US venture capital firms invested $19 billion in Chinese startups

Firms on both sides of the world have utilized VC investment to invest in companies in sectors where FDI has faced growing regulatory scrutiny. Chinese VC firms have invested in semiconductors, for example, while U.S. VC Firms have invested in sectors limited to foreign firms in China like digital payments and internet start-ups.

Confidence is key

In order for foreign investments to work, companies are dependent on the success and stability of the nations where they choose to invest. Both American and Chinese companies have invested a lot in each other, through decades of foreign direct investment and now growing venture capital investment.

As the U.S.-China trade war rages without an end in sight, it’s worth remembering that ongoing tensions cost more than just tariffs on the products in your shopping cart. They are also a roadblock to long-term investments that bring additional capital, exports and jobs to each other’s economies.

Lauren Kyger

 

Lauren Kyger is Associate Editor for TradeVistas. Prior to joining TradeVistas, she was a Research Associate at the Hinrich Foundation focused on international trade issues. She is a Hinrich Foundation Global Trade Leader Scholar alumna, earning her Master’s degree in Global Business Journalism from Tsinghua University in Beijing. She received her Bachelor’s degree from the Walter Cronkite School of Journalism and Mass Communication at Arizona State University.

This article originally appeared on TradeVistas.org. Republished with permission.

New HSBC Report Urges Pro-Trade Policies

New York, NY – Though the US “continues to confront a competitiveness challenge of too few quality jobs and too little income growth, there is a future in which America can create millions of good jobs connected to the world via international trade and investment,” according to “Made in America – Made for Trade,” a new report released by HSBC.

Reaching that future, though, “will require US policies that are based on a sound understanding of how American companies succeed in today’s dynamic global economy, and of the critical role that trade finance plays in that success,” writes the report’s author, Prof. Matthew Slaughter of the Tuck School of Business at Dartmouth College.

The US, he concludes, could boost productivity and revitalize the economy in the next decade if the country “pursues an expansive and connected set of pro-trade policies in the areas of international trade, investment, immigration, tax, and the social safety net.”

The report’s major points:

* In absolute dollars, US exports have more than doubled from$1.04 trillion in 2003 to $2.26 trillion in 2013. “The net result has been a commensurate surge in how important exports are to the total US economy.”

* In the past three years, exports as a share of US GDP reached about 13.5 percent; the highest share since at least 1947.

* Exporters and importers “are more capital-intensive, more productive, and pay higher wages – about 15-20 percent higher for companies that trade and about 25-30 percent higher for multinational companies.”

* The tally of US companies that export has risen steadily in recent years, reaching a record 304,867 in 2012. Small and medium-sized companies – those that employ 500 workers or fewer – accounted for over 97.7 percent of this total count, at nearly 298,000.

* International trade “has boosted annual US income by at least 10 percentage points of GDP relative to what it would have been absent this global engagement. That translates into an immense aggregate gain in 2013 of at least $1.7 trillion, an average gain of over $13,600 per US household per year.”

* An aggressive pro-trade policy initiative could create, over the next decade, about 10 million new high-paying trade-connected jobs in America: one million per year or about 100,000 per month. This is indeed an aggressive goal. But it is also one that is no doubt attainable.

The HSBC Made for Trade report was crafted as an on-tour “national conversation” with leaders in business, government, industry and academia in four US cities whose economies have been shaped by global trade holding discussions on the role of global trade in today’s economy.

The national tour looks at the contribution of international flow of goods, services and capital to the US economy, and the opportunities for American businesses brought about by global trade.

10/02/2014

AMCHAM Blasts China’s ‘Opaque’ Investment Rules

Los Angeles, CA – A major US trade promotion group is asserting that Beijing is targeting foreign companies “with opaque laws and rules that contribute to a deteriorating environment for investment.”

According to the American Chamber of Commerce in China (ACCC), 60 percent of those US-based businesses that responded to a recent survey said they feel foreign businesses “are less welcome in the country than before” – up from the 41 percent of respondents in a previous survey conducted in late 2013.

In addition, the group said, 49 percent stated that foreign companies are being “singled out” in the Chinese government’s ongoing pricing and anti-corruption campaign, which, many of those surveyed said, is “politically motivated and threatens to exacerbate a decline in foreign direct investment in the world’s second-largest economy.”

ACCC members say they have “growing perceptions that multinational companies are under selective and subjective enforcement by Chinese government agencies,” according to ACCC Chairman Greg Gilligan.

The country’s laws and rules, he said, “lack transparency and are at times only vaguely related to the particular case.”

Dozens of foreign companies “are being targeted in probes, with regulators opening an anti-monopoly investigation into Microsoft Corp. in July and state media accusing Apple Inc. of using its iPhone to steal state secrets, said Gilligan, who serves as Vice President and Managing Director for PGA Tour China.

In an interview with the state-run China Daily newspaper, Xu Kunlin, the head of China’s National Development and Reform Commission’s anti-monopoly bureau, called the charges that the country is specifically targeting foreign companies “groundless and baseless.”

Xu’s reactions were echoed by a spokesman for the Foreign Ministry in Beijing, who said that China’s anti-monopoly measures “are transparent, fair and done in accordance with the law.”

China, the spokesman said, “will as always welcome foreign companies and enterprises to develop cooperation in all fields and build a good market economy. At the same time, we request foreign companies observe Chinese laws while in China.”

American Chamber members have “concerns that rules are shifting again for foreign companies in China in ways that are highly opaque and difficult for local managers to anticipate or adapt to,” according to the ACCC’s Gilligan.

The group’s members, he said, “strive hard for full compliance and need support and greater clarity to achieve that goal.”

The ACCC’s membership representatives from more than 1,000 US-based companies of all sizes including Microsoft, Johnson & Johnson, Dell, Oshkosh, Qualcomm, and Mead Johnson.

09/22/2014

 

FDI in China Drops to New Low; Anti-Trust Actions Blamed

Los Angeles, CA – China attracted $71.1 billion in foreign direct investment from January to July, down 0.4 percent on the same period in 2013, with FDI in the country reaching $7.8 billion in July alone, the first decline in overseas capital inflow in 17 months.

The slashing of spending in China’s manufacturing sector by companies from the US, Japan and the European Union is being blamed, primarily, on an increase in Beijing’s recent crackdown on foreign companies alleged to be engaging in “anti-competitive” business practices.

Over the past year, China has taken action against a number of ‘big ticket’ foreign companies, accusing them of breaking the country’s anti-trust regulations, which many feel are opaque and in violation of World Trade Organization rules.

Most recently luxury car brand Mercedes-Benz has been accused of manipulating prices for after-sales services in the country, while Beijing has imposed fines on milk powder companies including Mead Johnson Nutrition Co and Danone SA, alleging breach of its anti-monopoly laws.

China has also launched a probe into US-based Microsoft and chip maker Qualcomm over anti-trust claims, while several pharmaceutical companies including GlaxoSmithKline are facing probe in the country over alleged corruption and price fixing.

The probes have raised concerns among foreign investors that the country is targeting foreign firms operating there in an effort to, as one source out it, “flex its muscles.”

According to the Ministry of Commerce in Beijing, though, the anti-trust investigations aren’t responsible for the drop in FDI. Instead, the agency said, the “volatility of FDI” is a natural reaction to the country’s “efforts to balance the economic structure.”

The monthly decline “is not sufficient enough to reflect the general trend. It must not be linked to the anti-monopoly probes into some foreign invested companies or be associated with other baseless speculations,” said Commerce Ministry spokesman Shen Danyang.

“All market players should operate their business according to the law,” he added. “They should be punished according to the law and be subject to appropriate legal penalties if they violate the law.”

Beijing, he said, “expects foreign investment to keep a steady growth in the coming years and total FDI in 2014 to remain at a similar level with last year.”

08/21/2014

Mergers and Acquisitions Touted Over FDI

Washington, DC – For decades, state and local governments have offered packages of tax breaks and other incentives before foreign companies in the hope of luring them to the US to create jobs.

A new study published by the Brookings Institute asserts that strategy is “deeply flawed” and that “mergers and acquisitions are driving foreign investment in the US, not the opening of new establishments.”

Civic leaders, in turn,” would accomplish far more by bolstering industrial amenities to retain overseas companies than by offering rich subsidies designed to attract new ones,” it said.

“Policies that narrowly focus on (new business) openings are probably not going to give you a big bang for your buck,” according to Devashree Saha, a senior policy analyst at Brookings and lead author of the report.

In 2011, only 26 percent of all jobs at US locations of foreign companies were created by the opening of a new factory, office or store, while nearly a third were generated by foreign takeovers of US companies, Saha said, citing data from the Organization for International Investment (OFII) that found that, over the past two decades, 84 percent of foreign companies that came to the US did so through an acquisition.

“Federal, state and local governments should invest more to build strong industry clusters by ensuring an adequate supply of skilled workers, modernizing US infrastructure and increasing investment in research and development, among other initiatives,” the Brookings study said.

According to Nancy McLernon, president of the Washington, DC-based OFII, state and local leaders often ignore foreign companies that come to the US through mergers instead of connecting them with suppliers, customers and skilled workers. “That aftercare is critically important,” she said.

The US share of global foreign direct investment plunged from 37 percent in 2002 to 17 percent in 2012, according to OFII. The US is still the worldwide leader, but emerging markets such as China have grabbed a growing share of foreign dollars.”By recognizing the importance of mergers and acquisitions, we can capture more of that market share,” said McLernon.

Foreign-owned companies employ about 5.6 million workers in the US, or about 5 percent of private payrolls, according to the Brookings paper. Their employment grew steadily from 1991 to 2000, but has stagnated since.

Yet, it said, the firms generate outsize benefits, accounting for a fifth of US goods exports and 15.4 percent of all private research-and-development in 2011 with foreign owners of US operations paying higher wages than US companies — $77,000 vs. $60,000, on average.

07/29/2014

FDI Tax Breaks, Incentives Slammed in New Report

Washington, DC – The use of tax breaks and other incentives by state and local governments and economic development agencies across the country to attract foreign businesses has come under fire in a study just released by The Brookings Institution.

Calling the practice “deeply flawed,” the economic think tank states that “mergers and acquisitions are driving foreign investment in the US, not the opening of new establishments.”

Civic leaders, it said, “would accomplish far more by bolstering industrial amenities to retain overseas companies than by offering rich subsidies designed to attract new ones.”

According to Devashree Saha, a senior policy analyst at Brookings and lead author of the report, “Policies that narrowly focus on new business openings are probably not going to give you a big bang for your buck.”

In 2011, only 26 percent of all jobs at US locations of foreign companies were created by the opening of a new factory, office or store, while nearly a third were generated by foreign takeovers of US companies, he said, adding that over the past 20 years, 84 percent of foreign companies that came to the US did so through an acquisition.

“Federal, state and local governments “should invest more to build strong industry clusters by ensuring an adequate supply of skilled workers, modernizing US infrastructure and increasing investment in research and development, among other initiatives,” the study found.

While the US is still the global leader in attracting FDI, the US share of global foreign direct investment (FDI) shrank from 37 percent in 2002 to 17 percent in 2012 with China and other developing economies grabbing a growing share of foreign business, according to data from the Washington, DC-headquartered Organization for International Investment (OFII).

“Outsize Benefits” Generated

Foreign-owned companies employ about 5.6 million workers in the US, or about 5 percent of private payrolls, according to the Brookings study. Their employment grew steadily from 1991 to 2000, but has stagnated since.

“Yet, the firms generate outsize benefits, accounting for a fifth of US goods exports and 15.4% of all private R&D in 2011,” the study said. “Foreign owners of US operations also pay higher wages than US companies — $77,000 vs. $60,000, on average.”

The report also ranks states and “metro areas” based on their share of jobs at foreign-owned establishments.

In 2011, Delaware led with 8.5 percent of all private-sector jobs at foreign-owned locations, particularly in the pharmaceutical, medicine, manufacturing and insurance sectors, followed by South Carolina with 7.5 percent of its private jobs at foreign-owned companies, largely in the auto industry.

Bridgeport, Connecticut, led among US “metro areas” with foreign firms accounting for 13.6 percent of private payrolls, particularly in the computer systems design and brokerage fields.

Greensboro, North Carolina, ranked second with 9 percent – primarily retail grocery stores, auto manufacturing, and pharmaceuticals). Worcester, Massachusetts tied for second place with most of its foreign-owned employers in the power generation, electrical products and insurance sectors.

In the 20 metro areas analyzed for the Brookings study, FDI made up more than half of all jobs in the largest industries active in Dayton, Ohio; Chattanooga, Tennessee, and Charleston, South Carolina, and San Jose, California.

07/03/2014