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An OPEN Client Edition
Updated 4/23/05, 10:30 AM PDT (adds "Global Tax Rates")
Annex Research Analysis of U.N. Annual Report on Global Investments
To Russia with Love and $$$
Russia, Far Eastern Europe, Most Attractive Region, Next China, India?; Best Educated at Low Labor Cost
PHOENIX, Oct 25
–Matt looked like a quintessential highbrow limo driver.
His black buttoned-up uniform seemed custom-tailored.
Matt… strike that, Matthew seems more fitting… acted as if he
were meeting a client at London’s Dorchester hotel rather than at the
San Francisco airport. It was
only after he took off his cap, revealing his shaved head, that one
realized Matthew was probably about 60.
When he opened his mouth, it quickly became
obvious that Mathew was no ordinary limo driver. He was an English major with an MBA. Until recently, he used to be an executive with a big leagues
IT vendor. When the company
transferred work to India, he was left looking for a new job. Rollz Royce Limo was better than golf laced with self-pity.
So Mathew squeezed the lemon that life handed him and made a
Alas, his employer’s performance didn’t
live up to its highbrow name. They
dropped the ball on this writer’s return trip.
So I ended up having to hail a taxi.
“Are you a Russian?” I asked the cab
“Yes, I am,” he replied with some
trepidation. “How did you
“Just your accent,” I said.
“Don’t worry, I am not with the INS” (Immigration and
Naturalization Service), I joked, trying to reassure him.
“How do you like it here?” I continued.
“It was great for the first 10 years,”
Igor replied, adding that he used to work as a software engineer in the
“What happened then?”
“A year ago, the company transferred work to
India. It went from boom to
Sound familiar? Two for two?
Golf was not an
option in this man’s life. But
going back home to Russia is. I
told Igor that. He waived it
off as an off the wall idea. He
shouldn’t have. I was
merely passing on Wayne Gretzky’s advice.
Asked by a reporter what made him such a high-scoring hockey player, the “Great One” replied, “knowing where the puck is going to be.”
In the world of global investments, this means Russia and Far Eastern Europe (the former Soviet dominions around Russia). If reason and pragmatism prevail over politics and ancient animosities, “To Russia with Love,” and now with dollars, too, promises to be the next major destination for multinational investors. Russia may be the next China or India, and not just a nostalgic memory of a 1963 James Bond movie.
Why? Because Russia and the former Soviet satellites have some of the best educated work forces in the world. Even better, they come at low prices relative to the high cost of labor in developed countries (see the chart and Tables 1, 2, 3, 4).
That’s one of the statistics that jumped out
at us from the latest United Nations report on global investments.
And it confirmed what we have been saying since 1996 about the
reasons for investment appeal of Eastern Europe (see “Renaissance
II,” Annex Bulletin 96-32, June 1996).
But that’s nothing new, the skeptics may
observe. Why now?
Actually, it may not be literally “now.”
As with all low-cost wonders, the appeal of India and China will
eventually wear off. Especially
of India, since its low labor cost attraction is based on highly
transportable human know-how, as Mathew and Igor have found out.
Once Indian companies and their workers get “rich,” by local
standards anyway, they will look for opportunities elsewhere.
That’s what happened with the low cost software development
Meccas from the 1980s – Hungary and Israel, for example, now regarded as
countries somewhere between developing and developed.
India’s, China’s Attraction
Meanwhile, India has been enjoying an
investment renaissance of sorts, though not nearly as rich or as long
lasting one as China’s. In
2003, the year in which the global investments sagged by 18%, the third
annual contraction in a row, foreign investments in India surged by 24% to
What makes India so attractive?
a word, its population.
“It is the first time in history that
India’s (large) population has become handy,” said Som Mittal, senior
vice president in charge of Hewlett Packard’s Indian services
operations, replying tongue-in-cheek to our question during a recent
conference in San Jose, CA. Mittal
should know. He is an Indian
entrepreneur who was bought out by large multinationals (first Digital
Equipment Corp., then HP).
Continuing to speak in a lighthearted vein,
Mittal credited three major factors for India’s popularity:
Pingala, the Indian mathematician who first discovered the binary
system in 5th century BC;
Columbus, for having discovered America (while looking for India);
The British, for having left the English (language) behind.
Levity aside, since English has become a
global business language, India’s proficiency in it has been indeed its
big advantage over non-English speaking world regions, such as Russia or
other Eastern European countries. But
that advantage is rapidly disappearing.
Younger generations of Russians, Ukrainians, Poles, Serbs, etc.,
especially the highly educated ones, are all soaking in the American
culture and language with amazing speed and fervor.
China has proven that neither the English proficiency nor a high education
levels are as important to investors as low cost of labor and political
In 2003, China continued to rake in foreign investments, the global slump and its ideology notwithstanding. This communist country attracted another $67 billion last year, 16 times more than India (!). That’s also more than double the amount the U.S. got ($30 billion). Until now, America has been the highest foreign investment recipient of any country in the world. Well, no longer…
Since 1990, China has received $659 billion in foreign investments, 23 times more than India. That’s about one-third of all foreign direct investments in the developing world.
Yet, India’s work force is better educated:
(First), India produces about two
million college graduates every year versus China’s 850,000. Second, about 80% of India’s college graduates are English
speaking, while the Chinese ones have minimal English language skills.
By contrast, the Philippines, for example, the third cheapest
country in terms of software programmers, graduate about 290,000 people
per year – nearly all of them English speaking.
(from “Unbreakable Spirit,” Aug 2004)
Similarly, foreign investors have by and large shunned the world’s largest country despite its natural and human riches. Russia has received 24 times less foreign investment per capita than Israel; 17 times less than Hungary; nine times less than Mexico; six times less than Brazil; and half as much as China, the world’s most populous country. And that’s despite the fact that Russia is the world’s second best educated country, second only to tiny Finland, its neighbor (see the chart).
that may change in the future. As labor costs and global ambitions of
India and China begin to rise, so will Russia’s appeal, as well as that
of its neighbors – Ukraine, Belarus, Latvia, etc.
Drop in Eastern Europe, Surge in Israel
Meanwhile, Eastern Europe as a whole, and not just Russia, suffered an investment setback in 2003. Ironically, as nine Eastern European countries joined the European Union, the western investors “rewarded” them with a 33% drop-off in spending. Foreign investments in Eastern Europe dropped form $31 billion in 2002, to $21 billion last year.
Even such former darlings of multinational
investors as Czech Republic and Hungary were shunned. The Czechs got 70% less capital that the year before ($2.6
billion vs. $8.5 billion), while Hungary suffered a 13% setback (from $2.8
billion to $2.5 billion). Poland,
the region’s largest recipient of foreign investments in 2003, stayed
virtually flat ($4.2 billion vs. $4.1 billion).
Meanwhile, a surge of foreign investments into
Israel amid a raging civil war with Palestinians proves that capital is
not always a coward, as is often said.
In 2003, Israel received $3.7 billion in foreign in
than double the amount it got the year before ($1.7 billion).
The UN report does not give out the source(s) of the sudden capital influx into Israel. Given the brutality of the continuing Israeli-Palestinian conflict, however, it is probably a safe bet that it is not the Arab oil money that’s boosting the Israeli economy.
Elsewhere in the world, foreign investors
continue to cut back their commitments to Latin America and Caribbean.
In 2003, investments in Brazil, Mexico and Argentina dropped by
39%, 27% and 39% respectively. The amount of annual foreign spending in Latin America is now
at less than half that it was in the 1990-2000 period ($50 billion vs.
$100 billion or more).
By contrast, the Asia/Pacific region (which
includes China, of course), continues to boom (up 14% in 2003).
This region has now replaced Latin America as the favorite
developing countries destination of foreign money ($107 billion in 2003
vs. $50 billion, as you saw above).
All Roads Lead to Luxembourg
There is one country, however, and a tiny one
at that, that towers above all global giants when it comes to foreign
investments. With population
of under half a million, and an area of less than 2,600 square km, this
country is smaller than any of the 50 states; yes, even smaller than DC.
Yet is has attracted more foreign capital than China, and much
more than the entire United States of America, according to the UNCTAD
What country is it?
In 2003, Luxembourg received $88 billion from foreign multinationals, compared to $67 billion for China and $30 billion for the U.S., as you have seen before. The year before (2002), Luxembourg got even more money ($117 billion).
What is the reason for that?
In a word, banking.
“Luxembourg offers favorable conditions for
holding companies and for corporate HQ, such as certain tax exemptions,”
the UN report noted in its 2002 edition.
More than 80% of the money Luxembourg has
received was due to “trans-shipping” of foreign investments through
it, according to UNCTAD, enroute to some other foreign destinations.
That’s why Luxembourg also figured
prominently in our recent study of foreign ownership in America (see “Sellout
of America,” Oct 2004), which highlighted the various tax avoidance
methods that multinational companies use in order to evade or reduce their
U.S. taxes. Tiny countries
such as Luxembourg, Cayman Islands, Bermuda or Switzerland are the
beneficiaries of such schemes and high U.S. taxes.
So “all roads lead to Luxembourg?”
But many of the roads paved with gold by multinationals do.
So China, India today… Russia tomorrow?
Maybe. Who knows… It
sure looks that way, “if reason and pragmatism prevail over politics and
ancient animosities,” as we said earlier.
But politics and ancient animosities have always been a part of
global investments strategies. Yet more often than not, greed and self-interests have won
out over ideologies or other higher moral principles that were supposed to
guide investors’ pocketbooks. Just
look at Red China as one recent glaring example.
So when we predict
that the next global rage would be “To Russia with Love and $,”
we’re basically betting that greed would once again prevail.
Time will tell…
bargain hunting! Bob
Happy bargain hunting!
PHOENIX, Apr 23, 2005 - Besides luring multinational investors with the world's best-educated work forces (see "To Russia with Love and $", Oct 2004), recent studies of global tax rates have shown other reasons why global investments may start flowing toward Russia and Eastern Europe in the future. Five of Top 10 countries with world's lowest income tax rates are from Eastern Europe.
As you can see from the following chart that combines average top corporate and individual income tax rates, Russia and Hungary top the list of the 31 major countries we have analyzed.
They are joined among the Top 10 by Poland, Slovak and Czech Republics, Portugal and Mexico. Ireland, Switzerland and Iceland are the only western countries in the Top 10.
The U.S. ranks 21st out of the 31 countries whose income tax rates we have analyzed. France, Denmark, Germany and Japan hold up the rear as the least attractive places in the world for foreign investments based on tax rates.
Russia Corporate tax law underwent a comprehensive reform starting from January 1, 2002.
For additional Annex Research reports, check out...
2004 Global: To Russia with Love and $ (Oct 2004); Sellout of America (Oct 2004); China Follies Revisited (Mar 2004); A Passage FROM India (Mar 2004); IBM: Greed De-clawed (Feb 2004); China Now Bigger Than U.S.! (Jan 26); IT Industry: Whither Goeth It? (Jan 20); Five Most and Least Likely Forecasts for 2004 (Jan 2004)
2002 Global: China: Real Cold War Winner (Mar 8, 2002); Bush League All-Stars (Jan 2002), SEC Launches Formal Probe of Wall Street Research (Apr 2002), Greed Bites Back (Nov 29, 2002), Salomon/Gutfreund: Wall Street Casino (June 21, 2002)
A selection from prior years: "Robber Baron" Era Is Back (Jan 2001), "A Cleaner, Neater World? Hardly. Deadlier, for Sure" (Feb 2000), More, Cheaper Service Jobs in the U.S. (Mar 1999), "From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998), THE GREAT AMERICAN HOOVER (1997)
2004 IT: To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004) HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)