Annex Bulletin 2005-19                        October 24, 2005

An OPEN Client Edition

Updated 10/24/05, 7:20 PM PDT (adds U.S. dollar chart)

GLOBAL TRENDS

Annex Research Analysis of U.N. Annual Report on Global Investments

Yin-Yang Pacific Tsunamis

Australia Investments Soar in 2004; Money Also Pours into China, Russia, Brazil and Even Argentina Again; Global Investments Up 2%; Developing Up 17%, U.S. Rebounds by 69%, But he E.U. Slumps by 36%

NEW YORK, Oct 24 – As one natural tsunami wreaked havoc in the Asia/Pacific region at the close of 2004, another man-made tidal wave washed up on the shores of Australia and several other Pacific rim countries.  The former brought death and destruction; the latter prosperity and merriment - the yin-yang effects of Pacific tsunamis.

And what countries were the biggest benefactors?  Australia, first and foremost.  It received $43 billion in direct investments in 2004, a six-fold increase over the year before.  It was by far the strongest vote of business confidence that any country in the world got from the stingiest of judges – the capitalists who vote with their wallets.  As a result, the Pacific Rim region investments also soared by 46% in the aggregate over the year before.

After years of relative neglect, Russia’s oil and gas industry helped the world’s largest country start to get some business recognition that it had been sorely lacking since the end of the Cold War.  The Russia investments soared by 47% in 2004 to $11.7 billion, a five-fold increase since 2001.

Nor is this just an energy boon driven by high oil and gas prices.  Many IT companies have rushed into Russia (pun intended J) in pursuit of its excellently educated and still relatively low cost work force.  No surprise there (see “To Russia with Love and $$$,” Oct 2004 and “New "Drang Nach Osten",” Sep 2005).

Other Eastern European countries also continued to attract foreign investment in large numbers.  In fact, this area is the only world region that did not suffer any declines at all in the post-9/11 era.  In 2004, investments in Eastern Europe jumped by 45% over the prior year to $35 billion.

Latin America.  The biggest Latin American countries staged a comeback in 2004 in terms of foreign investments.  Brazil and Mexico, for example, attracted $18.2 billion and $16.6 billion in multinationals’ capital, the 79% and 46% annual increases respectively. 

And even the lowly Argentina, an erstwhile multinationals’ darling that turned into a pumpkin three years ago, soared back last year with a 125% jump in foreign investments to $4.25 billion.  Bottom fishing by the Wall Street sharks?  Probably.  Just as was the case after the 1997 Southeast Asian financial crisis.  Which goes to show us economic privation, and not just prosperity, can attract foreign capital.  Another yin-yang story…

China.  Despite increases in foreign investments elsewhere around the world, the Red China continues to be the biggest sustained attraction for western capitalists in the last 15 years.  In 2004, China added another $95 billion to its foreign investment coffers, for a total of $753 billion since the end of the Cold War.  This ranks China now as a virtual equal to the U.S., the country that has always dominated all others in terms of foreign investment appeal.

U.S.  Speaking of the U.S., the American economy rebounded in 2004 from a dismal 2003 investment record in two prior years.  The U.S. ended the year with $96 billion in foreign investments, up 69% from 2003, but still considerably below the $159 billion-level in 2001, or the $314 billion-record our country reached in 2000.  Still, a rise is better than three

India.  In 2003 and 2004, and especially during the last U.S. presidential campaign, political rhetoric made out India as the biggest nemesis of the American workers.  But talk is cheap.  And the latest UN figures show that political noise can overpower financial facts by a country mile. 

In 2004, for example, even after a hefty 25% annual increase in foreign investments, India attracted “only” $5.3 billion of foreign capital.  China, on the other hand, got $95 billion, as you saw earlier.

The discrepancy between the two countries is even larger over a longer period of time.  Since 1990, for example, China has attracted 22 times (!) more capital than India.  Yet our politicians, especially the Democrats, are screaming bloody murder with respect to “offshoring” of American jobs to India, while remaining mostly mum about those that have gone to communist China.

Why different strokes for different folks?  Maybe the Indians yet have a thing or two to learn from the Chinese about buying of American politicians? (see “Sellout of America - II,” Mar 2005, “The Worst of Both Worlds,” Mar 2005 and “China Follies Revisited,” Mar 2004).

Australia.  Foreign investment flows into Australia increased to a record $43 billion in 2004.  Partly, this was due to a growth of equity investment from $2.3 billion in 2003, to $35.5 billion in 2004, and a significant (56%) rise in M&A deals.  These were driven by a strong demand for Australia’s natural resources. 

For example, two Japanese general trading companies, Ito Chu and Mitsui, plan to invest jointly a total of $3 billion in iron ore in Australia with BHP Billiton (Australia).  The privatization of State-owned assets, and liberalization of the media sector, also played a part in foreign takeovers.

In short, the apparent Australian prosperity is mostly built on selling out of its resources to foreigners.  With economic policies like that, it’s just a matter of time before prosperity turns into privation.  If in doubt, just ask the citizens of another country that starts with the letter “A” (Argentina).

E.U.  Which brings us to the biggest laggard among the countries the UN report on investments surveys – the European Union.  Even though the latest UN report reclassifies the data to reflect the enlargement that added many fast-growing Eastern European countries to the EU, this continent’s foreign investments dropped by 36% in 2004 to $216 billion.  Which means that the sluggishness of western industrial behemoths, such as France and Germany, for example, outweighed the benefits of more nimble economies to the east.

Global investments in France, for example, dropped by 43% in 2004, from $43 billion to $24 billion.  But the French had a relatively good record compared to Germany’s, the largest EU economy.  The latter actually had a $39 billion foreign investment deficit, as many multinationals called on their local subsidiaries to pay off the parent company loans.  It was the most massive exodus of capital from a single country since we have been keeping track of global investments (in the last 15 years).

Nor was Germany alone in that respect.  Nearly $11 billion of foreign capital fled Denmark in 2004; almost $5 billion left the Netherlands (for a total $24 billion decline since 2003), while Ireland and Spain suffered $17 billion and $11 billion declines in 2004 respectively. 

The U.K. was the only major western European country to have attracted more foreign capital in 2004 than the year before ($78 billion vs. $20 billion).  Since the U.K. is the least “European” of the EU countries, the global capitalists, and not just the European voters, seem to be sending a clear message to Brussels: “The EU ain’t working!”

Globalizing R&D

As we’ve noted earlier, the focus of this year’s UN report on global investments has been the globalization of R&D.  This theme dovetails neatly on our recent report on the same subject (see “New "Drang Nach Osten",” Sep 2005). 

Last year, we talked about the globalization of services in the context of foreign investments (see “To Russia with Love and $$$,” Oct 2004).  As the R&D is a form of service activities, like other service, it is “fragmenting”, the UN reports notes, with certain segments being located where they can be performed most efficiently.  Indeed, according to a survey of Europe’s largest firms conducted in 2004 by UNCTAD and Roland Berger, all service functions – including R&D – are now candidates for offshoring.

Global R&D expenditures have risen in the past decade to reach some $677 billion in 2002, the last year for which the UN has collected data.  The R&D is highly concentrated.  The top 10 countries, led by the U.S., account for more than four-fifths of the worldwide total.  Only two developing countries (China and Korea) feature among the top 10.

But the share of developed countries fell from 97% in 1991 to 91% in 2002, while that of developing Asia rose from 2% to 6%.

Similarly, there has been a rise in innovation outputs (as measured by the number of patents issued).  The share of foreign patent applications from developing countries, South-East Europe and Russia to the United States Patent and Trademark Office, jumped from 7% to 17% between 1993 and 2003.

The globalization of R&D is also taking place beyond Eastern Europe and Russia.  Since 1993, for example, when Motorola established the first foreign-owned R&D lab in China, the number of foreign R&D units in that country has reached some 700.

The Indian R&D activities of General Electric – the largest multinational in the world – employ 2,400 people in areas as diverse as aircraft engines, consumer durables and medical equipment. 

Pharmaceutical giants, such as Eli Lilly, GlaxoSmithKline, Novartis, Pfizer and Sanofi-Aventis, all run clinical research activities in India. From practically nothing in the mid- 1990s, the contribution by South-East and East Asia to global semiconductor design reached almost 30% in 2002.

In 2003, foreign affiliates accounted for more than half of all business R&D in Ireland, Hungary and Singapore and about 40% in Australia, Brazil, the Czech Republic, Sweden and the United Kingdom.  Conversely, the R&D remained under 10% in Chile, Greece, India, Japan and the Republic of Korea.

Summary

From China to India to Eastern Europe and Russia seems to be the direction of the big global financial tsunami, with sporadic waves of foreign dollars hitting the shores of Australia or Latin America.  A polite way of describing the phenomenon would be to say that it is driven by lower labor costs and higher educational quotient.  But the truth of the matter is that the fuel of global investments is greed, the same force that drives Wall Street investments.

If in doubt, just check out the cross-border M&D (mergers and acquisition) statistics in the latest UN report.  In 2004, they surged by 28% to $380 billion, the highest level in the post-9/11 era.  Since 1990, the cross-border M&As have accounted for $5.3 trillion, or two-thirds of all global foreign investments.  

That is why we wrote a year ago:

“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…”

(An excerpt from “To Russia with Love and $$$,” Oct 2004)

And time has already told, as you saw from the 46% surge of investments into Russia.  As we look ahead, we see more of the same trend for the next several years… a “New Drang Nach Osten,” only with bigger numbers as the latest wave gathers momentum.

Happy bargain hunting!

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