Changing Trends In Outward Investment
Debashish DasGupta, Chief Sales Officer at Amicorp Group, discusses the trends, challenges and opportunities for investment across Asia and the Middle East.
Asia is emerging as a prominent foreign investor, catalyzing the global trade recovery and shouldering nearly two-thirds of global trade volume growth. Asian and Middle Eastern economies continue to showcase sustained growth in both inward and outward foreign direct investment (FDI). Outward Asian investments have diversified significantly by geographical spread and sectoral composition in the past five years. FDI outflows from Asia and the Middle East have nearly doubled in the last eight years reaching $401 billion in 2018, contributing 40% of global FDI outflows.
Key trends include a multifold increase in international mergers and acquisitions (M&A). Overseas M&A by Asian and Middle Eastern companies have witnessed threefold growth, to $343 billion in 2018 from $88 billion in 2009. Recent major M&A activities by Asian and Middle Eastern companies include China Investment Corporation’s acquisition of Logicor from Blackstone, the acquisition of WeWork Cos by SoftBank Group Corp., the purchase of Shire PLC by Takeda Pharmaceutical Co, and Calsonic Kansei’s acquisition of Magneti Marelli S.p.A from Fiat Chrysler Automobiles.
Outward foreign investments from Asia declined slightly in 2018 due to growing geopolitical trade tensions between the US and China. This has led to Chinese overseas investments increasingly moving away from the US to developing Asian economies. ASEAN countries like Singapore, Indonesia and the Philippines are emerging as major beneficiaries of Chinese investments. Canada has also gained from the current US-China standoff, with Asian investments in the country rising from $635 million in 2016 to $2.7 billion in 2018.
Overseas investments by Korean businesses, in particular, electronic goods and automotive companies, including LG, Samsung, Hyundai, and KIA, continue to rise. Korean companies are placing these investments in high-growth areas such as artificial intelligence (AI) and 5G.
Outward FDI from the Middle East is also at an all-time high. Foreign investments from Saudi Arabia, the U.A.E. and Turkey span across new global locations and emerging disruptive technologies. Saudi Arabian investments have come from the country’s sovereign wealth fund and large private investors, such as the Kingdom Holding Company.
There are some challenges. Cross-border M&A present industry participants with many considerations, including political frameworks, unfamiliar jurisdictions as well as increased financial and tax compliance burdens. Many cross-border M&A deals have been withdrawn due to regulatory, political, and competition policies. Anticipating and planning for these potential challenges is critical to the success of any cross-border transaction.
Critical issues encountered by Asian and Middle Eastern companies in international/cross-border M&A transactions include the political climate. National politics has a significant influence on the freedom to operate in the local business landscape. Political parties exercise indirect control through unions, campaign groups and other public interest institutions, which determine the “freedom and authority” of a foreign player operating in the host nation. The absence of synchronized objectives between national political institutions and the foreign corporate could heighten the risks of a sudden business shutdown, resulting in massive unemployment.
There are also tax and accounting considerations. The release of the Panama Papers in 2016 exposing offshore tax evasion, corruption, money laundering and terrorist financing around the world has provided a tremendous impetus for global institutions and countries to introduce regulations around transparency and the standardization of reporting and communication between home and host countries. Adoption of these norms by major global regions has increased compliance requirements for cross-border transactions.
The FDI inflow screening process often rejects international M&A deals deemed to be a threat to the domestic industry playing field in the host country. Screening is established to ensure no transfer of autonomy or excess power to the foreign investor in exerting control over critical infrastructure or technology or product in the host market. Unfair market competition from cross-border deals runs the risk of trade monopoly and creates pressure on domestic players. The host country’s competition regulatory bodies often dissolve such deals, which threaten consumers’ freedom and access, prioritizing national interest.
Regarding employment and labor, varying local jurisdictions, customs, and practices across nations make talent acquisition complex for a foreign investor. When operating in a new economy, a foreign investor is heavily reliant on local business partners to support its critical labor pooling and management activities. The foreign corporation is not only subject to social and cultural variations in available local talent, but it is also expected to comply with various laws and applicable restrictions.
Adherence to the various cross-border regulations also remains a challenge for many entrants. Foreign investors often need to grapple with complex policies such as those drafted in line with rising national security concerns, local content requirements, land, and fiscal incentives for international players.
Pre-deal due diligence is vital before venturing into a new country. It empowers the entrant with knowledge on national and regional tax laws, the target’s financial information, political stability of the host country, and the target’s compliance with various regulatory and compliance standards in the country of operation.
Organizations undertaking cross-border transactions are increasingly opting for assurance services to optimize foreign earnings and minimize compliance risks. Assurance services help facilitate trade, supporting a foreign investor in scaling faster growth in a new territory through shortened transit times in cross-border trade flows.
Assurance services cover a wide range of functions such as forensic and integrity services, financial accounting and advisory services, and international tax planning, which enable foreign investors to address potential challenges in cross-border transactions. They also bring about a transparent and trusted reporting system for financial decision-makers.
Amicorp Group is an independent global service provider providing a broad range of assurance, administrative, legal, corporate secretarial, and support services as one of their many business verticals. Amicorp helps companies and HNWI’s meet transparency standards and regulatory requirements in cross-border deals while managing stakeholder demands. Amicorp has a team of professionals working across the world and is a leading player in emerging markets–servicing across countries from Brazil to Indonesia and China, offering expertise on the latest standards of service, risk management, compliance requirements, and regulatory knowledge.