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FDI flows and the need for a local presence - EY - Global

Trading placesFDI flows and the need for a local presence

67% of companies noted that their supply chain is increasingly servicing their company's growth in emerging markets.

Rapid-growth markets, and China in particular, will represent the fastest-growing source of final demand over the coming decade.

This will provide additional impetus for firms to locate production in the destination region so they can be responsive.

This suggests that Foreign Direct Investment (FDI) is likely to be increasingly directed to emerging markets over the coming decade, and that regional supply chains will grow in importance as a result.

More than 67% of companies surveyed as part of Ernst & Young’s Driving improved supply chain results noted that their supply chain is increasingly being developed to service their company’s growth in emerging markets. Despite declining transport costs, distance between markets can still pose a barrier.

Grupo Modelo case study: getting enough containers to Asia

For example, José Parés, Sales and Marketing Vice President of Grupo Modelo, whose export and import brands include Corona, Bud, Carlsberg and Tsingtao beer, noted that with the slowdown in consumption growth in the US, the flow of containers from Asia has declined.

This has presented Grupo Modelo with a challenge in getting enough containers to ship their products to Asia. In response, Grupo Modelo has recently opened a distribution centre in Shanghai to enable it to reach consumers in Asia more effectively.  

Risks in creating a local presence

  • Market entry costs commonly underestimated 
    Creating a local presence with these rapid-growth markets is not without its risks.
    More than one-third of the companies surveyed for  EY’s The Master CFO Series: What lies beneath? underestimated the costs associated with market entry, particularly when looking beyond the BRIC countries into less familiar territories.
  • Time over-runs 
    Time over-runs were an even bigger problem, with 43% of respondents saying that the investment took more time than they had anticipated.
  • Corruption 
    Serious corruption problems can also represent risks in many developing economies. For example, Russia’s and Venezuela’s prospects for FDI and growth are hampered by the high perceived levels of corruption.
    They are ranked within the bottom fifth of countries (those with the highest levels of corruption) according to Transparency International’s Corruption Perceptions Index. Companies should examine the scale of such problems and consider controls and procedures to manage such risks before entering destination countries.

Countries making improvements to business environment

At the same time, many rapid-growth economies are making significant improvements to the operating environment for businesses.

According to the World Bank’s annual Doing Business report, China and India are among the top 40 most improved economies, in terms of creating a favorable regulatory environment for trading and entrepreneurship, since 2005.

And one-third of the top 30 most improved economies are from Sub-Saharan Africa.

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