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Friday, October 12, 2012

The Globe: Investing in the Post-Recession World - Harvard Business Review

The Globe: Investing in the Post-Recession World - Harvard Business Review: "The Globe: Investing in the Post-Recession World"

For an interactive map of global growth, including additional countries, click here.
Opportunities for corporate growth in 2011 seem to be both everywhere and nowhere. The global recession is officially over, but it’s still haunting much of the world. Government actions and contradictory economic trends further confuse the picture: Brazil is planning to spend while Australia is cutting back. Trade tensions are rising between the United States and China. Indonesia tempts inflation by keeping rates low.
Emerging market economies such as India are growing vigorously, offering hope for multinationals intent on expansion. Yet in virtually every country, negatives vie with positives, partly because of variation in how countries have managed the downturn. Are they stimulating their economies? Courting foreign direct investment? Imposing austerity?
Companies need a way to cut through the chaos and avoid pitfalls. Here we present a guide—based on an aggregation of political and macroeconomic factors—for determining where growth is likely, which governments are encouraging or impeding foreign investment, and which sectors in those countries provide the greatest opportunities.
Drawing on Eurasia Group’s political analyses and on economic databases from sources such as the International Monetary Fund, we assigned scores to countries on the state of the macroeconomy (which affects issues such as consumer demand, labor unrest, and exchange rate stability) and on foreign investment policy (which affects multinationals’ access to opportunities). We plotted the countries on a graph and divided them into four groups, ranging from least to most risky. Although other factors also matter to multinationals, we focused on those two issues because they are affected by political decisions, which can be difficult to comprehend and can change unexpectedly.
Some of the results are surprising. Chile, with its stability and transparency, comes out ahead of perennial investment favorite Brazil. China has a more-favorable investment environment than India, but that gap is likely to close as India’s government implements a variety of policy changes.
How We Assigned Scores
To assess a country’s macroeconomic condition, we drew on data that correlate with economic conditions, including GDP growth, inflation, exchange rate volatility, government budget balance, current account balance, and foreign exchange reserves. To evaluate a country’s policy environment, we used political data and analysis from Eurasia Group. We measured how hospitable the policy and regulatory environment is for foreign investment by assessing the extent to which government policies (such as regulation) and practices (such as corruption) inhibit economic activity. For both macroeconomic conditions and policy environment, we used scales of 1 to 10, with 1 representing the greatest degree of risk and 10 the lowest.
As an example, an analysis of Spain’s macroeconomic conditions reveals deterioration in several variables in the past year. For instance, the unemployment rate increased from 18% in 2009 to an estimated 19.9% in 2010. The exchange rate volatility of the euro also increased over this period, which decreases the stability of the macroeconomic environment. In addition, Spain’s real GDP growth is slow in comparison with that of other countries: The IMF estimates that Spain’s economy contracted 0.3% in 2010 and will grow only 0.7% in 2011. The government’s policies have not helped Spain’s macroeconomic condition: In January 2010 the government introduced austerity measures that included a decrease in public sector wages, increases in the value-added tax, and income taxes on high-income earners. Although the government is implementing austerity to appease bond investors, these policies limit consumer demand, while spending cuts keep public expenditures from rising to offset the decrease in demand. Thus Spain’s macroeconomic score decreased over the past year. A variety of market indicators corroborate the deterioration in Spain’s macroeconomic environment, including a 5.3% decline in the country’s equity markets and a 16% increase in the government bond yield year-on-year to October 2010.

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