World business climates in late 2000 are, for the most part, fair. But some forces are at work that could change that in the New Year. Energy prices in Western markets, particularly the United Kingdom and Continental Europe, are exerting pressure on businesses that manufacture and transport goods. A scarcity of skilled labor is a problem in all major markets, which increases the cost of labor. And instability of the fledgling euro is adding extra currency risk to global businesses.
In the meantime, things are good, particularly in the USA, which is enjoying the longest period of economic expansion since World War II. The USA again ranks number one in the International Institute for Management Development?s annual World Competitiveness Yearbook Scoreboard (see chart). Whereas deregulation drove economic expansion in the early 1990s, New Economy factors are the catalyst now. ?The USA is a pioneer in the Internet economy,? says Prof. Stephane Garelli, director of the World Competitiveness Yearbook project. ?In 2003, an estimated 10 percent of the U.S. GDP will be generated on the Internet.?
Asian markets rank poorly by comparison, with the exception of Singapore, which has claimed the number two spot for several years in a row. ?Thailand, Malaysia and the Philippines are picking up again, but Indonesia lags behind still economically,? says Tom Bennema, a senior consultant with Ernst & Young?s International Location Advisory Service, in Utrecht, the Netherlands. Bennema worked in Kuala Lumpur, Malaysia, during Asia?s economic travails of the mid-1990s.
Multinationals are once again interested in the region, but different parts of the region. ?There is less interest in labor-intensive investments in Thailand and Malaysia,? reports Bennema. ?Electronics industry players are moving from Malaysia to China now, primarily for labor availability reasons.? Labor in Thailand is less expensive than in Malaysia and more available.
?In some ways, Asian countries are capable of making quantum leaps using Western technology and bypassing the trial and error we see in the West,? Bennema points out. This should industries flourish. ?In Malaysia there is the multimedia supercorridor, which is a dedicated area south of Kuala Lumpur that attracts foreign companies. In this area, major advances in information technology and Internet systems are taking shape thanks to a very flexible investment climate. Companies there might be able to develop industry by using foreign technology and by developing their own work forces, too. Countries will benefit from foreign technology, but actual benefit will come at a point when they can develop their own technology.?
Eastern Europe Comes of Age
Labor shortages in Europe are driving a renewed interest in shared-service centers and in optimizing distribution networks. ?We see an increase in the number of mainly automotive and chemical industry projects in Hungary and Poland, but Ireland is past its peak now,? says Bennema. ?Hungary also is seeing a strong increase in electronics and information technology related projects,? and the reason has to do with more than just labor availability, he asserts.
?Just a few years ago, the Eastern European countries were still hampered by a lower attitude towards quality and a cumbersome business climate,? he relates. ?Much of that has changed. The region is more open, more liberalized, and there is less red tape and a higher awareness of the importance of quality. ?There is always a balance between labor costs and quality and ease of doing business and quality of life, but Hungary and Poland specifically are gaining ground relative to European Union countries.?
In general terms, Europe as a whole will benefit handsomely from New Economy business activity. ?Amsterdam, London and Frankfurt are fighting to be the number one New Economy city,? says Bennema. ?But we also see in cities like Geneva a lot of U.S. investors in IT companies for which operational costs are less important than finding a location in Geneva, for example. Different location factors are important for various industries, which is why cities like Stockholm are putting themselves on the map.?
Bennema?s colleague at Ernst & Young, Dries Lodewijks, a manager in the International Location Advisory Service, has recently completed some research that could add depth to companies? business climate analysis. ?We were asked by the Netherlands Foreign Investment Agency in the Ministry of Economic Affairs to look at the consequences of the United Kingdom not participating in the euro for attracting foreign investments,? he explains. ?We looked at the most mobile business sectors, and we looked at how euro-sensitive these sectors are. The point is to see which sectors the Netherlands attracts in that context.? His research, when available, will shed light on the relationship between the ?eurozone? and industry migration. (Further coverage of this research is planned for a forthcoming
issue of Site Selection.)
Ongoing integration of the European markets and the onset of the euro are the key issues impacting business climates in Europe, says Bill Pijpers, vice president of marketing at Buck Consultants International, Nijmegen, the Netherlands. ?Some countries are more prepared for this single currency than others,? he says. ?It will have a major impact, because cost structures will become more transparent and competition will increase to some extent, and transfer of goods will increase.?
High energy prices may negatively affect European economies as the winter months approach, Pijpers notes. ?The EU must do something, but much of the problem is beyond their control. Gas prices are very high in Europe due to taxes at the national level, but I don?t think the governments will reduce them considerably. If energy production doesn?t increase, prices will go higher, and transportation companies are going out of business. Of course, that will affect the business climates.?
Brazil Beckons
Latin America must still counter perceptions of risky political landscapes, which are often true, depending on the market. ?U.S. investors tend to put Latin America together with Asia, the Middle East and other emerging regions,? says Bruce Lorimer, at CB Richard Ellis, in Sao Paulo, Brazil. ?The fact is that we in Brazil do not have political unrest or instability. We are going through a period of peace and stability, and it takes time for that to come across, especially as laws are changed over time.?
Lorimer says investment in Latin America from Europe and the USA is substantial, and Brazil is benefiting from much of it. Economic growth is strong relative to other markets, and inflation is under control. ?Almost every sector that requires large capital investments is investing in Brazil, such as telecommunications and petroleum,? he says, because it is too expensive for Brazilian companies to make the necessary investments. High interest rates are stifling local industrial development. Foreign investors are capitalizing on Brazil?s privatization of these capital-intensive industries.
All of which is good news to the real estate community. ?Developers here are enjoying excellent returns, in the region of 20 percent,? says Lorimer. ?There are very good opportunities to find cheap sites and create value at those sites due to the excessive amount of demand for office space. The fact that the economy is doing so well means that this situation is likely to get more difficult for occupiers. For the next couple of years, the demand-driven economy will keep prices up.?
