Global Location Trends 2009

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The shared services industry did not escape from the downturn in global investment numbers in the past year. The number of new services centers established, as well as the number of jobs created within these centers, both decreased in 2008 compared to previous years. This is one of the conclusions of IBM's latest Global Location Trends report, which describes the latest trends in where companies are deciding to establish their new operations around the world.*

A year of turbulence
Firms entered 2008 under a cloud of uncertainty about their prospects, with the financial system in severe difficulties and the global economy on the brink of recession. Indeed, the data now shows that some countries, notably the US, had already entered recession at the end of 2007. Accordingly, the latter half of 2007 saw an emerging paralysis of financial markets and limited access to credit for companies and consumers as banks aimed to de-leverage their balance sheets. This trend continued and intensified during 2008, with the global financial system and economy unraveling in dramatic fashion.

As we saw in last year's Global Location Trends report, the impact of the emerging financial crisis on foreign direct investment was already evident during the last months of 2007, with a significant reduction in investment activity, notably in services. With the financial crisis developing into a fully-fledged global economic recession during the course of 2008, global investment activity continued its downward trend. Jobs created from foreign investment projects fell from more than 1.1 million in 2007 to just over 800,000 in 2008. This is equivalent to a decline of more than 25%, the biggest drop in international investment since we started tracking investment announcements.

A change in motivation for investment
The deteriorating economic situation had significant implications for how companies approached their global operations. In previous years, a prime motivation for expanding internationally had been to gain access to growing or new markets. Accordingly, companies sought to locate their operations such that they could take advantage of opportunities in existing or emerging markets with growth potential -- either by locating or expanding operations directly in key markets, or by locating operations with a view to export to the main markets. This resulted in a widening of investment activity, as companies continued to expand their geographic scope and search for opportunities in new regions and countries around the world.

With consumer confidence falling and market prospects deteriorating rapidly, the prime concern for companies changed from one of market access to one of cost containment and reduction. Furthermore, the constraints on credit resulting from the financial crisis meant that companies found it increasingly difficult to finance their investment projects.

The concomitant changes in approach to international activities were characterized by an emphasis on consolidating existing operations, lowering capital expenditures on investment projects, and giving greater priority to opportunities for cost savings. This all manifested itself in not only lower investment levels but also a change in where investment projects were located and the type of investment that took place. The strong focus on cost reduction and consolidation also to some extent translated into a re-boosted interest in shared services type of establishments.
 
Investors consolidating and widening their geographic scope of investment
The greater focus on consolidation and cost reduction rather than market entry had varying implications for where investors were looking to locate their activities. On the one hand it meant that many of the large and developed economies, such as the US, UK, Germany and France, increased their share of global investment, as companies consolidated activities in stable countries with existing mature operations, despite the rapidly deteriorating domestic economic conditions in these countries. Accordingly, the US advanced a position in its overall ranking, from 3rd to 2nd, ahead of China but after India; while France, Germany, and Canada all improved their positions in the ranking.

Furthermore, companies looking to reduce costs continued to look for opportunities in new countries as recent 'hot spots' have become overheated and costly. This has resulted in a number of emerging economies increasing their share of investment at the expense of other previously low cost locations. For example, 2008 saw significant increases in the share of jobs created for countries such as Tunisia, Algeria, Egypt, Turkey and Romania, while central European countries such as the Czech Republic, Poland and Hungary saw significant declines in their share of investment and jobs created, as did some Asian countries, such as Malaysia, the Philippines, and Vietnam.

Figure 1 - Top ranking destination countries by estimated jobs - 2008 (07)

 
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Other countries that have gained from the consolidation efforts are those that have a compelling proposition to investors for those business activities that can easily be consolidated. For example, despite a rapidly deteriorating domestic economy, Ireland experienced significant absolute and relative gains in inbound investment as a result of the country's strengths in services and R&D, which is reflected in the country's being the top destination when taking account of population size.

Figure 2 - Top ranking destination countries* by estimated jobs - per 100,000 inhabitants - 2008 (07)

 
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The combined trends of consolidation and widening of scope are further evident when analyzing the performance of cities around the world. Cities, themselves virtually complete economies in some instances, are increasingly becoming the focal points of global economic activity, and analysis of their performance offers a more granular picture of trends at the country level. Hence, measured by number of projects, London is the world's top destination for investment. As the economic centre of gravity of the UK it profits from the country's strong performance, but has additionally established itself as a key global location for international services operations. London is followed by traditional strong performers Singapore and Paris. Cities such as Hong Kong, Dubai, Manchester, and Frankfurt saw significant improvements in their relative performance, while some cities that have been known as major 'hot spots' for investment attraction in recent years, such as Budapest, experienced a relative decline in their ranking. It is noteworthy that the top 20 destination cities in the world include 8 Asian cities, 10 European and only 1 city from North America. The lack of US cities in the ranking is largely explained by the fact that the many projects going to the US are dispersed among a large number of different cities, with investors having many options for locating their activities in different places around the country.

Figure 3 - Top ranking destination cities by number of investment projects* - 2008 (07)

 
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The changing fortunes of countries and regions around the world are also partly explained by significant changes in the type of investment that occurred. During 2007, the immediate difficulties associated with the financial crises resulted in a significant decline in investment for services activities, with the financial and business services sectors particularly badly hit. With credit constrained and economic activity slowing, 2008 saw the impact of the deteriorating economic environment spreading to other sectors of the economy, with production and R&D activities also seeing substantial declines in investment activity.

Service centers
When zooming in on investment trends in service centers specifically, it is clear that these declined considerably in 2008, creating less than 120,000 jobs in 2008 compared to more than 175,000 in 2007. India continues to be the top destination globally for services activities, followed by the UK and the US. A number of countries have entered or re-entered the top 20, with Poland ranked 6th as a result of gains in shared services and Ireland 14th, gaining in higher end services projects. In addition, El Salvador, Argentina, and Egypt are now in the top 20, highlighting investors' willingness to explore opportunities in new countries for their services activities. In contrast, China and the Philippines experienced significant relative and absolute declines.

Figure 4 - Top ranking destination countries by estimated jobs in services - 2008 (07)

 
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New locations emerging as key contenders for investment
A growing trend in foreign direct investment in the last few years is that companies are expanding their geographic scope of investment activity in search of new cost-efficient opportunities. This is, for example, manifesting itself in companies looking to locations in Africa and the Middle East as alternatives for serving the European market as opposed to traditional 'hot-spots' such as various Eastern European cities. This trend also reflects the improvement in the business environments that these locations have instituted in recent years. Accordingly, it is the combination of a more favorable business environment and competitive costs that makes such locations increasingly attractive to investors. This is evident when analyzing locations in a cost-quality map - an analytical method developed by IBM-PLI - which provides a tailored assessment of the relative attractiveness of locations for particular business activities with respect to the quality of the business environment along the y-axis and operating costs along the x-axis. Locations further up the y-axis offer relatively more favorable business environments while locations further to the right offer a more attractive financial proposition. A location's position in the map indicates the cost-quality trade-off available to investors. As is illustrated in the graph below, some African locations are now offering attractive cost-quality trade-offs for some investment projects compared to competitor locations in Eastern Europe.

Figure 5 - Combined cost & quality assessment illustrates African locations emerging as key contenders for investment

 
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* The Global Location Trends report uses IBM's proprietary Global Investment Locations Database (GILD), which records investment project announcements around the world to analyze global trends in corporate location decision making.
 
The full Global Location Trends report can be downloaded at www.ibm.com/gbs/pli.

To discuss findings in this report please contact Roel Spee on tel. +32 2 416 5928 or roel.spee@be.ibm.com, or Patsy Van Hove on tel. +32 2 416 5925 or patsy.van.hove@be.ibm.com.