The FDI crystal ball grows ever murkier

By Michel Lemagnen, Head of Business Intelligence, GHP

Those of you know me will know that I am not averse to making predictions via my crystal ball. I have been working as a market and industry analyst across a range of sectors and countries for more than 20 years, and the last 12 of those specifically in the world of foreign direct investment. During that time I’ve made plenty of predictions and forecasts, and, by and large you’ll be pleased to know these have been pretty accurate. But for once, I find myself genuinely confused when I look into my crystal ball.

Part of this is that the different international FDI databases all have a slightly different angle on things and vary in the ways data is collected, monitored and validated. Having worked on one of them for many years, I know this is a tough job so I am not raising any criticisms here. So whilst we wait for the final “end of year” figures to come out, it is pertinent to look at what we do know and get some feedback from one of the sources.

Let’s start with cross-border M&A because that is less controversial – although there are plenty of variations in definitions. The source data is here is Bureau van Dijk’s Zephyr global M&A database. However, focusing only on deals which resulted in a final share in the target company of over 50%, the trends for Jan-Sep 2011 showed an 8% increase in the number of cross border deals in Europe compared with Jan-Sep 2010. However, there has been sharp decline of 29% in deals into Central and Eastern Europe. In contrast, Western Europe has done well with a 12% growth in deal numbers.  Historically, across Europe,  the most active quarters are Q1 and Q4 – for example, there were 607 in Q4 2010 and 645 in Q1 2011.  Since then, although quarterly deal volumes have fallen, these are still ahead of the same periods of 2010.

Nordic Cross Border  M&A – warning signs in Q4?

The cumulative position for the  four Nordic countries between Jan-September 2011 is positive with a 12% increase – although Denmark has been an exception to this with a decline of 10%.

Finland itself had  the strongest growth record of all the Nordics in the first ¾ of 2011 with 47 projects, 38% up on the same period in 2010. However,  so far (as at 9th December) in Q4, only Sweden has had a good time of it and there were only 5 cross-border M&A deals into Finland – well down on the 2-year peak of 20 deals completed in Q3 2011 and compared with 12 deals in the corresponding period in 2010.

Cross-Border M&A in the Nordics, 2010

Cross-Border M&A in the Nordics, 2011

Cross-Border M&A in the Nordics, 2010 and 2011 totals

Organic Foreign Direct Investment – Growth Continues in Europe

As mentioned earlier, the picture in terms of organic FDI – i.e. where a company establishes or expands new facilities in a foreign country – is less clear and we’ll have to wait for the audited results to get a more definitive understanding. Ernst & Young’s European Investment Monitor, which is produced by global FDI Consultants Oxford Intelligence, provides some indicators as to what to expect and the picture for Europe is positive with a 13% increase in deal numbers in the first three quarters of 2011 compared with Jan-September 2010.  The data for the Nordics showed a 15% increase in deals with Finland up 47%!

My former colleague and esteemed brother Peter Lemagnen, CEO of Oxford Intelligence kindly provided some comments for us:

“The crisis in the Euro and general instability in respect of Western economies has not yet been reflected in the numbers of foreign investment projects coming to Europe or moving across Europe. This should be no surprise as there is a distinct time lag in between a down turn in the economy and the impact on fdi. For example the impact of the financial crash in 2008 did not impact fdi numbers for that year, and only in 2009 was there a slow down in numbers.  Indeed for the first three quarters of 2011, fdi investment is 13% ahead of the same period of 2010. Numbers of the final quarter of 2011 are not yet available and it is too early to see there is any significant slow down in investment numbers. It is anticipated that 2012 will now be impacted in terms of investment and Oxford Intelligence forecast a decline in project numbers.

Markets such a Spain and Ireland continue to attract foreign investors in spite of problems in their economy. Spain is very significantly ahead of the same period last year and Ireland has maintained it investment position. In both cases their cost / quality position has significantly improved for companies as rents, salaries, etc have all fallen and availability of labour and office space has increased. “

In summary, if it fair to conclude that both for Finland and the Nordics as a whole, the first ¾ of 2011 were very good indeed – especially Quarter 2 which saw a 43% growth in organic FDI deals and a 47% increase in the number of cross-boder M&A deals. Quarter 3 started to show signs of a slow down, particularly in organic FDI, which was between 28% and 44% down on deal flows, depending on which database you look at. The cross border FDI figures are not yet released for Q4 and are being validated. However, there has certainly been a noticeable slowdown here in Finland in both organic FDI, cross-border M&A and cross-border growth capital (minority stakes).

The prospects for 2012 are uncertain because it is clear that the current economic stability issues in the Eurozone are seriously impacting investor confidence and risk perceptions. I would personally anticipate a year-on-year  decline in overall European and FDI and cross-border M&A activity during the 2nd and 3rd quarters of 2012 with a possible recovery in quarter 4.   I would also say that I expect this to be the case for Finland with investments in the Helsinki region holding up better than those in the rest of the country.