Growth+ What matters most to CEOs expanding across borders today


Regulatory conditions are always a factor when a business takes on the ultimate risk to invest directly in another economy...

The real calculation is just how much of a factor given other dynamics that affect business growth and profitability. In this study, based in part on PwC’s Survey of over 1,100 business leaders in May-July 2016, we show that regulatory conditions are rising to the top of the risk/reward investment case for cross-border expansion in the 21 member economies of Asia-Pacific Economic Cooperation (APEC).

This marks a change. Five years ago, as developing economies reached parity in attracting foreign direct investment, more business leaders in the region identified access to expanding markets as the most important driver of their investments. Today, CEOs remain focused on access to dynamic markets, but are balancing that against those policy conditions that help or hinder prospects to expand and realize returns in another economy. Over the next few years, as the APEC region remains a magnet for investment, the findings suggest that economies that establish better regulatory conditions will attract a larger share.

In part, this shift reflects growing competition among the world’s policy makers to attract business investment through incentives or reforms and boost their own participation in global value chains. The World Bank’s Ease of Doing Business research sees a convergence taking place in regulatory practices as lower-income economies move to lift business barriers and improve their rankings in competitiveness measures. APEC economies have been particularly active here, a companion PwC study shows.

Executives are also responding to jurisdictional leaps in areas like anti-corruption enforcement. We’re moving away from a world where the border gets to define the rules.

Businesses today are dealing with policy goals and regulations in one economy that may conflict with those in another economy, and differ yet again from global industry standards. Mining group Freeport-McMoRan Inc., facing this very issue, built a project in Congo to the same environmental standards as an existing mine in Arizona. “It’s the right thing to do but ultimately, if you don’t do it, it will come back to haunt you,”  Richard Adkerson, Vice Chairman, President and CEO, told PwC in an interview.


Full details on PwC's 2016 APEC CEO Survey research methodology

Our findings suggest that business investment is now more likely to flow to economies with the right policy environment and talent pools as well as growth prospects. That’s what we mean by Growth+.


 


Evolving new economy rules factor

“The digital economy will become a very important catalyst for cooperation between economies because it's cross-industry and cross-border in nature. Technically, the flow of information is completely unrestricted. The only consideration now is whether each society can embrace it with an open mind.”

Hugn-Tze Jan, Chairman, PChome Online, Inc.


 

More businesses are bumping into regulatory complexities overseas as customers demand new things and new tech-based, tech-powered products and services create new markets. Think of the multi-language ingredients labeling on imported snacks, and layer on local rules on fat content as well as different consumer preferences for fair trade and organic sourcing. It’s a small but telling picture of the demands put on business across borders.

The patchwork of rulemaking underway in the world as governments seek to address data privacy and security are an emerging issue with many competitive implications. For example, requirements that aim to keep data from crossing borders add to computing costs, estimated at 30%-60% more, for local companies cut off from major cloud services providers as a result, according to UNCTAD’s ICT Analysis Section. What’s harder to determine is investments not made due to uncertainties with the evolving rules for data privacy and security. Survey responses suggest that it’s growing: 26% of executives this year say they would be ‘highly likely’ to invest more in the APEC region if data rules or standards were harmonized, up from 16% of executives surveyed three years ago.

As data flows increase, and as e-commerce and digital services grow as a percentage of cross-border trade, regulations will strive to keep pace with technology while protecting consumer privacy and ensuring data security. This will likely become more pressing as APEC economies compete to become data-hosting and management centers.

The surge of interest and investment in financial technologies (FinTech) offer an interesting twist. This is an area where policy makers in financial hubs are prepared to compete on regulatory conditions by creating ‘sandboxes’ to support business innovation. Hong Kong Financial Secretary John C. Tsang’s  2016–2017 budget details plans to encourage firms to “explore application of blockchain,” the technology that enables cryptocurrency (among other things).


APEC remains a magnet for cross-border investment

While global growth and trade flows continue to disappoint, foreign direct investment (FDI) flows bucked the trend in 2015, rising 15% on the year, excluding corporate reconfigurations. APEC economies are beneficiaries, capturing 54% of global business investment inflows in 2015, up from 52% in 2014, according to UNCTAD’s World Investment Report.

This year’s APEC CEO Survey responses do not indicate a pullback. Although there is no change this year in a key measure of CEO confidence—just 28% of all APEC business leaders remain ‘very confident’ in revenue growth over 2016–2017—a majority of business leaders (53%) say they will increase investments over the coming year. And like last year, most of any increase in investments is planned to take place in APEC economies.

The US and China continue to draw investment from more CEOs. Yet responses show CEOs also continue to pursue geographic diversification. This year, on average, CEOs are business investors in seven other APEC economies. Last year, on average, CEOs were investors in six. Regulatory conditions rise in importance as businesses seek to stretch operations across more economies.

Christine Holgate, CEO and Managing Director of Australian healthcare company Blackmores, describes their regionalist approach: “China is the biggest market in the world with about US$50 billion worth of opportunity for a company like Blackmores but the next big cab off the rank for us will be Indonesia. We've had over 40 years operating in ASEAN so we've got deep understanding of the region but like a balanced approach to our opportunity.”

There is evidence of a strategy for CEOs to spread investments closer to home. These reflect efforts underway among like-minded economies to pool their strengths in regional trade pacts like the Trans-Pacific Partnership (TPP) or the Pacific Alliance, which unites Chile, Colombia, Mexico and Peru. For example, CEOs in Peru are more likely to increase their investments in Chile, Mexico, and the US over the next year. And ASEAN-based CEOs are more likely to increase investment in other ASEAN economies.

Regional capabilities are becoming the benchmark for CEOs: 38% identify a regional leader in APEC or a multinational company from an emerging economy as their leading rival. This signals a changed competitive arena that’s underlying the investment flows. Only two years ago, 41% of APEC CEOs identified a multinational company from a developed economy as their leading rival.

“We are a lot stronger together. Presidents and business leaders in each country are showing the will to integrate because of the benefits it will bring to our countries. The world is pointing toward integration. There is no other way.”

Alberto Salas, Chairman, Chilean Confederation of Business and Industries, discussing the four-member Pacific Alliance


 


APEC CEOs signal where government leaders can improve the regulatory environment: enforcement and coordination across borders

The World Bank sees a convergence gradually taking place in regulatory practices as lower-income economies move to lift business barriers tracked in the Ease of Doing Business reports. Among APEC economies, a similar exercise shows progress against a checklist of good practices. Over the past five years, for example, the project found that assessing cost and impact of regulation is becoming the norm in the APEC region. Measures to increase transparency and consultation also have improved if not as systematically. APEC business leaders note the change, but they see room for improvement, especially with enforcement and policy coordination across borders.

Regulatory practices are steadily improving in basic areas, according to Vorapak Tanyawong, president of the Krung Thai Bank Public Company Ltd. Consistent growth in intra-regional trade and an increase in cross-border acquisitions show that Asia Pacific is opening up, he said. But the pace relies on APEC economies’ continuing to advance on reforms. That is the “key challenge,” he adds.

The APEC CEO Survey responses indicate the importance of following through on the reform agenda. This is where CEO perceptions of progress across the full range of regulatory activities are the weakest: nearly twice as many CEOs (28%) are now less confident in enforcement than those who are more confident.


So how do APEC economies stand in terms of their appeal for cross-border business investment?

PwC built a dataset of measures of regulatory conditions pertaining to cross-border business to assess how APEC economies stack up against perceptions of other investment destinations for business leaders. In this companion study, we show that while APEC economies have some of the best cross-border business environments in the world, the rest of the world is catching up in important areas.
 


Implications

For policy makers

Over the next few years, as the APEC region remains a magnet for investment, our findings suggest that the economies that offer better regulatory conditions will attract a larger share. CEOs signal that APEC leaders should focus their limited resources on two things that can unleash more investment: strengthen enforcement in their economies and cooperate on harmonization of data policy and standards.

For business leaders

Understand the objectives of regulatory moves, such as building trust in consumer data privacy. Then you can make strategic moves to address the underlying objective, rather than just assure compliance. Working with the regulators as industry ecosystems, giving them comfort their efforts can lead to measurable, positive change for their economies, is the way to go. Reductions in tariff and non-tariff barriers, mutual recognition of standards, intellectual property protection and more predictable trade flows are but some of the prizes to be won.

Contact us

Juan Carlos Mandujano
Client & Markets Partner
Tel: +(511) 2116500 ext. 8113
Email

Emily Church
Senior research fellow
PwC US
Tel: +1 (646) 471 1535
Email

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