As the US trade and technology war with China staggers on, the 2019-nCoV virus shuts down schools, and more people begin to question the sustainability of global integration, I looked at a few charts in search of a reality check.
Here’s what I found.
First, the overall trend in outbound foreign direct investment (FDI) shows a steady climb despite a few blips in the Great Recession in 2007 and 2018. Total cumulative FDI exceeded $35 trillion by 2019 (see Figure 1) and the long-term trend is undoubtedly robust. Most importantly, outbound investment from developing countries is in an early acceleration trend and already comprises approximately $7 trillion by 2018, or 20% of global total. Expect this to continue.
Figure 1: Outbound FDI Stock by Economic Region, 1990-2018 (USD Millions)
Second, cross-border greenfield investment into new projects and companies also remained relatively positive between 2003 and 2018 with the exception, again, of the 2007 financial bubble and bust. Despite cyclical fluctuations, annual activity in both the services and manufacturing sectors has been steady. Each segment reached almost $500 billion in value during 2018 alone, which was up year (and a leading indicator, as these are announced deals).
Figure 2: Annual Value of Announced Greenfield Investment, 2003-2018 (USD Millions)
Third, cross-border M&A activity–which is generally more volatile and cyclical as it’s often tied to to financial market valuations–reached a historical peak in manufacturing during 2016, and remains elevated. Meanwhile cross-border M&A in the services industry–technology, health, education, etc–continues to rise. Hardly a vote against global integration.
Figure 3: Value of Cross-Border M&A Sales by Sector, 1990-2018 (USD Millions)
In short, these simple charts so not suggest doomsday for global market activity; quite the opposite. They also underscore how much opportunity has yet to be created. As mentioned previously, developing countries such as China and India are at the very early stages of outbound investment. Consider also that there has been $35 trillion in global cumulative FDI figure since 1990 against the current value of the world’s GDP in one year–2018–at $84 trillion. Finally the United States, far and way the largest source of outbound FDI, currently invests a meager 1.25% of its GDP away from home.
At ground level, I’ve looked closely at global investment and operational activity over the past years within the education and human capital/future of work industries. My conclusion is that most enterprises, from start-ups to universities, are way behind the curve in extending their presence abroad. Unfortunately this is often happening in the face of their home markets shrinking, competitively saturated or limited in sustainable growth.
What should they do?
Global Expansion as a Trade-Off?
Consider the recent case of Class Pass. Founded in 2013, the company began as a fitness app and now has over 25,000 studio, gym and wellness partners worldwide for its users. The company recently became the first “unicorn of the decade,” largely through its international expansion which began in 2018 (helped in Asia by Singaporean sovereign shareholder, Temasek and the acquisition of Guava Pass) and primed to accelerate after raising a $285m Series E round.
Ordinarily this case would be nothing new but I was caught by something Class Pass’s CEO Fritz Lanman said during a recent interview:
“We have upwards of 70, 75 folks in America focused on American expansion and believe we only cover currently about 15% of the serviceable zip codes in this country – the zip codes that have enough fitness studios and gyms for us to exist,” Lanman said.
But the international opportunity for ClassPass has been undeniable, Lanman acknowledged.
Today international expansion–the “trade”–is at the center of its growth strategy. Now, I don’t know how Class Pass will fare, how strong their execution model is, or how profitable their global expansion will be over time. GroupOn led a similar blitz into Asia only to fail spectacularly. Others such as eBay made their own series of mistakes entering China and elsewhere as did Uber across Asia (although its failures resulted in a large investment gain on paper). I highlight the Class Pass case (by all accounts successful…they’ve scaled quickly from 4 to 28 countries in only 18 months!) because there are thousands of other SMEs and start-ups that face strategic decisions every day in relation to global expansion, but you don’t read about them.
They might ask these questions:
- Is international expansion really a “trade-off”?
- When does it become less a trade-off and more a matter of survival?
- Is there a right time to do it?
- Do we have enough resources to succeed?
A Typical Global “Opt-In” Mindset
At one end of the spectrum, companies and investors often take what I call an “opt-in” global strategy, as if it’s as easy as picking something off a dessert menu (I actually had a client who once told me that India would be the “cherry on the cake.”) That is, a strategy that augments their core business by adding an exotic initiative to their bottom line but one which is ultimately non-essential to its future.
This thought process runs as follows:
- Companies often take a binary view on international expansion: that is, first gain significant market share or traction at home (whether the US, China, Brazil…) and only then expand internationally (but not “too early”).
- By the time companies get comfortable with their domestic market share, their product, IP or business concept may have already been deployed in overseas markets by local competitors.
- By waiting too long, late arrivals can face a much more costly and treacherous path to global success, particularly as their home markets shrink or become saturated by competition.
- Later on, pressure to “do something” globally can lead to sloppy, ill-prepared, relationship-driven business expansions that end up failing. Which reinforces the views of certain people who were skeptical of global expansion in the first place.
- It ends with the delusion that a stay at home strategy is the safest bet.
This is perhaps the most common strategy I’ve witnessed. If you can call it that. It is risk averse but also myopic. It says: continue what you’re doing and don’t worry about what is happening away from home. We’re safe.
A “Global First” Mindset
At the other end of the spectrum are those companies who adopt a “global first” mentality from their founding. Here their core market is, and the driver of their enterprise will always will be, away from home.
By default, this strategy generally requires a start-up mindset:
- Enter a specific global market as part of your proof of concept, with an existing or new business (if you have an existing business or enterprise, it will need to discover market fit, iterated value, etc, just like a start-up).
- The core business is built in a target country to solve a specific problem.
- Leveraging this success builds strong backward linkages to the home market, which enhances overall value.
- Replicating local know-how and resources beyond the target country–perhaps to neighboring companies–can be a force multiplier that achieves significant scale and is hard for others to replicate.
In the education world, Andela is a good example. The company was founded in 2014 based on a shortage of technology talent in the United States and what the founders saw as an untapped opportunity in Africa. Their business model–a talent arbitrage that prepares highly-skilled IT talent in Africa and places them into leading global technology company recruitment channels–has led to expansion across Africa, 6 global hubs and, at present, 200,000 applications for its program.
The traction in Andela’s Africa model now provides significant experience and know-how to scale across Africa and beyond to other emerging markets, largely through its global first mindset and accumulated human capital.
Opt-In or Global First? A False Choice
These two poles, of course, are an oversimplification of a more complicated range of activity. But as any reader of this blog knows, my strongly held view is that “going global” is a false choice: for companies, universities, investors and an increasingly larger segment of knowledge workers. Where is world’s future growth coming from? Future consumers? Labor market demand? Expanding student populations? New innovation at the grass roots level? University research? Future adoption of smartphones, data usage, online training, job analytics, productivity tools, health club memberships…? I could go on. One thing is clear: on an incremental basis this growth won’t be coming from the US and EU countries.
Leon Trotsky once wrote: “You may not be interested in war, but war is interested in you.” The so-called Rise of the Rest, whether talent and innovation from China, India, or in the heart of Africa, may one day be competing with your company, start-up, university and job.
The answer to the question “Will the rest of the world eat your lunch?” is for you to answer. But if you’re running or working in a business, university, or other venture, it might be time to at least ask the question and decide whether to do something about it.
Comments or questions?
You can contact Todd on LinkedIn or leave a comment or question at email@example.com.