The lack of liquidity in the markets is another element which may help to shore up FDI in the short term and it could become a more important investment activity as M&A is difficult for companies without significant cash reserves and even they will be more cautious until the market become less volatile.
According to O'Connell, now is not the time to become complacent or give up on FDI. There are still opportunities in the market and it's important that economic development organisations adapt their strategies accordingly. "The state of the beleaguered US and Western European economies is going to make attracting foreign investment a high priority activity, particularly for job creation in light of the stream of bad news on redundancies and consolidation."
Some economists are predicting US unemployment rates reaching the 9% mark by January 2009, making job creation a top priority. Like any past market shift, the change will represent disaster for some companies and opportunity for others.
"The dinosaur analogy is one to make here," said O'Connell. "When one species dies, another moves in to take its place. This holds true for companies and the challenge will be to closely monitor business activities and trends to quickly identify the businesses leveraging new market realities."
"The corporate landscape isn't the only one being affected by these economic shifts; entire countries and markets are adjusting to the new world order as well. The playing field in FDI has levelled as investors realize that developing regions are not a panacea particularly as their cost base has grown considerably in the last 18 months in response to their tightening labour pool. In contrast, the US is starting to look like good value and many US investors are starting to re-evaluate their offshoring plans in favour of nearshoring or even inter-state investment."
There are some sectors which will remain relatively insulated from the current crisis and these also happen to be some of the most dynamic and highest growth sectors in foreign investment including Environmental Technologies and Healthcare.
Another key factor for consideration is the number of FDI projects coming out of developing countries like China, India and Vietnam in the last 5 year period have been increasing steadily, with a substantial amount of inverse investment - evidence that key developing countries should be firmly on the radar for leading economic development agencies and governments. The volume today is still relatively small but this trend is set to continue and there's never been a better time for developed economies to understand and capitalize on the opportunities coming out of new World Cities like Beijing and Mumbai.
Tata Group from India is perhaps the best proponent of this growing trend with more than 100 Greenfield investments in the last five years. Other major players include ICICI Bank and Huawei Technologies.
Growing FDI sectors such as Environmental Technology are emerging from countries not traditionally associated as major source countries for foreign investment such as Spain which has a number of world class companies in this field.
"Every crisis produces opportunities and we're also predicting the rise of a new wave of professional services organisations providing risk management and compliance services into the banking sector," noted O'Connell.
"More than ever, countries and regions need to understand the global context for FDI and learn to respond, like the companies they are trying to attract, quickly and decisively, to compete for their share of the investment. Competition for these FDI projects will be formidable because politically, this is big stakes stuff. Job creation will be top of the political agenda for the next few years."
