By David Bartlett, RSM International
This article examines the impact of cross-border flows on client demand for accounting and consulting services. The findings of this study were presented at the RSM World Conference in Amsterdam in October 2013.
Measuring Cross-Border Flows
Pankaj Ghemawat of IESE Business School in Barcelona has devised a four-dimensional model to measure cross-border flows:
Trade Merchandise and service exports/imports as a share of GDP
Capital Outbound and inbound foreign direct investment and portfolio investment as a share of GDP
Information International Internet bandwidth, international telephonic traffic, cross-border technology sharing
People Foreign-born migrants as a share of the domestic population
This methodology yields a composite measure of the globalisation of national economies. As shown in Exhibit 1, 9 of the world’s 10 most globalised countries are in Europe. This reflects (1) the regional integrative dynamics of the European Union, (2) the geographic density of European commercial clusters with extensive cross-border interaction, and (3) the prevalence of small, open economies in Europe with high trade and investment ratios (Netherlands, Luxembourg, Ireland, Switzerland, Belgium, Sweden, Denmark). The regional entrepôts of Asia-Pacific (Hong Kong, Singapore) also rank high on the globalisation scale.
Among emerging and developing economies, Central and Eastern Europe registers comparatively high scores in the globalisation index, demonstrating the integrative effects of the EU’s eastward enlargement project. South Africa stands as the most globalised of the BRICS countries, reflecting high volumes of cross-border transactions in that country’s sophisticated financial services industry. The rest of the Sub-Saharan area exhibits the world’s lowest levels of globalisation, illustrating the swaths of underdevelopment prevailing in much of that region. However, cross-border flows are rapidly growing in certain Sub-Saharan countries including Ghana, Mozambique, and Zambia.
Cross-Border Flows: Trade
The investigation of cross-border trade flows yields the following findings:
• Between 2008 and 2009, merchandise exports in Europe fell from $6.8 trillion to $5.0 trillion. European merchandise trade rebounded in 2010-11-12, but has not returned to pre-recession levels. This illustrates the trade-dampening effects of weak GDP growth and fiscal austerity in the EU.
• Asia also suffered a sharp decline in merchandise trade in 2008-09 as the global recession took hold. But cross-border trade in Asia staged a strong recovery after 2009. Asian merchandise exports reached $6.1 trillion in 2012, rivaling Europe as the world’s largest trading power.
• Other regions (North America, Middle East/Africa, Latin America, Former Soviet Union) experienced smaller fluctuations in merchandise trade amid the global recession.
• China is now the world’s leading exporter of merchandise products, followed by the United States, Germany, Japan, Netherlands, and France.
• Services (traditionally regarded as non-tradable) comprise a large and growing share of global trade. This development shows the impact of advances in ICT and encryption technology that expand the domain of cross-border transactions.
• Travel, transportation, financial services, and computer services represent the largest categories of trade in services. Europe is the world leader in service-related exports ($2.1 trillion), followed by Asia ($1.1 trillion) and North America ($737 billion). Trade in services is growing rapidly in emerging markets, including China (4th in service exports behind the U.S., U.K., and Germany) and India (the global leader in offshored IT services).
• Intra-regional flows dominate trade in Europe (71.4 percent of aggregate trade). Intra-regional trade also prevails in Asia (53.7 percent) and North America (48.4 percent). Intra-regional trade lags in Africa (13.9 percent) and the Middle East (10.1 percent), the bulk of whose trade is conducted with Asia and Europe. In those regions, political, economic, and infrastructural barriers hinder intra-regional trade flows.
Cross-Border Flows: Capital
The study highlights the following trends in cross-border capital flows:
The Great Recession exacted a significant toll on cross-border capital flows in Europe. Between 2007 and 2012, inbound FDI flows in Europe fell from $906 billion to $276 billion. During the same period, outbound FDI flows from Europe declined from $1.3 trillion to $385 billion.
Inbound FDI flows in Asia held relatively steady amid the global downturn, reaching $407 billion in 2012 to eclipse Europe as the world leader. Asia is also converging toward Europe and North America as a leader in outbound FDI ($308 billion in 2012). China now ranks 2nd behind the U.S. in FDI inflows ($121.1 billion in 2012) and 3rd behind the U.S. and Japan in FDI outflows ($84.2 billion).
The other BRICS have become important players in foreign investment. Russia and Brazil rank among the top 10 destinations for foreign direct investment. The former country ranks 8th in outbound FDI. India (which has long underperformed in inbound foreign investment) is narrowing the FDI gap with the other BRICS as infrastructural improvements heighten that country’s attractiveness to foreign investors.
A rising volume of cross-border capital flows (both FDI and portfolio investment) is routed through financial holding companies in Europe (notably Belgium, Luxembourg, and Ireland), and offshore financial centers (Bermuda, British Virgin Islands, Cayman Islands, Isle of Man, Jersey). This development illustrates the growing use of offshore vehicles by multinational corporations to arbitrage differences in national tax jurisdictions (see “International Tax Reform: The Drive to Close Tax Loopholes in the OECD”, RSM Talking Points, September 2013).
Cross-Border Flows: Information
Research on cross-border information flows indicates the following:
• Cross-border information flows remain modest despite ICT advances that have dramatically improved the quality and lowered the cost of transnational communications.
• Small, open, wired countries (e.g., Hong Kong, Singapore, Switzerland, Denmark) report the highest levels of international Internet bandwidth capacity and international telephone exchanges.
• Among the G-7 countries, the United Kingdom and Canada exhibit the highest levels of cross-border information flows.
• Central and Eastern Europe and the Baltic Republics display Internet and mobile phone penetration rates approaching or surpassing levels in Western Europe and North America.
• Among the BRICS countries, Brazil, Russia, and South Africa register the highest levels of international Internet bandwidth. China and India lag in that metric, signaling wide scope for growth in ICT penetration in those countries.
• A number of countries report increasing participation in cross-border technology agreements, which promote sharing of R & D costs, diversify risks, and facilitate access to specialised expertise residing outside the home country. Small European countries (Luxembourg, Belgium, Switzerland, Slovak Republic, Ireland) register the highest shares of technology patents with foreign co-inventors.
Cross-Border Flows: People
Research on cross-border flows of people indicates the following:
• The United Nations estimates that cross-border migration reached 230 million individuals in 2012, representing 3 percent of the global population.
• Europe is the world leader in migration with 70 million migrants, followed by Asia (60 million) and North America (50 million). Small, open European countries (Ireland, Luxembourg, Switzerland) report unusually high migrant penetration rates.
• Multinational corporations exhibit growing demand for foreign born professionals, particularly migrants with advanced skills in science and engineering. Emerging markets are increasingly prominent sources of university trained professionals sought by global companies.
• Uncertainties over immigration policy frustrate efforts by American and European companies to recruit and retain foreign born professionals.
Demand for Accounting and Consulting Services
These developments in cross-border flows have major implications for accounting and consulting firms that service globally active clients.
Exhibit 2 shows historical and projected revenues of the accounting and consulting industries. Both industries displayed surprising resilience amid the global downturn, incurring modest revenue falls in 2008-09 followed by steady if unspectacular growth from 2010 forward. By 2018, global sales of accounting and consulting services are projected to reach $444.1 billion and $403.4 billion respectively. Asia-Pacific exhibits the strongest growth in client service demand during this period with a Compound Annual Growth Rate of 5.6 percent. The U.S. (by far the biggest single market for accounting and consulting services) is forecast to grow by 3.7 percent CAGR against 3.1 percent in Europe.
Conclusion
The trends noted above signal rising worldwide demand for cross-border services:
• Increasing need for global services by Western-based multinational corporations
• Growing demand for cross-border services by globally active small and medium enterprises
• Expanding cross-border activities of emerging market-based companies
• Rising demand for cross-border services by private equity funds
• Expanding access of high wealth individuals to global investment instruments
• Offshoring of accounting/consulting service delivery to emerging markets
• Continuing convergence toward internationally standardised accounting practices
These shifts in client service demand create important growth opportunities for accounting/consulting firms with cross-border capabilities: IFRS conversion support; international corporate tax services; foreign risk management services; global forensic services; international ICT services; cross-border M & A transaction support; cross-border private equity transaction; tax services for high wealth individuals and ex-patriot executives; and related cross-border services.
About the Author
David Bartlett, Economic Consultant, has over twenty years’ experience consulting, researching and teaching on international corporate strategy. He specialises in international growth, global manufacturing, foreign sourcing and distribution and corporate risk management. David is Senior Lecturer in Strategic Management and Entrepreneurship at the Carlson School of Management, University of Minnesota. He has also held faculty appointments at Vanderbilt University (USA), Yerevan State University (Armenia), and the University of World Economy and Diplomacy (Uzbekistan). David has received a Fulbright Senior Scholarship, Salzsburg Seminar Fellowship and other scholarly awards. He holds a PhD and BA from the University of California and an MA from the University of Chicago.
