By David Bicknell
Medium-sized UK technology companies are forgoing demonstrable investment opportunities in the BRICS economies in favour of domestic deals, according to new research from audit specialist Grant Thornton.
The research shows that three-quarters (75%) of medium sized UK technology companies have no plans to invest in new markets in the next 12 months.
The study reflects trends over the last five years for mergers and acquisitions in the technology market, which show that domestic investment continues to be the number one priority for ICT businesses. 141 UK to UK deals were completed in 2011, a higher volume than with any other market.
In terms of outbound investment from the UK technology sector, mature markets such as the USA, Australia and Germany have consistently remained at the top of the league in comparison to other emerging markets.
Wendy Hart, Head of Technology at Grant Thornton UK, is calling on investors in the UK’s technology mid-market to think beyond traditional investment regions and seize opportunities. She says: “Over the last five years the volatility of the global market has inevitably had an impact on the volume of cross-border deals taking place.
“Traditional, mature markets such as those in the G7 remain attractive to UK firms because of a familiar business environment, language commonalities and greater access to highly skilled employees. In contrast, outbound investment into fast-growing, tech-friendly economies such as India, China, Brazil and Israel is still relatively low.”
To help highlight the opportunities available, Grant Thornton has produced an ‘expansion index’ guide, which compares existing UK investment markets such as the UK, the USA, Germany, France and the Netherlands with emerging economies. The data demonstrates that the markets with the biggest opportunities are also the markets that present the biggest challenge for investors.
Wendy Hart continued: “The sheer volume of information that a business has to get to grips with before making an investment into an unfamiliar market can be daunting. There are three key stages that are vital foundations for a market entry strategy: full assessment of the opportunity available; thorough preparation so that a business is ready for execution; and management of the actual execution itself.”
In the report, Grant Thornton has also called on technology investment experts from around the world to provide detailed insight about key technology markets, both traditional and emerging.
Nick Farr, Head of China Britain Business Services at Grant Thornton UK, said: “One of the reasons that UK technology businesses are reluctant to enter China is a fear of copying or reverse-engineering of their products. Whilst this is still a risk, as China’s patent system evolves there are increasing opportunities for businesses to protect their intellectual property (IP). These opportunities are being noticed. Recent research by the China-Britain Business Council showed that 59% of UK businesses with a presence in China want to increase their R&D activity there.”
Some snapshots from the report:
“Grant Thornton’s Technology Expansion Index ranks China second for economic growth and third for infrastructure and technology. On the flip side, China is one of the lowest ranked markets for political and legal landscape and has one of the most complex systems in the world for business start-ups. It is this dichotomy, paired with the complexities of Chinese culture, that best explains the lack of UK businesses looking to enter the Chinese market.
“However, great returns are never easily achieved. The opportunity in China is huge, not just in terms of salary arbitrage and tax incentives. Despite the recent slowdown in China, growth is still upwards of 8% and this high growth potential means that those companies able to access the Chinese market will be better at meeting consumer needs and faster to market, leaving those who shied away from early investment trailing in their wake.”
“At 8.5 million square kilometres, Brazil is the size of a continent, and currently accounts for 40% of Latin America’s economy. IMF GDP growth forecasts through 2013 are strong at 4%, potentially underpinned by the impact of the 2014 World Cup and 2016 Olympic Games, which will drive technology investment. The domestic market for IT in Brazil is now the seventh largest in the world. $165.7bn was spent on ICT in 2010 with only $2.4bn of services exported.
“Brazil is a potential technology investment hotspot because of its large, stable, growing economy; a modern financial system that has largely escaped the global financial crisis; a strong base of local investors; and robust capital markets and a middle class of almost 100 million people aspotential technology consumers.”
“The Indian Government’s new ICT policy aims at speeding up development, including plans for fibre optic cable installation and aggressive broadband implementation.
“A strong driver for IT investment is India’s own Generation Y who are primed to become hungry consumers, particularly of IT, consumer technology and social media. India’s consumermarket, currently the world’s thirteenth largest, is expected to become the fifth largest by 2025. Its telecommunication industry, the world’s fastest-growing, added 227 million subscribers duringthe period 2010–11.”
“According to our survey, 18% of UK technology companies plan domestic investment in the next 12–18 months. Despite the economic downturn, or perhaps because of it, many technology companies are still lookingto consolidate and strengthen theirpresence at home rather than seeking out riskier, but potentially more rewarding climates.
“There is a trend in the UK technology market where large corporates are increasingly looking to acquire companies that provide specialist services or offer some innovation that addresses a niche they want to reach. Importantly, the current state of the overall market means that these companies can be acquired more cheaply than might have been possible pre credit-crunch,” says Wendy Hart.
For more details or for a hard copy of the report, which also features case studies on a number of UK technology companies, including Galleon Holdings, Ideal Industries, Mobile Tornado, Kelkoo, and Tessella, contact Emma Ap-Thomas at Grant Thornton. Tel: 0207 728 2348 or firstname.lastname@example.org