Post by Pablo Pereira

Where investment happens and why? This insightful report from McKinsey will catch your attention. It basically explains that we are in the midst of a “dramatically divergent global investment patterns” as competitiveness moves to the top of the agenda for companies. The concept of “levelized costs” becomes central to level competitiveness up. Let’s dive deep. First, experts explain that we are witnessing an investment divergence that is foreshadowing a remapping of the global economy. And this is the big picture now: investment has stalled in Europe, shifted in the United States, and pulled away from China. To be clear, China is the biggest investor by any measure but the staggering investment boom is facing diminishing returns. McKinsey asserts “When capital accumulates faster than demand, low capital productivity and low returns result”. “In China, these diminishing returns on investment have been termed neijuan, or “involution,” and the government has adopted policies to tackle it”. In fact, one of the biggest changes witnessed has been the ‘pullback from private investments” since 2021, replaced by state-owned companies Meanwhile, in the US, the biggest change has been the shift of investments into higher return asset classes: software and AI value chains. As such, “the US economy has benefited from much stronger productivity growth than most other advanced economies over the past two decades”. As per Europe and Japan, McKinsey highlights that investments are consistent with GDP growth below 1 percent (although regional figure mask large differences between countries – i.e. Germany). Second, we need to grasp better: What drives the divergence in investment trajectories among leading countries? McKiney focuses on micro-level factors analyzing differences across ten different industries introducing a “levelized cost framework” in order to compare investment competitiveness. They found that “European and US levelized costs are 50 to 300 percent higher in many industries than in best-in-class countries” (Exhibit 13 in the report). Experts conclude that capital expenditures, labor, materials, and energy all contribute to the cost gap and this is reshaping the mapping of investments. All in all, a great contribution of McKinsey in this field. For developing countries, the message is clear: both macro and micro-factors matter. Also, that winner-takes-most dynamics and time to market also matters. Yet, importantly, countries seeking to catch up with global investment leaders can push or pull seven levers. I highlight two of them: 1) remove regulatory complexity; 2) don’t compete on cost alone: differentiate and innovate. I believe that Latin America has unique opportunities to attract more productive investments. Enjoy reading https://lnkd.in/eZDzJznt