This is the first in a 7-part update series on FSG’s 2017 Events to Watch. Additional updates can be found below:
In December 2016, FSG released the report Events to Watch for 2017, which profiled the major disruptors that multinational companies should evaluate to ensure the resiliency of their strategic plans. As part of a series of blogposts, we seek to review and update FSG’s view on the likelihood, impact and signposts to monitor for each of the seven disruptors we profiled in the report. This post will evaluate the downside disruptor “Workforce Localization Crackdown.”
Events to Watch for 2017: Workforce Localization Crackdown
FSG saw growing backlash to globalization in developed markets and slowing growth in emerging markets as a downside disruptor to cross-market labor mobility. We anticipated that tighter limits on foreign workers and reduced international mobility of skilled labor in developed and developing countries could complicate hiring strategies for multinationals, forcing them to increasingly rely on more-expensive, less-qualified local staff. Although there are upsides to this scenario for multinationals, such as the ability to charge higher prices in some markets, the scenario primarily presents downside risks from a cost perspective.
Event’s Impact on Market Potential and Operating Environment
- Higher premium on specialized skill: as cross-national mobility is reduced, acquiring and retaining skilled workers will become more expensive
- Limited management mobility: restricted labor mobility will complicate multinationals’ efforts to rotate management, limiting the efficiency of their operations in many emerging markets
- Returnees to labor-exporting countries: skilled and unskilled workers returning to labor exporting countries will put pressure on local labor markets and cause remittances to fall
- Higher wages, spending, and prices: immigration restrictions should boost wages for native-born populations, supporting consumer spending and higher prices
Signposts to Monitor Revisions
Anti-immigration electoral victories: Voters in Western Europe are supporting pro-immigration and pro-EU candidates, as evidenced by the poor showing for Geert Wilder’s party in the Dutch elections, the ascension of Emmanuel Macron in French polls, and the victory of Angela Merkel’s Christian Democratic Union (CDU) in state elections. The French elections have become exceedingly tight, as far-left candidate Jean-Luc Melenchon has made a last-minute surge in the polls ahead of the first round of voting on Sunday. Although anti-immigration sentiment remains high in some Eastern European countries, and Western European rhetoric could shift dramatically with the election of Marine Le Pen, it is likely that pro-immigration/pro-EU positions will prevail. The following elections demonstrate this key point:
- Dutch elections: Anti-immigration sentiment was dealt a strong blow when Dutch voters rejected Geert Wilder’s Party of Freedom (PVV) in parliamentary elections on March 15. Although the PVV picked up seats, they are unlikely to enter the governing coalition. Instead, voters opted for the more liberal, pro-immigration party Green Left. While it is unclear if Green Left will enter the governing coalition, the election sends strong signals that voters are rejecting anti-immigration stances
- French elections: It is very uncertain which two candidates will advance to the second round of the presidential elections after the first round is held on April 23. While it is possible that France will elect an anti-immigrant euro skeptic president, this outcome remains unlikely
- German elections: Recent polls show weakening support for the populist euro skeptic party Alternative for Germany (AfD). Support for Merkel’s CDU has ticked up, as evidenced by their recent victory in state elections. Federal elections, scheduled for September 24, are too early to call, but it is likely that the CDU will maintain power and that the AfD will not enter the governing coalition
- Eastern European elections: anti-migrant sentiment has increasingly unified the so called “Visegrad group” of Hungary, Poland, Slovakia and the Czech Republic. In March, Slovakian Prime Minister Robert Fico, who has legally challenged the EU’s migration policy and has espoused anti-Muslim rhetoric, was re-elected for a 3rd term
Policy comments in developed markets: The Trump administration has sent conflicting signals on immigration. Expedited processing of H-1B visas has been suspended and the Justice Department and U.S. Citizenship and Immigration Service (USCIS) indicated they would investigate U.S. employers that showed a preference for hiring H-1B workers over Americans. USCIS also announced that computer programing jobs would not automatically qualify for H-1B visas. On April 18, President Trump signed an executive order directing federal agencies to favor American companies and promising modest reforms to the H-1B system. The order is less drastic than many feared, and would not substantially overhaul the existing H-1B system. Despite such anti-immigration posturing, Trump recently appointed pro-immigration economist Kevin Hasset to lead his Council of Economic advisors, although it is unclear whether Hasset will be an influential voice in the White House.
Weaker labor markets in emerging markets: Saudi Arabia is further tightening restrictions on foreign labor. According to their Fiscal Balance Program, the existing expat levy will be increased and expanded beginning in 2017. Levies on expat workers will be gradually revised upward between 2017 and 2020 and will be expanded to cover dependents of foreign workers beginning in July 2017. Although South Africa has considered a points-based immigration system, the policy is yet to be finalized.
Growth in both developed and developing economies has picked up, with some estimates indicating that emerging markets are experiencing their fastest growth since 2011. These trends suggest that emerging markets are unlikely to experience weak labor markets in the near future. However, the global economic recovery is closely linked to China’s currency management and its infusion of credit into the domestic housing market. A bursting housing bubble or a dramatic devaluation of the Yuan could yet endanger resurgent global growth.
A workforce localization crackdown was originally forecast at a low probability of 20%. Given the electoral and economic trends described above, we are maintaining this probability at 20%.
Actions to Take
Multinationals can still expect growing electoral pressures to undermine support for open migration of unskilled labor (our base case scenario). It is somewhat less-likely that skilled labor will also be subject to anti-immigration trends. However, multinationals should be prepared to deal with a downside scenario arising from more restricted labor-markets and labor-mobility. FSG’ s Events to Watch for 2017 report provides in-depth scenarios, expected impact on business performance and operations, as well as recommended frameworks for contingency planning and effective market monitoring.
For our latest updates and insights, FSG clients can access the Events to Watch for 2017 report on the client portal.