The latest data from the International Business Report (IBR), Grant Thornton’s global survey of mid-market companies, shows that business leaders plan to increase investment over the next 12 months.

Despite firms in many countries dealing with the highest interest rates they have seen in years (making credit more costly), investment intentions are up in every category compared to last year.  

Globally, more than half of firms we surveyed expect to increase investment across technology, research and development (R&D) and staff. The growth in investment echoes, and is likely a result of, the rise in optimism among mid-market firms. Technology is the area most firms plan to invest in, with 61% of mid-market firms expecting this to happen over the next 12 months, up from 57% in the second half of 2022. 

 

 

“Traditionally, investment in technology was led by larger firms with deeper pockets, and the productivity gains came later down the line. But now, technology is accessible to companies of all sizes, and this has largely been driven by the rise in the use of the cloud. For mid-market firms in particular there are huge opportunities available.  

“The most notable benefit of investing in technology for these firms is the additional productivity gains from better data and the automation of business processes. With employment costs rising, automation offers a clear way to reduce labour costs. Firms are faced with a decision to either invest in technology or outsource to a cheaper jurisdiction, with many choosing the former due its greater longevity.  

“Artificial intelligence amplifies this process, replacing what gets done by humans and getting it done quicker, allowing mid-market firms to make scalable improvements. Ethical concerns, however, are already starting to come to the fore with AI, and we are yet to see how these anxieties may lead to greater regulation and limitations on businesses’ use of this transformational tech.” - Nick Watson, Partner, Global head of technology, Grant Thornton UK 

Energy firms reinvesting bumper profits in technology

The most significant increase in investment intentions is taking place in the energy sector, with oil and gas firms being the most likely to increase investment.

Three in every four (75%) mid-market oil and gas businesses expect to boost investment in technology this year, a significant jump from just one in three (31%) planning to do so at the end of last year. Given a prolonged period of higher profits arising from the surge in oil and gas prices, it is unsurprising that businesses within these sectors now have more funding to invest in technology. In comparison, only one in three (33%) of oil and gas businesses are increasing their investment in new buildings, and only 43% are increasing investment in plants and machinery. 

Mid-market energy firms’ increased investment in technology indicates how the sector is innovating, with more firms looking to realise the potential of renewable and sustainable energy sources through investment in new technologies. At the same time, leaders continue to prioritise investment in areas most likely to deliver long-term value. Oil and gas firms are using this technology investment to increase efficiencies, reduce gas extraction costs, automate drilling costs, improve worker safety, and improve supply chain management.  

“Most oil and gas firms have benefited from significantly increased profits over the last year, and now they are looking at how they can put these earnings to good use. Many mid-market firms are currently reinvesting their profits into further oil and gas exploration to find additional reserves. Typically, the returns on investment in oil and gas are 15-20% in comparison to renewables which are closer to 8%.  

“However, pressure from consumers and governments across the world are changing this trend, driving clean growth in the form of hydrogen, wind, solar, nuclear and numerous other forms of renewable energy. We can especially see this in Texas, for example, which has become the number one state in the US for the amount of power generated by wind, with Houston positioning itself to be a global leader in carbon capture.” - Bryan Benoit, Global head of energy and natural resources and Global co-leader valuation services, Grant Thornton US 

Mid-market firms embrace innovation to stay competitive

Despite rising costs and persistent economic uncertainty, businesses are increasing investment in research and development (R&D). Globally, this has risen slightly from 51% at the end of last year to 54% this year, significantly higher than it was pre-pandemic (45% in the first half of 2019). Mid-market business leaders are demonstrating their focus on the future and desire to keep innovating to stay ahead of competitors and keep abreast of the fast pace of technological change.

“Most mid-market firms invest because they want to take advantage of an opportunity or maximise productivity. Where there are gains to be made in productivity, many firms will accept the cost arising from the current high cost of finance, as the benefits on productivity will far exceed the finance cost for these firms.  

“Compared to 15-20 years ago, many businesses have accumulated significant cash reserves and are less reliant on external funders and are more capable of investing direct themselves. Coupled with this, there are many more innovative funding options available that present alternative funding structures compared to more traditional forms of bank debt. Therefore, whilst interest rates may intuitively discourage investment, businesses can still deliver on their investment plans owing to the funding options available that support a longer-term view to be taken.”  - David Munton, Global Leader, International capabilities and support, Grant Thornton International  

Intelligent investment offers route to success for mid-market

The increase in optimism among mid-market business leaders has been accompanied by a stronger desire and expectation to invest overall. In particular, appetite to invest in technology, staff skills and R&D in 2023 is relatively high. This is coupled with a growing confidence in overcoming barriers to investment and a growing desire and capability to invest in the human side of business. It is, however, essential that businesses keep the right balance. With mid-market firms in many parts of the globe being exposed to the highest interest rates in over 10 years, this additional burden could drag businesses backwards if they overextend themselves to fund investment.

Many business leaders won’t have experienced an extended period of expensive credit and will need to ensure that they have a strong board and good advice to help them maintain investment in the areas that matter to them. With the right conditions in place for success, firms will be able to make the most of their investments, and plan for growth, both domestically and through trade with partners.

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i. www.cnbc.com - Fed declines to hike, but points to rates staying higher for longer - 20.09.23
ii. www.ecb.europa.eu - Monetary policy decisions - 14.09.23
iii. www.ft.com - ECB raises interest rates to all-time high - 14.09.23
iv. www.bbc.com - Wages overtake inflation for first time in nearly two years - 17.10.23
v. assets.publishing.service.gov.uk - The Potential Impact of Artificial Intelligence on UK Employment and the Demand for Skills - 08. 21