Foreign Direct Investment: On the Rebound?

Almost three-fourths of companies plan to increase their FDI in the next three years, according to the 2016 Foreign Direct Investment (FDI) Confidence Index® from global strategy and management consulting firm A.T. Kearney. This year’s edition of the Index, FDI on the Rebound?, finds that in the face of slowing trade growth and rising macroeconomic uncertainty—particularly in emerging markets—global business executives are increasingly looking to deploy FDI for growth opportunities.

The United States again tops the FDI Confidence Index, holding its first-place position for the fourth year in a row. Global business executives are also more bullish on the U.S. economic outlook than for any other economy. China claims second place in the FDI Confidence Index, also for the fourth consecutive year. However, investor expectations about the Chinese economy turned decidedly more negative this year, and executives say they will reduce their FDI in China if market volatility persists.

Foreign Direct Investment
(Source: A.T. Kearney)

“The United States and China have held steady at the top of the Index in the face of significant changes in the global operating environment over the past four years,” said Paul Laudicina, founder of the FDI Confidence Index and chairman of A.T. Kearney’s Global Business Policy Council. “Executives’ sustained interest in investing in the United States and China demonstrates the undeniable and enduring attractiveness of the two largest economies in the world. Over the 18 years of this assessment we have observed consistent investor preference for large markets with robust economic prospects.”

The FDI Confidence Index offers an in-depth view of forward-looking global investment sentiment from senior executives. Since its inception in 1998, the study has reliably pointed toward firms’ top choices globally for FDI, with the countries ranked in the Index reliably tracking closely with the destinations for actual global FDI inflows.

FDI On The Rise

Global executives are increasingly turning to FDI to ignite growth opportunities, despite the overall trend of slowing globalization. Global FDI flows jumped 36 percent to an estimated $1.7 trillion in 2015—the highest level since 2007—and the vast majority of executives also believe that FDI will become more important for corporate profitability and competitiveness in the near term. Accordingly, more than 70 percent of firms in the survey plan to increase their level of FDI over the next three years. A likely reason for this is the rise of protectionist sentiments in many countries—creating greater need for a local presence to do business in those markets.

Global business executives are almost evenly split on whether the outlook for the global economy is better than last year. This is the least bullish outlook in several years, which likely accounts for the dominance of developed markets in the FDI Confidence Index. Developed markets capture eight of the top 10 places in this year’s Index and 80 percent overall.

“We are seeing a continued flight to safety in the primary destinations for FDI,” said Erik Peterson, managing director of the Global Business Policy Council and co-author of the study. “It is not hard to understand why. The profound uncertainty in the economic prospects of many large emerging markets is causing investors to turn their attention to developed markets in North America and Europe.”

foreign direct investment
(Credit: Jupiterimages)

This year’s investor survey finds that political risks in the United States and EU could cause these economies to lose some of their luster as FDI destinations. A significant percentage of business executives say that they would reduce FDI into the United States if Americans elect a populist (far-left or far-right) president in the November election. And while Europe continues to represent a prime investment destination, accounting for 13 of the 25 countries in the 2016 FDI Confidence Index, the looming possibility of a Brexit is clearly weighing on executives’ minds. If British voters choose to leave the EU, executives say they would decrease their FDI into both the United Kingdom and the EU more broadly. Given that the United States and EU markets currently dominate the FDI Confidence Index, this raises the question of where firms will shift their investments to if these scenarios occur.

For the second year in a row, global business executives see an increase in geopolitical tensions as the highest risk in the external environment. This is followed by concern over political and economic instability in emerging markets, which is probably behind the weaker performance of emerging markets in the Index. Commodity prices are a true wild card, though, with roughly the same percentage of global executives seeing an increase as a decrease in commodity prices as likely this year.

Regional FDI Highlights

Americas: The United States maintains its top ranking for the fourth straight year. Foreign investor interest in the U.S. market is widespread, but Japan, Canada, and China are primary sources of FDI in the United States. Canada gains one spot to rank third place in this year’s FDI Confidence Index. Long-awaited reforms under the Investment Canada Act, such as a reduction in the threshold for a required government review of the net benefits of private sector foreign investments, are improving Canada’s attractiveness as an FDI destination. Brazil and Mexico are the only two Latin American countries to appear on the 2016 FDI Confidence Index, and both experience a significant drop in the rankings.

Europe: Europe retains overwhelming interest from business executives this year, with 13 countries ranked among the top 25. This is a slight drop from an all-time high of 15 in last year’s Index, but demonstrates the ongoing attractiveness of the European market to global business executives. Despite the Volkswagen emissions scandal, continued instability in Ukraine, the refugee crisis, and high-profile terrorist attacks in Paris and Brussels, the reality is that European economies continue to strengthen. Germany rises one rank to fourth overall, the lead spot for the European region this year, followed by the United Kingdom in fifth place. In eighth place, France is the only other European economy to make the top 10. This year investor interest in European economies is limited to developed markets, with European emerging markets notably absent.

Asia: China ranks second for the fourth year in a row. There remains broad cross-sector interest in investing in China from respondents to the FDI Confidence Index survey. That interest could be broadened further by the State Council’s recent announcement of the partial privatization of key industries—including telecommunications, electricity, military equipment, oil and gas, and civil aviation—which will also open them up to foreign investment. Japan continues to rise in the rankings, moving up one spot this year to sixth place—its highest ranking in the history of the FDI Confidence Index—and Australia also gains three places to take seventh position. The largest gain in rank in all of this year’s Index is Singapore, which rises five spots. India also rises two positions in the 2016 FDI Confidence Index, entering the top 10 after a one-year absence. In addition, two of the three newcomers to the Index this year are from Asia: Taiwan and Thailand.

Past editions of the FDICI are available online.