FDI in Emerging Markets to Rise over Next Two Years, According to AT Kearney
A foreign direct investment (FDI) rebound will be slow at best and the focus of corporate investments is increasingly on developing markets, according to the 2011 AT Kearney Foreign Direct Investment Confidence Index, a regular measure of senior executive sentiment at the world’s largest companies.
While 55% of corporate investors surveyed said their FDI budgets had returned to the levels they were prior to the economic crisis, more than one-fifth said they don’t expect their FDI to return to pre-crisis levels until 2014 or later.
“While volumes were nowhere near their highs of the mid-2000s, these modest gains signal the beginnings of cautious optimism on the part of investors. But with prospects for near-term recovery still shaky and debt crises looming large, this modest optimism could quickly revert to retrenchment,” said Paul Laudicina, managing officer and chairman of AT Kearney.
The world’s developing economies comprise more than one-half of the index’s top 25 countries, indicating that flows to these regions will accelerate as investment picks back up. According to the survey, investors are increasingly turning to the developing world more for its large and rapidly growing consumer markets than for its lower-cost labour. China remains the top-ranked destination by foreign investors, a title it has held since 2002, followed by India and Brazil. The US fell to fourth place from second, with its debt gridlock weighing heavily on investor sentiment.
A Slow Rebound
A variety of factors – including the sovereign debt crisis, the slow recovery in the US, and unrest in the Arab world – continue to make corporate investors cautious about the short-term future. More than 60% feel that the recession has significantly changed the global business environment.
“The real concern among executives appears to be regulatory activity within countries rather than protectionist measures among them,” said Erik Peterson, managing director of AT Kearney’s Global Business Policy Council, which helps business leaders identify global growth opportunities and manage business risks. Respondents in Europe are particularly concerned by decreased government capacity due to debt constraints. Peterson added: “Given decreased strength, governments may not be able to play the constructive role that the economy needs.”
With the US and Europe, two former bastions of stability, facing financial turmoil and slow growth, the formerly intuitive ‘safe be'” rules no longer apply. With more cash on hand but still deeply unsettled, corporate executives are using strategic planning tools to determine where the best bets can be made. In fact, according to the survey, more than 50% of investors are enhancing their strategic planning processes and tools in the wake of the economic crisis.
“The old rules of thumb can no longer be relied upon,” said Laudicina. “Executives are deploying strategic planning tools to increase their foresight and peripheral vision, which are crucial for navigating today’s highly uncertain business environment.”
Looking Ahead: More Taxation and Regulation?
Looking to the future, 60% of investors anticipate greater taxation in developed economies, calculating that public budgets will have to be brought back to balance through increases in government revenue, translating into higher tax burdens. Expectations are quite different in emerging markets, where increased labour regulations are seen as the most likely development.
As developing economies mature and integrate further into the global economy, their labour laws are converging with those of the developed world. Although heightened protectionism in the wake of the economic crisis has not yet materialised, about one-third of investors expect increased barriers to trade in both developed and developing countries, indicating that concern over the future of an open trading system has not subsided.
China, India and Brazil dominate the Index
With India replacing the US for the number two position, three major emerging markets – China, India and Brazil – took the top three spots as investment destinations of choice. Investors also reported the highest degree of optimism in the outlook for these three countries, with nearly half seeing a more positive outlook for Brazil (46%) than in 2010. More than one third saw improvements for both India (37%) and China (34%).
China maintained its number one position in the index. Investors are looking to capitalise on the country’s growing consumer market and service industry, as well as its move up the value chain in the technology sector. India also advanced in the standings, assuming the US’s former position, second place. “Given its strong growth and huge market potential, India should see a sustainable rebound if it can continue to reassure investors that it is committed to its current reform path,” Peterson said.
Brazil is also a magnet of opportunity, moving to third place from last year’s fourth. Brazil attracts more than half of all the FDI in Latin America, and this year China became Brazil’s largest foreign direct investor, with the focus of the inflows in commodities and energy.
Key emerging economies are also shifting the FDI landscape with their own investments, which have grown from 12% to 23% of global FDI outflows. “Given increasingly fierce competition from emerging market investors,” Laudicina said, “established players from developed economies will need to revise their strategies to deal with this new competitive landscape.”
The US Slides
Political gridlock surrounding the federal budget, financial instability, and depressed consumer spending combined to pull the US from second to fourth place this year. More than 60% of respondents indicate that their investments would be negatively affected by the US debt burden. Fiscal turbulence aside, its market size and quality of skills and technical resources continue to make it the top investment destination among developed economies and an important target in many international expansion strategies.