Ceepackaging

Analysis

FDI uneffected by credit squeeze

The assessment of senior executive sentiment at the world’s largest companies found corporate investors optimistic about the prospects for developing nations and increasingly targeting them for more corporate investment in the years ahead. These are among the findings from the latest Foreign Direct Investment Confidence Index, a regular survey of global executives conducted by management consulting firm A.T. Kearney. The Index provides a unique look at the present and future prospects for international investment flows. Companies participating in the survey account for more than $3.8 trillion in global revenue.
While China and India continue to rank first and second in the 2007 Index, 15 of the most attractive 25 FDI destinations are developing markets. Brazil, the United Arab Emirates and Russia all rank among the top 10. South Africa and Other Gulf States (Bahrain, Kuwait, Oman and Qatar) are making their debut in this year’s Index, while Vietnam, Malaysia and Indonesia are returning to the Index’s top 25 most attractive destinations.
Emerging markets also have registered the strongest investor optimism, with India, China, Brazil, the United Arab Emirates and Vietnam experiencing the most positive change in investment outlook during the last year according to executives.
Among developed countries, the U.S. again placed third overall in the 2007 Index. Europe’s economic recovery evidently helped Germany and the United Kingdom maintain their top ten rankings. Australia ranked 11 and France, Canada and Japan placed 13-15, respectively.
“The world’s economic center of power continues its perceptible shift from developed to developing markets,” said Paul A. Laudicina, managing officer and chairman of A.T. Kearney. “While global FDI recovers further from its 2003 lows, the increasingly transnational behavior of corporations is reflected in their investment preferences. Developed countries are competing with developing countries for investment capital, and developing countries are increasingly winning out.”
Concern about U.S. Economy
Despite the shift in investment expectations, global executives remain concerned over the role the U.S. plays in the health of the world’s economy. Global executives cited the slowing U.S. economy (55 percent), volatility of the U.S. dollar (45 percent), rising interest rates (39 percent), increased government regulation (38 percent) and the volatility of energy prices (37 percent) as the top concerns facing the world economy.
Meanwhile, investors are nearly evenly split over their plans for U.S. investment amid concerns about the country’s economic health. While 52 percent of executives said they plan to increase their investments in the U.S. over the next three years, 44 percent said they plan no change and 4 percent plan a decrease in their U.S. investments. The number one reason given for not investing more in the U.S. was the availability of other overseas investment options.
“At a time of market uncertainty, it is a remarkable vote of confidence that 96 percent of executives plan either to increase or maintain their investments in the US economy. But this also reflects the way that the falling dollar has made US assets cheaper,” said Martin Walker, senior director of the Global Business Policy Council, which conducts the study.
China and India top FDI rankings
China and India remain the top two countries in the 2007 Index. China leads the Index rankings for the fifth consecutive year and ranks first among Asian investors, 34 percent of whom plan to invest there over the next three years. Both developed and developing country investors cite China as their most preferred destination for first-time investments.
India retains second place in the Index, a position it has held since displacing the United States in 2005. India continues to attract investors in the high value-added services industries, particularly financial services and information technology. Three quarters of respondents who are “highly likely” to invest in India over the next few years are from outside Asia.
Regional Highlights
Executives see numerous risks and opportunities in various emerging regions of the world. Those planning investments in Asia are most concerned about rising energy costs. In China, concerns include intellectual property threats and the perceived unpredictable legal and political environment. While executives see opportunity in Eastern Europe’s lower labor costs and proximity to Western Europe, they remain concerned about corruption and the lack of reform in the region. In Latin America, the rise of populism is seen as a deterrent to investment by a majority of investors. And in Africa, investors see reducing government bureaucracy and introducing financial or tax incentives as key actions to boost investor optimism in the region.
“While China and India remain the top destinations for first-time investments overall, developing country investors are more bullish about new markets such as Vietnam, Brazil and South Africa, while developed market investors tend to stick to familiar markets,” said Janet Pau, manager of the FDI Confidence Index. “Developing country investors also are likely to be responsible for more than half — 54 percent — of the investments greater than $500 million over the next three years.”
Rise of the Middle East
Middle East investment destinations attained the highest-ever rankings in the FDI Confidence Index, with the United Arab Emirates in 8th place (up from 22nd in 2005) and other Gulf states debuting in 17th place among top FDI destinations. Corporate investors see access to the wealthy regional market as a top opportunity for investment, followed by the availability of services industry hubs like Dubai. A fast-growing population and access to capital, in addition to energy reserves, are also among the top attractions of the region.
However, there is a lack of interest in the region from North American investors relative to their Asian and European counterparts. Among Asian investors, the UAE ranked 5th, and among European investors it ranked 10th. By contrast, the UAE did not rank among the top 15 most attractive destinations for North American investors.
“This lower interest from North American investors may be partly attributable to corporate concerns over potential political backlash at home,” said Walker. “Yet it is indicative of the strategic and investment challenges confronting executives in a globalized world replete with more FDI choices than ever before.”
FDI faces increased competition from private equity, sovereign funds
High-profile investments by hedge funds, private equity firms and sovereign wealth funds have not gone unnoticed by corporate investors. One-third of executives consider the growth of these non-traditional sources to be benign or positive. Only 13 percent take a negative view. Among the three investment channels, private equity is viewed by 62 percent of investors as the greatest competition to traditional FDI.
Sustainability in global investments
Corporate investors across all regions are concerned about the sustainability of the global economic order. Sixty-six percent of executives cite global competition for scarce energy resources as the largest challenge to global sustainability over the next 20 years. Climate change follows closely behind, cited by 55 percent of respondents. Other top concerns include global competition for non-energy natural resources (47 percent), increasing pollution from developing countries (44 percent), and wealth and income asymmetries between the developed and developing worlds (38 percent).
Corporations are taking note. Fifty-three percent of investors have programs in place that enhance eco- and energy-efficient practices, products, and technologies. Companies globally are also adopting formal, written sustainability codes to guide corporate practices (34 percent).
Investor enthusiasm notwithstanding, 75 percent of executives say their firms either don’t track the return on investment (ROI) of their sustainability initiatives or they don’t know if it is being tracked. Of the 25 percent of global investors whose firms are tracking sustainability ROI, 70 percent expect returns of 10-40 percent.
“The role of sustainability in FDI decision-making will be an increasingly important dynamic going forward,” said Laudicina. “Companies see significant business opportunities in sustainability initiatives but are not widely and consistently tracking the returns on those efforts closely. More rigorous attention to the sustainability imperative will bring with it important top and bottom-line benefits.”
The 25 Most Attractive FDI Destinations According to Corporate Executives:

1. China
2. India
3. United States
4. United Kingdom
5. Hong Kong
6. Brazil
7 Singapore
8. The United Arab Emirates
9. Russia
10. Germany
11. Australia
12. Vietnam
13. France
14. Canada
15. Japan
16. Malaysia
17. Other Gulf States
18. South Africa
19. Mexico
20. Turkey
21. Indonesia
22. Poland
23. Central Asia
24. South Korea
25. Czech Republic