A cautiously optimistic outlook based on realigned expectations, as well as the United States returning to the top of the rankings, are the themes of the 2013 A.T. Kearney Foreign Direct Investment Confidence Index (FDICI), a regular measure of senior executive sentiment at the world’s largest companies. Conducted regularly over the last 15 years by global management consulting firm A.T. Kearney, the Index provides a unique look at the present and future prospects for international direct investment flows. The 2013 FDICI was released at A.T. Kearney’s Global Business Policy Council CEO Retreat, an annual gathering of global executives and thought leaders held this year in Marrakesh, Morocco.
This year 70 percent of corporate investors surveyed expect near-term recovery of their companies’ FDI levels. Half see their budgets as already returned to pre-crisis levels and 20 percent expect a return by 2014. If this were to happen, the FDI swell could provide a knock-on effect to global growth as macroeconomic clouds clear away. However, almost one-third are still taking a “wait and see” approach to FDI.
“While investors are still in a holding pattern as they have been since the recession, they seem more optimistic and less jittery than they have in recent years,” said Paul Laudicina, chairman emeritus of A.T. Kearney and chairman of its Global Business Policy Council, which helps business leaders identify global growth opportunitiesand manage business risks. “There’s been a leveling effect this year between developed economies and developing nations in terms of foreign investment. The world seems to be slowly finding its footing.”
The world’s developed countries make a surprisingly strong showing in this year’s FDICI, with Canada, Australia, Germany, and the United Kingdom joining the United States in the top eight positions. Overall, developed economies comprise more than one-half of the FDICI’s top 25 countries, indicating that flows to these regions are likely to keep accelerating. According to the survey, investors are guardedly optimistic and seem to be basing their decisions on varying signs of economic recovery around the globe. While for the first time since 2001, China did not top the FDICI rankings as enthusiasm for the U.S. resurgence pushed it to second in investors’ minds. Despite Europe’s debt crisis and gloomy outlook on recovery, seven European countries ranked in the top 20, with Germany placing highest at number 7.
A shift in optimism A variety of factors—including high-impact weather events, the Eurozone crisis and stagnation in economic recovery, China’s rising labor costs, and the U.S.’s own slow recovery in the face of fiscal uncertainties in Washington—continue to make corporate investors jittery about the short-term future. Half of respondents said they are more optimistic about the global economy than they were a year ago. Still, just 34 percent of corporate investors expected the global economy to recover to pre-recession levels by 2014. When asked that question for the 2010 FDICI, 73 percent of respondents expected recovery within two years.
Investor optimism has shifted most positively for Brazil, with investors 40 percent more positive compared to the 2012 FDICI. The U.S. (39 percent more positive), China (38 percent) and India (36 percent) followed closely behind. Reflecting overall improved investor sentiments, countries in the top 25 rankings received higher scores across the board as compared to those scores in 2012.
Most respondents have calibrated their expectations toward slow, steady growth across the world over the next three years. The outlook for emerging markets is rosiest, with 78 percent expecting growth in some form. “Rather than a temporary safe haven during economic upheaval, emerging markets are developing into a complement, instead of an alternative, to the developed world,” noted Erik Peterson, managing director of A.T. Kearney’s Global Business Policy Council. “The lines are blurring. Executives are deploying strategic planning tools to understand that the risk and reward of investing inemerging markets is converging with those of developed economies.”
Looking ahead: A More Level Playing Field The traditional view of emerging markets as high risk/high return is shifting as developed economies become more volatile and less predictable. In factor after factor, including macroeconomic volatility, consumer demand, regulatory barriers, and taxation, corporate investors responding to the FDICI now see emerging markets having essentially the same level of risk as developed markets. The only category in whichemerging markets are perceived to be significantly riskier is political volatility. Increased risk in developed markets is influencing FDI decisions. For example, 77 percent of respondents said the fiscal disarray in the U.S. has or will impact their investment decisions, and 55 percent said the Eurozone crisis had already impacted their investment decisions in Europe.
Nonetheless, U.S. Moves to First The United States reclaimed first place in this year’s FDICI for the first time since 2001. Like investments in the rest of the world, U.S. inflows are still below their 2008 peak of $306 billion, but the country has made a gradual rebound mirroring that of the rest of the world. Inflows during 2011 were up 15 percent from 2010, reaching $226.9 billion and making the United States the world’s number one recipient of foreign direct investment for the sixth consecutive year. U.S. manufacturing productivity has been on the rise since the recession. After downturn-induced cutbacks, companies made the best of a bad situation by investing in productivity-enhancing tools and equipment. Coupled with a weaker dollar and rising wages in developing countries, these gains have the potential to bring long-term benefits to the U.S. economy. However, 77 percent report that their investments have been affected by the current uncertainty and political brinkmanship surrounding the U.S. federal budget.
China slipped to the number two position in the Index this year for the first time since 2001. Higher labor costs in China raise questions about the longer term attractiveness of China’s development model and create the potential for reshoring certain manufacturing to customer markets. Yet, the vast majority of respondents (73 percent) are staying in China despite rising labor costs. While six percent said they do not perceive rising labor costs, 36 percent said they will remain in China but seek to increase productivity. Twenty-eight percent of respondents said they would move to other markets to avoid rising labor costs in China. Only six percent of respondents intend to move operations back to higher cost markets.
“With many of the gains in productivity of the past few years now exhausted, companies themselves will need to generate efficiency gains by improving communication and processes, enhancing speed and flexibility, implementing new technologies, and developing talent. FDI could play a role in these efforts,” Laudicina observed.
Brazil maintained its third place position in the FDICI this year. In 2011, its FDI hit $66.7 billion, its highest level ever and a 37 percent increase since 2010. More inflows are likely on the way, with the 2014 World Cup and 2016 Olympics needing transportation and infrastructure investments of $200 billion. Manufacturing remains the recipient of nearly half of Brazil’s FDI, with European, Scandinavian and Chinese investors all adding billions to its economy.
The 2013 FDICI offers a surprising set of opportunities in the developed and developing worlds alike. Asia is home to a growing number of economic powerhouses, Latin America’s major economies are gaining ground, and even Europe has a number of bright spots. Key emerging economies in the Americas are making a strong showing in the FDI landscape this year, with Chile, Argentina, and Mexico joining Brazil in the top 25. Hubs in the Middle East and Africa thrive through sustained regional instability. The United States, once considered a problem child, is a beacon of unexpected hope in the coming years. These findings reinforce the notion that the playing field is leveling between emerging markets and developed countries.
“Given sociopolitical and economic forces that seem only to be racking up new surprises each year,” Peterson said, “investors in developed economies and emerging countries alike will need to find nimble strategies to deal with this shifting landscape.”
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About the FDICI Study The FDI Confidence Index® was constructed using primary data from a proprietary survey administered to senior executives of the world’s leading corporations. Participating companies represent 27 countries and span 17 industry sectors across all six inhabited continents. Together, the companies comprise more than $1 trillion in annual global sales. Respondents include C-level executives as well as regional and business heads. The survey field work was completed in October and November 2012.
