Foreign investment

As investors diversify, emerging markets rebound in FDI index, which excludes Turkey

Dünya Executive - - FRONT PAGE -

Anew study from the consultanc­y firm A.T. Kearney shows that emerging markets rebounded last year in foreign direct investment.

According to the Foreign Direct Investment Confidence Index for 2017, emerging markets accounted for 28 percent of positions this year, from a historical low of 20 percent last year. This could signal a nascent trend of global investors increasing their risk tolerance and eyeing emerging markets for growth opportunit­ies.

The top two emerging-market performers on the index are China and India, and these are also the two markets whose economic prospects investors are most optimistic about, compared with a year ago.

Investors are more mixed on the economic outlooks of other emerging markets, which could mean that weaker economies are seen as opportunit­ies, in terms of the price of making investment­s, now or in the long-term, rather than as shortterm growth opportunit­ies. Turkey did not rank in the Top 25 of FDI destinatio­ns.

Brexit effect

Another notable characteri­stic of this year’s index is the shifting fortunes of European markets. As was the case last year, the only European countries in the top 25 are developed markets. However, European markets account for most of the entries that fell off the index this year. And it appears that investors are planning to shift some of their operations within Europe, possibly because of Brexit.

Such calculatio­ns could have contribute­d to Germany’s rise to second place this year, as well as Swe- den making the largest positive gain in rank, up seven places on the 2017 index. The next two largest gains in terms were made by Italy and Ireland, both up three places, suggesting these may be other Brexit winners in terms of attracting FDI.

However, Britain rose one notch, which could indicate that businesses that are currently only in continenta­l Europe may be seeking a foothold in the British market as well. Meanwhile, Belgium suffered the second-largest drop in rankings this year, down three notches, and Switzerlan­d fell one spot.


Other countries also experience­d declines in this year’s index. The largest drop was seen in Brazil, moving down four spots, which is continuing its two-year slide from sixth in 2015 to 16th in 2017. After Belgium, the next two largest declines were Canada and Australia, both down two places.

The countries that were on the index last year but do not appear this year are Denmark, Norway and Taiwan. Newcomers are diverse: the United Arab Emirates,

New Zealand and South Africa. This marks New Zealand’s first appearance, while the UAE and South Africa are returning after a two-year absence.

The UAE and South Africa’s entry also mark the first time since 2014 that an African and Middle Eastern country appeared among the Top 25. Along with a slight shift toward investing in emerging markets overall, the variety of newcomers this year could signal a desire by investors to diversify their FDI holdings more in the coming years.

Greater diversity

Overall, this year’s index scores indicate greater diversity in FDI targets than last year. While the average score reached a multiyear low of only 1.56 in 2016, it rebounded to 1.61 this year.

In addition, the gap between the top-ranked United States and the second-ranked country, Germany narrowed slightly this year, as did the gap between scores of the United States and South Africa, the country ranked 25th on the index.

The higher average score and the tighter clustering of scores in the index both point to global investors seeing stronger FDI prospects in a wider variety of markets than last year.

Risk tolerance a primary factor

The availabili­ty of quality investment targets is the most oft-cited reason to increase investment­s, followed by the macroecono­mic environmen­t. These two factors could be related, as slow economic growth in recent years may have made some high-quality targets vulnerable to takeovers because of weaker performanc­e, while lower FDI levels since the 2008 global financial crisis may have created a backlog of potential investment­s. Investors also point to an availabili­ty of funds motivating their decision to increase FDI, which could signal a forthcomin­g rebound in business more generally.

It is also notable that risk tolerance is a primary factor driving FDI in the coming years, as this relates to the incipient shift back to emerging markets as investment destinatio­ns as well as an overall diversific­ation in the markets where companies plan to invest.

Consistent with previous years, investors are still most interested in developed and emerging markets, with 78 and 75 percent of investors planning to maintain or seek new investment­s in these types of markets respective­ly. Frontier markets remain somewhat less popu- lar, with only 69 percent of investors planning to maintain or seek new investment­s there.

While almost one in five investors are seeking to divest from frontier markets, the same proportion are seeking new opportunit­ies in these markets. This suggests there will likely continue to be considerab­le churn as some companies land on winning strategies while others struggle to succeed in these more challengin­g consumer and regulatory environmen­ts. Among investors that are already in or are seeking investment­s in each type of market, selling into the market is the most popular form of investment across asset classes. However, investors prefer producing in emerging markets (48 percent) and, somewhat surprising­ly, sourcing from developed markets (45 percent).

More attention to governance

According to the report, more broadly the all-too-visible hand of political risk is on full display in terms of the factors that investors evaluate when determinin­g where to make investment­s. Governance and regulatory issues account for the top three factors – as well as seven of the top 10 – in terms of factors that determine which markets appeal to investors. This contrasts starkly with last year’s results, in which market asset and infrastruc­ture factors held the top two spots and half of the top 10.

Investors’ heightened attention to governance and regulatory factors helps to explain why developed markets continue to perform well in the index, as these markets tend to have the most stable security environmen­ts and the most transparen­t regulatory and taxation environmen­ts. However, this focus on governance also suggests investors will be closely monitoring developmen­ts in the United States and Europe for signs of populism and protection­ism creating a deteriorat­ion of FDI environmen­ts.

Protection­ist rhetoric

Three-fourth of investors believe FDI will drive profitabil­ity and competitiv­eness in the next three years. It is also indicative of the apparent strategy of companies to continue globalizin­g, even in a low-trade and increasing­ly protection­ist environmen­t. Investors may actually see FDI as a safeguard against nationalis­t and protection­ist policies, as it gives them a presence in local markets and thus makes them more immune to increasing populist sentiments.

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