New Concerns in an Uncertain World

Despite significant obstacles, foreign direct investment (FDI) continued to rise in 2007, with global investors becoming more optimistic about opportunities in the developing world. China and India are choice destinations for FDI flows, followed by the United States and the United Kingdom. Developing countries, which are expected to account for an increasing number of large FDI deals, are showing special interest in frontier markets as first-time investment destinations.

These are among the major findings in A.T. Kearney’s 2007 FDI Confidence Index®. The Index tracks the impact of likely political, economic and regulatory changes on the foreign direct investment intentions and preferences of the leaders of top companies around the world. With responses from global executives spanning six continents and 17 industry sectors, the survey represents a unique window into the present and future prospects for international investment flows.

The following is an overview of the main findings in the latest Index.

China tops FDI rankings. China ranks first among Asian investors and second among European and North American investors. Both developed and developing country investors cite China as their preferred destination for first-time investments.

India boasts a sunny outlook. India retains second place in the Index, a position it has held since displacing the United States in 2005. Global investors’ outlook is more positive than a year ago (see figure). Multinationals are seeking economies of scale and more productivity in their IT and business process outsourcing functions.

United States comes in third. The United States continues to rank third among global investment destinations, but it attracts more interest from developed—rather than developing— country investors.

Other interesting findings. Nearly half of total FDI inflows to Europe went to three core European economies—the United Kingdom, Germany and France. The investment in these three countries alone is greater than the FDI flowing to all of Asia in 2006. In addition, 20 of the top 25 investment destinations on the Index are returning from the last survey, confirming investors’ continued confidence in destinations that have delivered results. Six of the G8 nations are represented, as are the BRIC countries (Brazil, Russia, India and China).

Continuing Shift of FDI?
As developed markets experience the effects of financial turmoil and emerging markets draw growing numbers of investors, the locus of power in FDI may be shifting. While still dominating the majority of outward FDI flows, developed markets also face unprecedented competition from emerging market capital. Many leaders in developed markets are at a crossroads: They recognize the need for fundamental reforms to help their countries regain global competitiveness and attract investment, yet their electorates are pressing to preserve national interests and domestic jobs.