U.S. is Top Target for Foreign Direct Investment

Investors are recalibrating their expectations toward slow, steady growth across the world over the next three years, according to the 2013 A.T. Kearney Foreign Direct Investment Confidence Index (FDICI). This report measures senior executive sentiment at the world’s largest companies, and has been conducted regularly over the last 15 years to assess the present and future prospects for international direct investment flows.

Although the outlook for emerging markets is rosiest, with 78 percent expecting growth in some form for those regions, 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. 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 of respondents 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,” said Paul Laudicina, chairman emeritus of A.T. Kearney and chairman of its Global Business Policy Council. “FDI could play a role in these efforts.”

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.

Looking ahead: A More Level Playing Field

In the developing world, emerging markets are no longer seen as temporary safe havens during economic upheaval. They are now considered a complement, instead of an alternative, to the developed world, according to Erik Peterson, managing director of A.T. Kearney’s Global Business Policy Council.

“The lines are blurring,” he added. “Executives are deploying strategic planning tools to understand that the risk and reward of investing in emerging markets is converging with those of developed economies.”

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 which emerging markets are perceived to be significantly riskier is political volatility. In fact, 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.

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.

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