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Foreign direct investment (FDI) is often viewed through the same lens as on-shoring or re-shoring. From a nation’s perspective, these activities retain or add jobs. FDI is becoming more important – and more global – to businesses, according to The 2019 A.T. Kearney Foreign Direct Investment (FDI) Confidence Index. Almost four-fifths of respondents expect to increase their level of FDI in the next three years.
Investors seem mixed on the destination of their investments, according to the survey. All but two countries among the top 25 on the index increased their overall confidence scores; and almost all of the 70-plus surveyed countries experienced gains. This was the most dramatic upward trend in scores in the 20-year history of the index, A.T. Kearney said.
Developed markets account for 22 of the 25 spots on the index — the highest-ever share of positions. But the average score for frontier markets increased the most, followed by emerging and developed regions.
A.T. Kearney posits that emerging and frontier markets outnumber developed areas. Or, while developed markets are favored by investors, they are examining emerging markets for future ventures.
Even as investors favor investing in developed markets, they also see increasing risks, the firm said. Investors point to political instability in developed markets as the most likely risk this year, followed by an economic crisis and a more restrictive business environment. Investors see these risks as far more likely to occur this year than the corresponding risks in emerging markets.
“I think the biggest challenge [to the U.S. market] is political risk,” said Steven Rosen, co-CEO of Cleveland-based private equity firm Resilience Capital Partners. There’s peril in ill-advised policy decisions and anti-capitalist sentiment fueled by the 2020 presidential election, he said.
“The paradox inherent in investors’ views on developed markets may be due to their greater focus on the risks in these markets because of their strong investment intentions there,” said Paul A. Laudicina, founder of the FDI Confidence Index and chairman of A.T. Kearney’s Global Business Policy Council. “At the same time, the risk of populism and protectionism in developed markets may actually be driving investment intentions as companies seek to maintain access to these key markets.”
Other paradoxes arise in an increasingly complex global environment. The survey suggests that these can be explained by investors prioritizing FDI as a part of a multi-localism strategy, characterized by the preference for local communities, industries, products, cultures and customs.
Cities are also becoming more important in FDI decisions. Almost 60 percent of investors don’t start decisions at the country level. Instead, they begin by selecting a region or by analyzing city options at a global level. Investors say that megacities and large cities will attract the lion’s share of FDI in the coming years, regardless of the type of business activity.
“The concentration of talent, innovation, and economic activity is likely to further favor megacities and large cities over less-populated alternatives,” said Erik Peterson, managing director of the Global Business Policy Council and co-author of the study. “This is clear in the strong correlation between the top-ranked countries on the FDI Confidence Index and the top-ranked cities on A.T. Kearney’s most recent Global Cities Index.”
Employment is the second most-important factor for investors evaluating cities, the survey found. But labor has become a problem for U.S. manufacturers. The nation's unemployment rate is near record lows. “We are in a very tight labor market,” Rosen said. “If you want to add a third shift in your factory, you can’t find labor anywhere. That makes it impossible to increase your volume, and [manufacturers] aren’t getting any traction in pricing.”
In April, the Institute for Supply Management reported its manufacturing employment index decreased by 5.1 percent from the prior month. Production, which decreased 3.5 percent, suffered in part from a labor shortage.
Regional highlights
Americas: Results are mixed for the Americas region. The United States and Canada both rank among the top five markets on the index for the seventh consecutive year, but Mexico falls significantly in this year’s index rankings (even as its score improves). And although 34 percent of investors are more optimistic about the regional economic outlook this year, this reflects less bullish investor sentiment on the Americas economic outlook than in last year’s Index.
Europe: With 14 markets, Europe is once again the region with the highest number of countries appearing on the FDI Confidence Index. Continued investor focus on European markets likely reflects in part the ongoing uncertainty surrounding Brexit, as companies seek to maintain their preferential access to the EU market. But investors are less optimistic about the prospects for several major economies, including the United Kingdom, Italy, France, and Spain.
Asia Pacific: Asia-Pacific markets do well on the 2019 index. Their share of spots on the index increases from seven last year to eight this year. And half of the Asia-Pacific markets on the index rank in the top 10: Japan, China, Australia, and Singapore. Investors are also most optimistic about the regional economic outlook for the Asia-Pacific. They are particularly optimistic about the economies of the region’s developed markets, including Japan, New Zealand and Singapore.
The full report is available here.
