Top 5 Global Foreign Direct Investment Prospects for 2013-2015: Emerging Market Safe Havens Dominate

In the 2013 World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) asked senior decision-makers in multi-national corporations across the private sector to identify the economies they would be most likely to invest in, in terms of FDI (Foreign Direct Investment), between 2013 and 2015 to expand their global footprints. The top 5 is a mixed bag with some very telling results but four major emerging markets dominate the list. The USA tops the group, followed by China, India, Indonesia and Brazil. Only one developed economy, the USA, is included but it leads the group cementing its importance as the largest consumer market in the world in US$ terms in 2013. The presence of three of the four BRIC (Brazil, Russia, India and China) economies in the top 5 also goes to show that despite the slowdown in real economic growth we’ve seen in these four economies in recent years, they are as important and as influential as ever to investors. The main lesson we can learn from the top 5 prospective host economies in the medium term is that investors are still wary following the global financial and economic crises of the last five years and are choosing steady returns from investments in safe havens rather than risking higher yields in faster growing frontier markets.

FDI Inflows to Top 5 FDI Prospective Host Economies as a Percentage of Total Global FDI Inflows: 2007-2012

Source: Euromonitor International from UNCTAD

USA: Possibly the most interesting thing about this group is that it is led by a developed economy, when it would be entirely reasonable to expect China to have overtaken the USA as the most attractive FDI host economy in the world by 2013. However, with 46.0% of respondents to the UNCTAD survey picking the USA as their preferred destination for FDI in the medium-term, it’s clear that despite the economy’s ongoing difficulties, the USA is still seen as the “Land of Opportunity” for prospective investors;

China: China was just marginally behind the USA in the survey, with 45.0% of respondents naming it as their top prospective FDI host economy between 2013 and 2015. With 91.0% of respondents picking either the USA or China, it’s clear that these two economies are each other’s biggest competition. The USA has the edge over China mainly for its pro-business investment policies and openness to trade and investment. However, China is getting better on this front with plans for further currency liberalisation and further “open-door” policies expected to take centre stage at the government’s November 2013 plenary session;

India: India has also been ramping up its reform efforts in a bid to attract more FDI from abroad. The country is struggling with a depreciating rupee and significant current account deficit which the government is struggling to reverse. In September 2012 the Indian government unveiled a slew of reforms to make the Indian economy more attractive to foreign investors, which they then expanded in July 2013 to allow for 100% foreign ownership in certain sectors. Forecast to be the biggest economy in the world in terms of population size by 2030 which means there is huge potential in India for foreign investors willing to play the long game;

Indonesia: Another Asian tiger, Indonesia, is the most open to FDI of the three Asia Pacific economies featured in the top 5. Real economic growth in Indonesia is very much driven by consumption, as opposed to investment, which is very attractive for investors. The country has a rapidly growing middle class as well as abundant natural resources. These factors, paired with investor-friendly, anti-protectionist policy reforms will ensure Indonesia remains a popular FDI destination over the medium- to long-term;

Brazil: Moving away from Asia Pacific, Brazil is another economy driven largely by consumption. However, the government is making a concerted effort to use investment to drive real output growth and move away from credit-fuelled consumption-led growth. Using incentives such as tax breaks to encourage private sector investment in infrastructure, the Brazilian government is hoping to narrow its widening current account deficit and shore up the real ahead of hosting the FIFA World Cup in 2014 and the Olympic Games in 2016.