WASHINGTON, Oct. 12 (UPI) -- After two consecutive years of declining confidence in foreign direct investment, nearly 70 percent of global investors have a better outlook on the global economy and an increased willingness to invest overseas, according to the 2004 Foreign Direct Investment Confidence Index, published by Chicago-based consulting firm A.T. Kearney Inc.
This year, corporate investors said they perceive greater profit opportunities, and reduced macroeconomic and political risks, in the world's leading emerging markets -- a potential driver for future foreign direct investment (FDI).
But other issues -- including terrorism, corporate governance and an outsourcing backlash -- while not dampening the overall optimistic trend, are definitely a consideration among investors.
Sixty-nine percent of leading executives surveyed said they were more optimistic about the global economy, while one in 10 said they were more pessimistic. More executives this year expect to meet profit targets in the major emerging markets of China, India, Brazil, Mexico and Poland. And, fewer executives view these markets -- with the exception of Mexico -- as high-risk areas for foreign direct investment (FDI) than did last year.
The last time such a strong majority of investors were so optimistic about the global economy was in 2000, when foreign direct investment reached an all-time high of $1.4 trillion.
Although government regulation and instability are still viewed as some of the most serious risks, these problems appear to be less daunting to global investors than before. Fewer global investors (51 percent) view currency and interest rate volatility as a major risk compared to last year (63 percent), whereas 46 percent of global investors in 2004 cited political and social disturbances as a risk, compared to 62 percent in 2003.
This new optimism however is tempered by heightened concerns over corporate governance, theft of intellectual property, terrorism and threats to employees and assets.
Twenty-five percent of global investors said terrorism and volatile energy prices influenced their overseas investment decisions. Nearly a quarter of global investors view military conflict in the Middle East as a critical factor concerning their FDI plans.
"Investors who have not overhauled their strategic planning functions, and put in place rigorous risk identification and management systems will be ill-prepared to absorb the next inevitable shock to the global economy," said Paul Laudicina, A.T. Kearney vice president and managing director of the firm's Global Business Policy Council, which conducts the study.
One in five wholesale and retail investors said the potential backlash against offshoring would impact their FDI decisions. Nevertheless, 66 percent of global investors said they are willing to offshore work, compared to 50 percent last year. Investors said that some top deterrents to outsourcing included higher labor skills/education, better infrastructure, and proximity to consumers.
The performance of the U.S. economy, the dollar and the fate of the Chinese economy -- as China remains the most attractive FDI destination in the world -- will also temper future FDI decisions, the report said.
China remains the FDI darling of survey respondents, with the United States in second place for the third year running. About 40 percent of global investors said they felt more positive about China's economy, compared to 10 percent who had a less favorable view of China. While leading corporate executives consider the overheating of the Chinese economy to be the third most important factor influencing their FDI decisions, this has not changed the strategic equation that investors consider the upside benefits to outweigh the risks in China. However, the real winner is India, which rose from sixth place to the third most likely global FDI location.
"India is on the cusp of a real FDI take-off. Whether or not it achieves its potential will be powerfully influenced by how the Indian government manages its business policy environment," said Laudicina.
Although China and India are both at the top of the list for short-term FDI -- that is, within the next three years -- global investors view these two destinations as very different markets. For China, the interest is in manufacturing and assembly, while India is in the lead for information technology (IT), business processing and research and development investments.
The gap is closing between India and the United States, leaving China and India to compete for the two leading positions in the global economy. This will affect competition between these two countries, the United States and the rest of the world, the report said.
Investors say they favor China over India because of its market size, access to export markets, government incentives, favorable cost structure and macroeconomic climate.
On the other hand, these same investors favor India's highly-educated workforce, management talent, rule of law, transparency, cultural affinity and regulatory environment.
China's FDI flows ($53.5 billion) are primarily capital-intensive and are larger than India's ($4.3 billion), which are skill-intensive, concentrated in information and technology areas.
China's strength has helped drive the economic success of the region. Five of the six largest improvements in investor confidence were from Asian markets, including Hong Kong, Australia, Singapore, Malaysia and New Zealand. In part, this healthy economic performance across the region is due to North American and European investors seeking to diversify their operations.
But despite China and India's popularity, the stability and safeguards offered by the United States, Britain and Ireland could make these even more attractive choices for some FDI.
For instance, Glasgow, Belfast, and Dublin are low-cost places that offer educated workers, solid infrastructure, financial and political climates, safeguards for intellectual property and quality control -- which could prove more attractive than the cost advantages of a Shanghai or Bangalore offshore destination.
New European Union members also saw slightly lower levels of interest from investors this year. Poland dropped from fourth to 12th place, the Czech Republic from 13th to 14th place and Hungary from 17th to 19th place. Global investors named poor infrastructure (67 percent of investors), corruption (60 percent), and the erosion of low-cost advantage (53 percent)among the main perceived threats to the competitiveness of the ten new EU members.
"EU law will likely add a new layer of bureaucracy and may undermine new members' relative FDI advantages in areas such as favorable tax and labor conditions, which could push investors toward Romania, Bulgaria, the Balkans, Ukraine, and China," the report said.
Other countries that fell somewhat out of favor with investors were Russia, Mexico and Brazil. The Kremlin's battle with oil giant Yukos and terrorist attacks over the past year have damaged corporate investor confidence, except for oil and gas investors. Mexico saw a staggering fall from third to 22nd place, with unfulfilled reforms in telecom, infrastructure, and energy, and China's rise as an outsourcing center, to blame. Brazil fell from ninth place to 17th place due to economic instability among other concerns.
