The United States is the top-ranked FDI destination for the fourth year in a row. The US economy is proving resilient to the risks facing other countries, including many other developed markets.
Content excerpts courtesy of atkearney.com
In May 2016, A.T. Kearney released its annual FDI Confidence Index, which surveys C-level executives and regional and business leads from companies from 27 countries. A.T. Kearney’s Foreign Direct Investment Confidence Index®, established in 1998, ranks countries based on how changes in their political, economic, and regulatory systems are likely to affect foreign direct investment inflows in the coming years.
The United States and China once again claim the top two spots in the Index, holding these respective positions for the fourth year in a row. These two countries have held steady at the top of the Index in the face of significant changes in the global operating environment over the past four years, including the ongoing economic slowdown in China, persistently low global oil and commodity prices, and the sharp appreciation of the US dollar. The sustained interest of global business executives in investing in the United States and China in the face of this volatility demonstrates the enduring attractiveness of the world’s two largest economies.
However, the gap between top-ranked United States and second-ranked China doubled from 0.10 points last year to 0.20 points in 2016. This is symptomatic of the widening US lead overall. Bullish sentiment among global business executives on the economic outlook for the United States reinforces this trend. More broadly, executives’ outlook on the US economy is considerably more positive today than it was in 2015, with the same holding true for other large developed markets such as Germany, the United Kingdom, and Japan. In contrast, global executives have grown less optimistic over the past year about the economic prospects of most of the emerging markets in the Index, with the notable exception of India.
Overall, the average score in the 2016 FDI Confidence Index is much lower than in recent years, at just 1.56 this year compared to about 1.75 in each of the three previous years. At the same time, however, executives tell us that they plan to increase their FDI levels in the coming years. The lower average scores, then, are likely driven by uncertainty about which markets will be the best bets in the medium term, rather than by lower interest in FDI overall.
The global economic outlook, as well as the outlook for country economies around the world, remains highly unpredictable. After more than a decade of emerging-market-led global growth, developed markets are now the primary engines. Business executives are unsure how long this new reality will last and seemingly have incorporated this wild card into their medium-term FDI outlook, leading to fewer “high likelihood” and “medium likelihood” responses on investing in individual markets—and more “low likelihood” responses. This suggests that although companies will continue to engage in FDI, it has become increasingly difficult for them to determine where to invest.
United States Outlook
As the top-ranked FDI destination for the fourth year in a row, the United States is proving resilient to the downside risks other countries face as the global economy struggles to pick up momentum. Private consumption, job creation, and continuing wage growth will continue to play crucial supporting roles in the economy, offsetting many of the negative competitiveness effects of a strong dollar.
While foreign investors are drawn to the strong economic performance of the United States compared to other developed markets and many emerging markets, FDI inflows could be affected by political risks in a crucial presidential election year. One issue is that political gridlock is rising to new levels, so reforms that would improve the business environment and encourage more investment are unlikely to be passed into law by Congress.
Another potentially more damaging effect would be the election of a candidate from outside the US political mainstream (for example, Donald Trump or Bernie Sanders). According to the survey, the number of companies increasing their FDI into the United States would decline by 13 percentage points if such an event were to occur. Business executives from Asia and the Americas are the most concerned about a non-mainstream candidate winning the US presidency. The share of companies from these regions that would increase their FDI into the United States would fall by nearly 20 percentage points if a populist candidate wins the White House.
FDI inflows into the United States, however, demonstrate investor confidence in the steady recovery of the United States so far. UNCTAD estimates that FDI inflows reached $384 billion in 2015, the highest number since 2000. This marks a significant recovery from 2014, when FDI inflows to the United States hit a 10-year low.
Foreign investor interest in the US market is widespread, but three sources in particular stand out. The first is Japan, which was the largest source of FDI in the United States in 2015 (with $36 billion in investments) according to the US Bureau of Economic Analysis. Canada, another long-standing source of FDI in the United States, continues to show strong interest in American companies and was the largest originator of foreign M&As in 2015, according to Dealogic. One of the biggest M&A deals in the United States was the acquisition of Salix Pharmaceuticals by Canada’s Valeant Pharmaceuticals for $15.9 billion. However, China is quickly becoming the fastest growing source of FDI in the United States. In just the first half of 2015, China invested $6.4 billion in 88 transactions, according to Rhodium Group, the highest semester on record.
The Valeant-Salix deal was part of a broader trend of FDI into the American pharmaceutical sector. Other significant acquisitions include the UK company Shire’s $5.2 billion acquisition of NPS Pharmaceuticals, Israel’s Teva acquiring Auspex for $3.5 billion, and Japan’s Otsuka purchasing Avanir for $3.5 billion. The largest pharmaceutical M&A deal of 2015 was the German firm Merck’s purchase of Sigma-Aldrich for $17 billion.
Conclusion and Business Implications
Even as many indicators of globalization continue to stagnate, global FDI flows may be on an upswing. Global business executives are united in the view that FDI will become increasingly important to corporate profitability and competitiveness in the near to medium term. And they are acting accordingly, increasing their planned investments abroad. Developed markets are still attracting the lion’s share of investors’ interest, claiming 20 of the top 25 spots in this year’s FDI Confidence Index.
However, high-performing emerging and frontier markets can continue to attract FDI inflows if they have investors’ desired market characteristics. Despite the stability in the top two ranks of the Index once again this year, it is clear that there is a lot of volatility in the global economy as well as in global FDI flows—signaling challenges and opportunities for both global business executives and countries seeking to promote investment.
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*This article is for informational purposes only, and does not constitute legal advice or create an attorney-client relationship. This article does not make any guarantees as to the outcome of a particular matter, as each matter has its own set of circumstances and must be evaluated individually by a licensed attorney.
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