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.
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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
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.
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.
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.
Are You Interested in Investing in the United States?
The Grady Firm, P.C. specializes in business, employment, and immigration law for California entrepreneurs, and acts as the liaison for foreign business owners that wish to expand their operations to the United States by providing business, immigration, and cultural counseling. The Grady Firm has offices in Los Angeles and San Diego, and serves clients remotely from across the globe.
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