Foreign Investment 

Confidence Slowly Returning

By: A.T. Kearney

        Despite being more optimistic than the economy than in the immediate aftermath of the Sept. 11 terrorist attacks, global executives are less likely to make foreign direct investments than they were in early 2001, the last time similar research was conducted, the first broad decline in investor sentiment in five years. Also for the first time, a majority of investment decision-makers no longer prefer mergers and acquisitions (M&A) as a mode of entry, finding other means of foreign direct investment more attractive.

    These are among the findings of the latest Foreign Direct Investment Confidence Index report released by the global management-consulting firm A.T. Kearney.

    “It appears that the unwinding of the FDI boom of the late 1990s has not yet fully run its course. Investors are less likely to engage in FDI, and in particular, M&A, although it is still the dominant vehicle of global FDI activity,” said Paul A. Laudicina, A. T. Kearney vice president and managing director of the firm’s Global Business Policy Council, which conducts the study.

    The annual survey of CEOs, CFOs and other top executives of Global 1,000 companies reveal that corporate investors have less confidence in investment destinations worldwide, as shown by a lower world average of FDI Confidence Index scores. This represents the first time since the Asian financial crisis that the likelihood to invest abroad has declined.

    Despite the decline, fewer than half of corporate investors hold a more negative view of the global economy today than one year ago. An A.T. Kearney study conducted shortly after the Sept. 11 attacks found 94 percent of investors more negative.

    “While corporate investor attitudes certainly are not restored to pre-9-11 levels, they have nonetheless rebounded from the most grim view of the world we detected last October,” said Laudicina.

China overtakes U.S. for the first time

    For the first time in five years, China overtook the U.S. as the most attractive foreign investment destination. While investor attractiveness declined across nearly all markets this year, China bucked the global trend. Investors are increasingly more attracted to the Chinese market and more optimistic about the Chinese economy. By contrast, U.S. FDI prospects have been dampened by a slow economic recovery, stock market volatility, corporate scandals and continuing concerns about homeland security.

    European investment destinations continue to dominate the Top 10 Index rankings, with the U.K., Germany, France, Italy and Spain leading the way. Russia recorded the biggest shift in investor sentiment in the Index, jumping from below the top 25 to 17th place. Argentina fell sharply while both Me xico and Brazil lost ground, taking 9th and 13th place respectively. Although still suffering from economic malaise, Japan achieved its highest ranking ever, assuming 12th place as investors see greater opportunities to position themselves in the Japanese market.

Massive cross-border M&A is over — at least for now

    Continued softness in the global economy, sagging equity prices and concern over corporate earnings and governance practices has weakened CEOs’ appetite for mergers and acquisitions. Only 40 percent of global investors preferred M&A to other modes of entry, compared with 60 percent in 2001 and 71 percent in 2000.

    The huge run up in global FDI flows during the late 1990s was largely driven by increases in the size and volume of M&A deals.

    “The softening of investor attitudes toward M&A likely reflects the end to an extraordinary period of economic expansion and the beginning of a period of corporate retrenchment,” said Laudicina, “rather than a permanent shift in investor habits.”

China leads emerging markets

    Since 1998, China consistently has ranked among the most attractive markets worldwide, along with Brazil, India and Me xico. In 2002 China continued its rise while these other large emerging markets declined in attractiveness.

    Asia displaced Latin America as the third most attractive region for FDI, tracking just behind North America and Europe, with China, Japan, Hong Kong, Australia and Vietnam showing the most improvement among Asian markets. However, most ASEAN countries face lackluster FDI prospects, as investors express diminished interest despite the return of political and economy stability across the region.

U.S. FDI attractiveness dips

    U.S. FDI inflows declined by 60 percent in 2001, and consistent with the broader decline in Index scores this year, investors are less likely to invest in the American market today than previously. The uncertain direction of the U.S. economy, stock market volatility and corporate scandals have led executives to view the U.S. economy with considerably less enthusiasm. Moreover, the overwhelming factor determining FDI decisions globally, according to senior executives, continues to be the state of the U.S. economy.

    Nevertheless, the U.S. remains the top investment choice for British, Canadian and German investors. Also, many global investors who previously had not operated in the United States plan to invest there: roughly 10 percent of all first-time foreign investments worldwide are likely to be made in the U.S. market. Thus, the lure of the world’s largest market remains strong, according to the study.

    Russia recorded the biggest investment sentiment shift in the Index, moving up to 17th place from its position below the top 25 last year. Russia now trails just behind its Central European neighbors - Hungary, the Czech Republic and Poland. This surge in confidence, principally driven by natural resources and wholesale/retail investors, was likely encouraged by Russia’s rapid and marked improvement in economic fundamentals and also by reforms enacted by the Putin government. Investor confidence likely was further bolstered by the country’s shifting political and economic relations with the West.

  Russia continues to fare less well, though, in actual volumes of inward FDI relative to other transitioning countries in the region. This may be a function of the poor market perception hangover that has deterred investors in the recent past. Nonetheless, increased optimism among global investors could presage an upswing in FDI for Russia, should positive market signals and fundamentals continue.

  Country and sector coverage among the participating companies reveals a normal distribution compared to the Global 1000 population.

  The Global Business Policy Council is a strategic service of A.T. Kearney that helps chief executives monitor and capitalize on geopolitical, economic, regulatory, technological and social change worldwide. Council membership is limited to a select group of corporate leaders and their companies. The Council’s core program includes periodic meetings in strategically important parts of the world, timely analytical products, regular member briefings, regional events and other services.

About A.T. Kearney

  A.T. Kearney, www.atkearney.com,  is one of the world’s largest management consulting firms. With a global presence that includes more than 60 offices in 37 countries, spanning major and emerging markets, A.T. Kearney provides strategic, operational, organizational and technology consulting and executive search services to the world’s leading companies. A.T. Kearney is the high-value management consulting subsidiary of global services leader EDS.