With all the policy and market debates on trade, which countries rank the highest among investors as a destination for attracting direct foreign investment? A recent analysis by A.T. Kearney provides its ranking of the top 25 countries receiving investor confidence.

Pharmaceutical companies, like companies in other industries, decide where to invest in their operations for a myriad of reasons. So which countries are prime and hold the most confidence for these investments? The US remains in the top position for investment intentions in the 2018 A.T. Kearney analysis with Canada rising to the second position while Germany falls to third, the UK remains at four, and China rounds out the top five.

Localization: a key trend in investment decisions

Seventy-nine percent of investors plan to increase their foreign direct investment in the next three years, according to the 2018 Foreign Direct Investment (FDI) Confidence Index from the global strategy and management consulting firm, A.T. Kearney. This is a four percentage point increase on last year’s results, which the firm says highlights the continued bullishness of investors amidst geopolitical turmoil and economic expansion. Investors also signal greater confidence in the global economy, with 66% more optimistic about the global economic outlook than they were in 2017.

Despite such optimism, this year’s report of the index, entitled Investing in a Localized World, finds that investors are also increasingly bracing themselves for economic disruption by adopting strategies to mitigate the effects of protectionism on their business operations. Eighty-nine percent of investors report that their company is pursuing or considering implementing localization practices. Government regulations play a key role in these decisions. More than one-third of investors indicate that their decision to localize is driven by market access restrictions while 27% report that their localization decisions are driven by protectionist trade policies. Localization strategies are causing investors to increase their FDI as they develop new supply chains, products, and workforces for specific local contexts.

“Investors appear to have recognized that the heady days of globalization are no more,” said Paul A. Laudicina, founder of the FDI Confidence Index and chairman of A.T. Kearney’s Global Business Policy Council,” in commenting on the study. “In an increasingly islandized world, global companies recognize that it is important to build local connections to ensure continued market access.”

In a move to localization, developed markets dominate in terms of investment intentions, accounting for 84% of the positions in the A.T. Kearny FDI Confidence Index. The US remains in the top spot of the index for the sixth year in a row (see Table I at end of article). Almost all developed markets in Asia rise in the rankings, and European developed markets performed strongly, accounting for more than half of all positions on the index. After a slight dip in investors’ focus on developed markets in the 2017 index, developed markets rebounded to capture 84% of the top 25 spots this year—an all-time high. The report concludes that developed markets are likely attracting such significant investor interest thanks to the synchronous upswing in economic growth across these markets—particularly in Europe—and their long-term favorable fundamentals, such as relatively transparent business regulations and high purchasing power, their competitive advantages in technological innovation, and the regulatory and competitive pressures to localize operations in core markets.

“Europe’s strong showing in this year’s index is a sign that—10 years after the onset of the global financial crisis—the European economy has finally turned the corner and is poised for greater growth,” says Erik Peterson, managing director of the A.T. Kearney Global Business Policy Council and co-author of the study.

Emerging markets, such as China and India, fell in this year’s index, but remain among the top investment destinations overall due to their market size and rapid economic growth. Emerging markets overall marked an all-time low for the share of emerging markets on the Index. Only four emerging markets appear among the top 25 countries for FDI intentions: China, India, Mexico, and Brazil suggesting that confidence in investing in specific emerging markets has declined but interest remains. For purposes of the study, emerging markets are defined as those countries that have middle levels of income per capita, offer a governance and regulatory environment that allows for some investment, and are somewhat integrated into the global financial system. While 44% of investors report that they are seeking to increase their investments in emerging markets, only 40% are seeking to do the same in developed markets and 39% in frontier markets. For purpose of the study, frontier markets are defined as developing economies with generally low levels of income per capita, less advanced regulatory environments, and weak integration with the global financial system. “Investor intentions, then, may be spread more widely across the emerging market space, resulting in fewer individual emerging markets appearing on the index,” concludes the report.

The authors of the report further explain that the fall of investor confidence in emerging markets may be better explained by investor preference for regulatory transparency and concern about political instability than any significant change in their overall fundamentals. Investors also perceive the possibility of political instability in an emerging market as more likely to occur this year than last year, according to the report. For the fourth year in a row, investors identify increasing geopolitical tensions as a “wild card” that is most likely to occur this year.

Regional highlights

Americas. Investors are split about the Americas region as an attractive investment destination. While North American markets such as the United States (1st), Canada (2nd), and Mexico (17th) maintain their positions or rise in the rankings, Brazil falls 9 spots to 25th (see Table I at end of article). “Global investors are very optimistic about the economic outlook in the Americas,” says the report. Over 40% of investors are more optimistic about the regional economic outlook this year than they were in 2017.

The US topped the A.T. Kearney FDI Confidence Index for the sixth year in a row, which the authors of the report attribute to the country to the size of the US market and recent economic upswing. They also note that the recent corporate tax rate cut likely also increases the appeal of investing in the US in the near to medium term. They also surmise that investors may be reacting in part to the US government’s recent protectionist stances “as FDI remains a crucial means for them to maintain access to this globally important market,” says the report.

One important observation from the report is that changes to the North American Free Trade Agreement (NAFTA) would disrupt FDI flows. Ninety-five percent of investors’ companies conduct business in North America, and the renegotiation or termination of NAFTA would reshape FDI patterns. “While modernizing NAFTA’s digital trade provisions would have the most positive net effect on FDI flows to member companies, terminating NAFTA would have the least positive net effect on FDI flows,” according to the report. Sixty percent of investors report that terminating NAFTA would raise their company’s cost of operations.

Europe. Europe is particularly attractive to foreign investors, capturing 14 of the 25 spots on the index. “Europe stages a bit of a comeback in 2018 after its share of positions on the Index had declined in the two previous years,” according to the report. All in all, European markets account for more than half of the total positions on this year’s A.T. Kearney FDI Confidence Index as well as half of the top 10. This report points out that this reflects substantial investor interest in establishing or expanding business operations in Europe. Furthermore, the number of European countries on the 2018 index increases from 11 spots in 2017 to 14—just short of the region’s all-time high of 15 spots on the 2015 index. In particular, France, Switzerland, and Italy are in the top 10, and the latter two of these countries each rise by a strong three spots. Furthermore, the three newcomers to the 2018 Index are all European markets: Denmark (20th), Portugal (22nd), and Norway (23rd).

In looking at the rankings in the 2018 index, Germany falls to 3rd place, while the United Kingdom maintains its 4th place rank (see Table I at end of article). France remains in the 7th spot, while Switzerland and Italy rise to the 9th and 10th position, respectively. The Netherlands (13), Sweden (14), and Ireland (19) all improve one spot while Spain falls to 15th, Belgium falls to 21st, and Austria holds steady at 24th.

The report points out that this widespread intention to invest in Europe may be related to the region’s economic upswing after several years of subpar economic performance. In addition, as in last year’s index, the pending withdrawal of the UK from the European Union (i.e., Brexit) may be motivating some investor interest in the rest of the EU member economies as companies seek to maintain their preferential access to the EU market.

Asia Pacific. Investors are the most bullish about the economic outlook for the Asia Pacific region, with 43% of investors more optimistic than last year about the region. Investor preference for the region, however, appears to have declined slightly, with only seven Asian countries appearing on this year’s index. China (5), India (11), and Singapore (12) all rank lower this year while Australia rises to 8th and New Zealand jumps to the 16th spot in only its second year on the index. Japan and South Korea hold steady at 6th and 18th, respectively see Table I at end of article).

China fell two spots in 2018 to fifth, marking the second consecutive year that the country’s rank has declined and its lowest-ever ranking in the history of the A.T. Kearney FDI Confidence Index. Although FDI confidence declined, 38% of investors are more optimistic about the economic outlook, a significant improvement from last year. The International Monetary Fund projects the economy will at 6.6% in 2018 and 6.4 percent in 2019.

“China’s drop on the index may, therefore, reflect the overall decline in or dispersion of investment intentions for emerging markets,” says the report. “It may also be in part the result of recent policy changes that have reduced transparency and increased regulatory burdens for investors rather than any major change to the country’s economic fundamentals.”

The report provides data from the US–China Business Council annual survey found that found, compared with three years ago, 40% of companies are less optimistic about China’s business climate, according to the report. The report, however, reports on certain steps that the Chinese government has taken to improve its investment environment. In August 2017, the State Council eased restrictions on foreign ownership and investment in the banking, transportation, securities, and insurance sectors. It also recently announced it will phase out foreign ownership restrictions in the automotive sector by 2022. In response to tax reform efforts in the US, the Chinese Ministry of Finance announced that it was exempting foreign firms from tax withholding obligations if profits are reinvested in China.

The top reasons guiding investments

Among market asset factors, the cost of labor is the most important issue that investors are considering in their FDI decisions this year, according to the study. While only 9% of investors indicated that labor costs were among their top two factors for choosing where to invest in the 2017 study, 13% identify this factor this year—the largest rise in importance among the factors examined in the study.

The study also points to “wild cards” that will influence FDI in 2018 with the top three being: (1) an increase in geopolitical tensions; (2) a rise in commodity pricing; and (3) political instability in emerging markets. A rise in commodity prices was the wild card that saw the greatest jump in investors’ perceived likelihood of occurring this year. Thirty-two percent of investors believe that commodity prices are likely to increase in 2018, compared with just 26% who held that view last year. While such price rises would boost the economic performance of commodity exporters, it would negatively affect the current account balance of commodity importers, notes the report with the sectors that rely on commodity inputs facing higher costs.

The study points out that 90% of investors are pursing localization or considering to do so. About 40 percent of companies that are localizing or considering doing so are hiring local talent or setting up production or manufacturing facilities in local markets, according to the study. At least one-third of such investors point to product design and research and development, market entry through mergers and acquisitions, or joint ventures, branding and marketing, and internal management as ways in which their companies are localizing. Two-thirds of the investors that are localizing or considering localization say they are using two or more localization methods.

Source: A.T. Kearney