Stronger FDI Winds May Be Blowing In the Direction of Frontier Markets 2

Increased FDI flow

Investors are keen to increase foreign direct investments (FDI) this year.

The annual AT Kearney FDI Confidence Index report for 2017 showed that 75% of the survey respondents intended to increase FDI over the next three years. This was up from 71% who planned to do the same last year. The respondents belonged to industrial firms, service-sector firms, and information technology (IT) companies.

Among the aforementioned investors, 79% of those based in Asia and 83% of those belonging to the IT sector were keen to boost their FDI – the highest among geographic and sectoral respondents respectively.

The main reason for their desire to increase investments was the availability of quality targets (34%), followed by the macroeconomic environment (29%). Greater availability of funds and increased risk tolerance (27% each) were other main reasons.

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Frontier markets to see an uptick?

Developed and emerging markets remain at the forefront of investor interest when it comes to FDI. The survey indicated that 78% and 75% of the investors intended to either maintain or initiate new investments across developed and emerging markets, respectively.

However, a key takeaway of the report was investor interest in frontier markets.

As seen from the graph above, a fifth of the surveyed participants were already invested and actively seeking new investment opportunities in frontier markets. Meanwhile, 30% were maintaining their level of investment and 19% were seeking new opportunities in frontier markets though they were not presently invested.

This interest in frontier markets is testimony to viable investment targets in markets which are considered to be on the fringe of investment worthiness. Further, this interest also draws from the view laid out earlier in the article that the macroeconomic environment has improved to a degree that even these fringe countries are becoming attractive.

But the positivity on frontier markets is not uniform. The graph above shows that 19% of currently invested firms are seeking to divest while 12% are neither invested in frontier markets nor seeking new opportunities.

The divergence is not unexpected, though, as these markets are not for all kinds of investors. The political and economic risk along with the relative difficulty in doing business requires expertise to successfully acquire companies in these nations.

Even though the UN Conference on Trade and Development (UNCTAD) expected strong FDI growth in frontier markets this year, it held that uncertainties are aplenty in these markets.

In the next article, let’s look at the regions most attractive for FDI investments.

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