Developed markets remained more attractive than emerging markets in 2016 as far as foreign direct investment (FDI) flows are concerned. The graph below, from a recent report by AT Kearney, a consulting firm, shows that for the second successive year, emerging and frontier markets took a backseat to their developed peers as far as FDI flows are concerned.
According to UN Conference on Trade and Development (UNCTAD) estimates, global FDI flows in 2016 declined by 13% from 2015 to $1.5 trillion. The decline in flows to emerging and frontier markets was sharper than that to developed markets. For this year, UNCTAD estimates a 10% increase in global FDI flow.
The higher FDI flow to developed markets was consistent with what AT Kearney had predicted in its 2016 FDI Confidence Index. According to the firm‘s analysis in the 2016 report, more developed nations featured in its list of 25 most attractive countries than ever before.
Peering into the future
After a brief look at the past, let’s look towards the future.
The primary reason that emerging markets have shaken up AT Kearney’s Confidence Index in 2017 is because of their higher representation in the new report. While India and China continue to dominate, some new entrants in the list of 25 have strengthened the case for emerging market attractiveness.
Of the three new entrants, two – the United Arab Emirates and South Africa – are emerging markets; the third one is New Zealand which has made its debut on the Index. Their entry marks the first time since 2014 that either a Middle Eastern or an African nation has been in the Index.
These entrants do signal a shift in interest towards emerging markets. Further, the report states, “The variety of newcomers this year could signal a desire by investors to diversify their FDI holdings more in the coming years.”
The report also highlighted the increased diversity in FDI targets. In 2016, the average score had declined to a multiyear low of 1.56, which is up to 1.61 this year. This indicates “stronger FDI prospects in a wider variety of markets than last year.”
Investors intend to increase and diversify exposure to emerging and frontier markets in 2017. Let’s look at this aspect in the next article.