The U.S. remains an attractive destination for foreign direct investment as investors flee the uncertainty of emerging and frontier markets.
WASHINGTON—June 16, 2020— Foreign direct investment (FDI) will plummet in the year ahead as a result of COVID-19, and the nature and timeline of recovery remain highly uncertain, according to The 2020 Kearney Foreign Direct Investment Confidence Index® (FDICI) from global strategy and management consulting firm Kearney. The company released the results of the survey today via a virtual press briefing.
The Kearney Foreign Direct Investment Confidence Index (FDICI) is an annual survey of global business executives that ranks markets that are likely to attract the most investment in the next three years. In contrast to backward-looking data on FDI flows, the FDICI provides a forward-looking analysis of the markets that investors intend to target for FDI in the coming years.
The survey was in the field as COVID-19 was starting its deadly spread across the globe, with market shocks just beginning to emerge. It captures a moment in time in which the world was on the brink—as it was entering a great storm, the company said in a release prior to the briefing.
At the outset of the survey period, before the spread of the virus, business leaders were reasonably bullish about the global economy and the future of direct investment. COVID-19 appeared to be contained in Asia. However, as investors realized they were “entering the storm” in the last two weeks of the survey, investor confidence predictably declined across the board—for developed, emerging, and frontier markets¹ alike, mirroring the rapid outbreak of the pandemic. Between the first two weeks of the survey and the last two weeks, scores for each of these categories of markets fell 25-33 percent.
“The pandemic and its subsequent economic shocks show just how quickly and profoundly the external operating environment can change,” said Paul A. Laudicina, founder of the FDI Confidence Index and Kearney’s Global Business Policy Council, in a statement. “Some markets will recover faster than others, and this likely explains why there appeared to be a return to the fundamentals—to large, more stable markets with more predictable political and regulatory structures. Developed markets will continue to do well this year, likely because they show strength in the factors that investors tend to prioritize, including an attractive investment environment and strong technological infrastructure.”
These preferences also explain the enduring appeal of the United States to foreign investors, which continues its longest run in the top position on the Index, dating back to 2013.
The country offers a business-friendly regulatory environment, market size, and technological infrastructure. Investors rank the availability of quality targets as the most important factor behind increasing FDI, while pointing to macroeconomic stability as a top hindrance. These responses suggest that investments will likely occur in developed markets, where these factors are generally stronger—and where the damage from COVID-19 is expected to be comparatively lower.
“Emerging and frontier markets will suffer much more at the hands of COVID-19,” added Erik Peterson, managing director of the Global Business Policy Council and co-author of the study. “A confluence of factors is at play, including inadequate medical infrastructure, limited fiscal options, a significant debt overhang, and higher levels of poverty overall. Many of these countries struggle with limited fiscal space and economic flexibility, as well as high exposure to exchange rate fluctuations, which are exacerbated by U.S.-denominated debt levels.”
As a result, only three emerging markets rank on the Index this year: China, Brazil, and the United Arab Emirates—their lowest share in the Index, but the same as last year. And while China remains the highest-ranked emerging market on the Index—a distinction it has held consistently since 1999—this year, it slipped to its lowest-ever rank in the history of the Index.
The 2020 FDICI is constructed using primary data from a proprietary survey of 500 senior executives of the world’s leading corporations. The survey was conducted between January and March 2020. Respondents include C-level executives and regional and business leaders. All participating companies have annual revenues of $500 million or more.
The companies are headquartered in 30 countries and span all sectors. The selection of these countries was based on UNCTAD data, with the 25 countries represented in the Index originating more than 95 percent of the global flow of FDI in recent years. Service-sector firms account for about 44 percent of respondents, industrial firms for 37 percent, and IT firms for 20 percent, Kearney said.
The Index is calculated as a weighted average of the number of high, medium, and low responses to questions on the likelihood of making a direct investment in a market over the next three years. Index values are based on responses only from companies headquartered in foreign markets. For example, the Index value for the United States was calculated without responses from U.S.-headquartered investors. Higher Index values indicate more attractive investment targets.
FDI flow figures presented in this report are the latest statistics available from UNCTAD, and all 2019 figures are estimates. The data on specific FDI deal values is from Dealogic unless otherwise noted.
All economic growth figures presented in the report are the latest estimates and forecasts available from Oxford Economics unless otherwise noted. Other secondary sources include investment promotion agencies, central banks, ministries of finance and trade, relevant news media, and other major data sources.
More information on Kearney can be found at www.kearney.com.
Past editions of the FDI Confidence Index are available at:
¹ Throughout this report, the term “developed markets” is used to describe the countries that the International Monetary Fund classifies as advanced economies based on high income per capita, high export diversification, and strong integration into the global financial system. Emerging markets are 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. 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.