In the two years since A.T. Kearney released its last Foreign Direct Investment Confidence Index, the global economy has faced unprecedented turmoil—a housing market collapse, a banking system teetering on the edge, rising unemployment, and falling sales across almost all industries. In the midst of this turmoil, we returned to examine the future prospects of investment plans for the 2010 FDI Confidence Index. While conditions have improved, senior executives at the world's largest companies remain wary of investing during the current climate, and few expect a full turnaround before 2011.
Still, several emerging markets remain attractive to foreign investors. China, India, and Brazil are in the top five of the 2010 A.T. Kearney Foreign Direct Investment (FDI) Confidence Index, while emerging markets with large consumer bases, such as Indonesia and Vietnam, also rank highly. Established developed economies also fared well, with the U.S. moving up to 2nd from 3rd, Germany rising to 5th, and France to 13th. Some smaller, more open emerging economies, however—such as Hong Kong (24th) and Singapore (14th)—dropped in the rankings.
These developments illustrate a trend in this year's Index: a flight to safety among international investors that benefits large emerging economies and established, developed ones. In the midst of the greatest period of economic dislocation since the Great Depression, these economies are judged to have the scale, depth, and in the case of emerging markets, growth potential to weather the storm.
Choosing Growth or Safety
Paradoxically, the search for safety over yield has led many executives to invest in the very markets whose growth prospects they are most doubtful of. For instance, more investors (22%) hold a negative view of the future of the U.S. economy than feel positively (17%) about it; yet the stability of the U.S. made it the most sought-after location in the world after China. Similar discontinuities were present for Canada, Australia, and Germany, all of which were viewed as having relatively weaker growth outlooks, but nonetheless ranked well for investment desirability.
A similar pattern of risk aversion appears when the FDI Confidence Index results are separated by region, revealing investors' preferences for closer, regional deals rather than global, further-afield transactions. The results showed a clear preference for foreign investment in the "near abroad" of countries that are foreign yet remain close at hand. For Asian investors, eight of the top 10 preferred investment locations were also in Asia, with only the U.S. (also a top safety choice) and Brazil falling outside of Asia. European investors stayed within Europe for six of their top 10 choices.
On a broader level, the proclivity of global investors to favor safer bets and closer-to-home locations could have significant longer-term impact on the global business environment. While these emerging FDI trends could be temporary (albeit likely to last for several years) and caused by a slowdown in business activity, they may also hint at a larger shift under way.
Stages of Corporate Evolution
The evolution of the global business model over the past half-century has seen the national corporation branch out further and further afield, first through simple import and export links; then shifting to a multinational model, where a company created copies of itself in different countries; and finally to the fluid, integrated global corporation as we know it today. With each successive step in the evolutionary chain, the more international global corporations became—and the longer, leaner, and further-flung their supply chains grew.
Were our long-held assumptions in error that this process of increasing globalization and integration would continue? Even before the crisis, challenges to the global model were mounting: Rising fuel prices (and the potential for carbon tariffs) were adding costs to a longer supply chain, while product safety and quality issues were increasing the need for supply-chain visibility. In fact, 79% of executives in the 2010 FDI Confidence Index said that either commodity price volatility or rising fuel prices were a threat to their supply chains, while 47% characterized quality and safety issues or supply-chain visibility as threats as well.
Since the financial crisis, new challenges have mounted, such as the limited availability of trade credit, shadow protectionism, and, of course, the slowing economy. Seen in this context, could the clear trend toward regionalization seen in the 2010 FDI Confidence Index be a leading indicator of a realignment of the global corporate model?
Starfish vs. Spiders
The possibility need not be alarming. To borrow from Ori Brafman and Rod Backstrom, the prospect of more "starfish" companies and fewer "spider" companies—that is, companies that are better able to survive a shock to one part of their system, like a starfish, rather than dying off, like a spider—is a positive thing. And if there is any loss of the efficiency and scale of the global corporate model, it should not be met defensively with a protectionist embrace of the familiar, the close-at-hand, or the seemingly "safe."
Indeed, it is this latter scenario that business and policy leaders must seek to avoid the most, by continuing to encourage cross-border openness, cooperation, and collaboration. The increasingly global nature of the challenges ahead demands an increasingly global response.
For an introduction to the 25 top ranked countries on the A.T. Kearney 2010 FDI Confidence Index, see our slide show.