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Facing a Growing Paradox The 2019 A. T . Kearney Foreign Direct Investment Confidence Index Investor sentiments reveal a variety of paradoxes in the environment for FDI, many of which can be explained by the rise of the age of multi-localism.Since we published From Globalization to Islandization in early 2016, my colleagues and I have asserted that the global operating environment is in the midst of a profound shift. Gone are the days in which ever-greater economic, political, and cultural integration was assumed to be inevitable. The forces pushing the world toward “islandization”in which nationalist and protectionist sentiments drive economies to turn inward and become their own islandshave only grown stronger in the intervening years. Last year, we identified this new reality as the “age of multi-localism, ” which is characterized by the growing preference for local communities, industries, products, cultures, and customs. A variety of paradoxes arise for global companies as a result of this complex environment. One of the most interesting is the rise in the importance of cities in an era of nationalism. Populism and nationalism continue to drive policymakingor more often, policy paralysisat the national level in countries around the world. As a result, decision-making power is devolving to the local level, with mayors and other local officials increasingly positioned as the policy problem-solvers of the 21st century. Paradoxically, then, in an era of more nationalist fervor and rhetoric, the forces making the most waves are, in fact, not at the national level. This shift away from attention at the national level is evident in this years FDI Confidence Index. Perhaps the most striking finding in this regard is that most investors do not start the process of determining where to invest at the country level. Rather, they focus first on the regional level or directly at the city level. And almost 60 percent of investors say they are now placing a stronger emphasis on urban areas as the basis of FDI destination selection than just two years ago. This focus makes sense in an age of multi-localism, as getting investments right at the local level becomes more important for business success. The realities of investing in an age of multi-localism also help to explain some of the other paradoxes in the country rankings in our Index. For instance, large developed markets that are turning away from global or regional economic integrationsuch as the United States and the United Kingdomremain crucial local markets in which companies need to succeed and therefore continue to attract significant investor interest, especially as cross-border frictions increase and global supply chains lose cohesiveness. It is also important to note that the FDI Confidence Index represents investors future intentions and therefore picks up weak signals of possible future trendsas opposed to other indicators that measure current FDI flows and thus relate primarily to FDI decisions made years ago. It will be interesting to see if this trend grows stronger in the coming years. As always, we welcome your views regarding the Index and our analysis. Paul A. Laudicina Chairman, Global Business Policy Council Partner and Chairman Emeritus, A. T . Kearney1 The 2019 Foreign Direct Investment Confidence Index: Facing a Growing Paradox View online: bit.ly/2019-FDICI Executive Summary Paradoxes permeate the Foreign Direct Investment (FDI) Confidence Index results. As elaborated in detail below, developed markets dominate the Index, but investors point to a variety of rising political and economic risks within these markets. While average scores increase the most for frontier and emerging markets, few of these markets rank among the top 25 countries for investment intentions. Investors continue to view rising geopolitical tensions as a probable risk this year but remain relatively bullish on the global economy. And despite investors consistently telling us in recent years that they plan to increase their levels of FDI, the recorded level fell once again in 2018. In addition, localism and cities are rising in impor - tance in an era of growing nationalism. These paradoxes at the global level also create some seemingly counterintuitive results in the Index rankings. The United States tops the Index for the seventh year in a row. The United States marks its longest-ever run at the top of the Index this year, likely reflecting its large domestic market, continued economic expansion, competitive tax rates, and technological and innovation capabilities. Recent policy volatility may be diminishing US attractiveness somewhat, though, as the score gap between the United States and the next-highest ranked country decreases this year. The top 10 likely destinations for FDI this year are relatively consistent with last year s results. The top 10 countries on the Index remain unchanged from 2018, with the exception of Singapore displacing Switzerland. Germany retakes the number-two position, while Canada falls to third. The United Kingdom holds steady in fourth place, while France rises to capture fifth place. And China drops to seventh this yearits lowest ranking in the 20-year history of the Index. This year, therefore, marks the first time in which the top five spots are all developed markets. Asia Pacific marketsincluding Japan, China, Australia, and Singaporedominate the rest of the top 10. Developed markets dominate the Index again . 1Developed markets account for 22 of the 25 spots on the Indexhitting their highest-ever share of positions, even outpacing last years record. European developed markets hold steady at 14 spots this year, while developed markets in Asia Pacific increase from five spots last year to six this year. The continued dominance of developed markets is likely linked to the fact that four of the top five factors that investors consider when choosing where to invest are related to governance and regulations. The only aspect unrelated to governance among the top five is technological and innovation capabilities, which also favors developed markets. . even though investors perceive that risks are rising in developed markets. Investors point to political instability in developed markets as the most likely risk this year, followed closely by an economic crisis in a developed market and a more restrictive business environment in a developed market. Investors see these possibilities as far more probable than the corresponding risks in emerging markets. The other top risk that investors identify this year is geopolitical tensions, although investors estimates of the likelihood of such a risk occurring falls somewhat from previous years. 1Throughout 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.2 The 2019 Foreign Direct Investment Confidence Index: Facing a Growing Paradox View online: bit.ly/2019-FDICI A wide array of emerging markets appeals to investorsdespite their absence on the Index. China, India, and Mexico are the only emerging markets on the Index, but data from the United Nations Conference on Trade and Development shows that FDI inflows to emerging markets have risen in recent years as those to developed markets have fallen. And 43 percent of investors tell us they are seeking new opportunities in emerging marketsslightly more than the 42 percent seeking new opportunities in frontier markets and the 41 percent doing so in developed markets. More strikingly, while there are increases in the average scores for almost all countries included in our survey, the average score for frontier markets increases the most (+0.15), followed by emerging markets (+0.12) and then developed markets (+0.09). There are far more emerging and frontier markets than there are developed markets, however, so it appears to be harder for emerging or frontier markets to break into the top 25 spots on the Index. And given the smaller size of many of these markets, their absorptive capacity for FDI may limit potential inflows. Investor optimism about the global economy remains strong but is waning. Investors remain largely optimistic about the global economy, with 62 percent saying they are more optimistic than they were last year. However, this is a fall from the 66 percent who were more optimistic in 2018marking the first such decline in global economic bullishness since 2016. Investors remain the most optimistic about economic prospects in Asia Pacific. Europe and Eurasia is also regarded as a regional bright spot, but investors level of optimism there has waned significantly since last year. The age of multi-localism is driving FDI decisions. Our survey results suggest that investors have begun to prioritize FDI as a part of business strategies to adapt to the age of multi-localisma period characterized by the preference for local communities, industries, products, cultures, and customs. More than 75 percent of investors tell us that FDI is more important now than it had been in recent years, and almost four-fifths say their companies will increase their level of FDI in the next three years as a result. More than half of companies are not concentrating on just one mode of investment, however, reflecting the need to tailor FDI strategies to the unique conditions of each local market. Companies therefore seem to be positioning themselves in local markets by adapting to idiosyncratic political risks, distinct policy frameworks, divergent economic conditions, and other unique local characteristics. Cities play an increasingly important role in FDI. Almost two-thirds of companies have more than half of their FDI in cities, with this emphasis particularly high among companies based in Asia Pacific. Large cities and megacities are the most popular investment destinations regardless of business activity or sector, reflecting the increasing concentration of economic power and productivity growth in the worlds leading urban areas. Economic performance is the most important factor in city FDI decisions, but labor force considerations also play an important role. And almost two-thirds of companies are engaging more with city-level stakeholders than in the past. Although this increase in the importance of cities seems inconsistent with rising nationalist sentiments, this paradox is in fact to be expected in the age of multi-localism.3 The 2019 Foreign Direct Investment Confidence Index: Facing a Growing Paradox View online: bit.ly/2019-FDICI The 2019 Foreign Direct Investment Confidence Index The United States tops the A. T . Kearney Foreign Direct Investment (FDI) Confidence Index for the seventh year in a row (see figure 1). 2While seven years is the countrys longest run in the top position on the Index, China holds the all-time record, as it maintained the first position from 2002 through 2012. The enduring appeal of the United States to foreign investors is likely a result of its business-friendly regulatory environment, skilled workforce, technological capabilities, and large domestic market. Recent policy volatility and a slowing economy 2The Index is calculated as a weighted average of the number of high, medium, and low responses to questions regarding the likelihood of making a direct investment in a market over the next three years. For information on the methodology and history of the FDI Confidence Index, see “ About the Study” in the Appendix. Ranking . SA.T.K y C x() The A.T.Kearney FDI Conidence Index H L 0.00 1.00 2.50 0.50 2.00 1.50 United States Germany Canada United Kingdom France Japan China Italy Australia Singapore Spain Netherlands Switzerland Denmark Sweden India South Korea Belgium New Zealand Ireland Austria Taiwan (China) Finland Norway Mexico Score 4 The 2019 Foreign Direct Investment Confidence Index: Facing a Growing Paradox View online: bit.ly/2019-FDICI appear, however, to be diminishing the relative attractiveness of the US market. This decline is apparent in the decrease in the score gap between the United States and the next-highest ranked country on the Index this year as well as the smaller gap between the highest and lowest scores among the top 25 markets. Germany rises one spot to reclaim the second position, after ceding the spot to Canada in last years Index. Canada remains in the top five, though, falling just one spot to third. And the United Kingdom holds steady in the fourth position for the third year in a row, despite the uncertainties associated with Brexit. France, another major European market, also rises two spots to enter the top five for the first time since 2002. This year marks the first time in the history of the Index in which all of the top five spots are held by developed markets. The top 10 countries on the Index remain unchanged from 2018 with one exception: Singapore rises to rank 10th and displace Switzerland, which falls to 13th. Within the top 10, Italy is one of the biggest gainers, rising two spots to 8th this year. The other notable movement among the top 10 is Chinas drop down two spots to 7th this year. It remains, however, the highest-ranked emerging market on the Indexhaving firmly held this position since 1999. More broadly, the Asia Pacific markets do well on the 2019 Index. Their share of spots increases from seven last year to eight this year, with Taiwan (China) rejoining the top 25 after a two-year absence. And half of the Asia Pacific markets on the Index rank in the top 10: Japan, China, Australia, and Singapore. European markets hold steady with 14 spots in this years Indexonce ag
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