By Dan Keeler
Multinational companies are increasingly focusing their foreign
investment in developed countries, favoring technological
development and productivity over cheap labor.
Among the top 25 countries targeted for foreign direct
investment by global companies, almost three quarters are in
developed markets, according to a study to be released Monday by
Chicago-based consultant A.T. Kearney. That is up from two-thirds
last year and a shade over half in 2013.
"Investors are telling us they're technology-centric," said Paul
Laudicina, chairman of A.T. Kearney's Global Business Policy
Council, which conducts the survey. "With few exceptions, the
countries at the top of the list are among those that are the top
global tech and innovation centers."
There may be a sea change under way in the global economy as
multinational companies focus their foreign investment more on
driving technological development and increasing productivity and
less on tapping sources of cheap, plentiful labor.
According to the study, of the top 25 countries that global
firms are expecting to invest in, almost three-quarters are
developed markets.
"Investors are telling us they're technology-centric," said Paul
Laudicina, chairman of A.T. Kearney's Global Business Policy
Council, which conducts the survey. "With few exceptions, the
countries at the top of the list are among those that are the top
global tech and innovation centers."
The study is based on a survey conducted this January of 500
senior executives world-wide who control FDI at their firms--all of
which have annual revenues of more than $500 million and almost
half with revenues over $1 billion. More than one-third of the
companies involved have headquarters in developing countries.
Shafik Gabr, chairman of Artoc, an Egyptian firm that invests
across Africa, said he sees significant interest among companies in
directing FDI into developed economies. Businesses doing so, he
said, "firstly for security and stability, second for the existing
clarity of the rules of the game and third, because the
infrastructure exists."
The U.S. and China occupy the first and second positions in the
table for the third year running, but executives surveyed for the
report showed a markedly higher level of confidence in the U.S.'s
prospects than in China's.
Almost half the respondents described themselves as more
optimistic about the U.S. economy than they were a year ago, while
less than a third were more optimistic about China.
The index measures sentiment rather than actual flows of
investment, so it is effectively a forward-looking indicator.
Launched in 1998, the index has proved successful at indicating
future investment trends. Since its inception, A.T. Kearney says,
countries ranked in the FDI confidence index have consistently
received at least half of global FDI inflows roughly one year after
the survey.
The surge in interest in productivity and innovation is good
news for developed economies but it could be an unwelcome
development for emerging markets--particularly smaller economies
such as Vietnam and Bangladesh that are currently pegging their
hopes for economic growth on attracting foreign manufacturers with
low-cost labor.
"Frontier markets are really not on the list," Mr. Laudicina
said. "Location is becoming less important. Investment
opportunities increasingly are less about tapping into low-skilled
labor or a demographic-dividend environment and more about higher
productivity, more sophistication."
Tom Speechley, a partner at private-equity firm Abraaj, which
has $9 billion under management, agrees that frontier economies may
be making a mistake by aiming to build their economies through
providing cheap labor, but he believes the current monetary
environment in which multinationals are operating may be having
more influence on their investing strategies.
"There is a lot of cash on corporate balance sheets," Mr.
Speechley said. "In an environment where we have near-zero or even
negative interest rates, companies are almost forced to invest.
Forced investment is going to be lower-risk, as opposed to
exploratory investment, so they are more likely to put the money
into developed rather than emerging markets."
Companies are guardedly hopeful about the prospects for the
global economy. Slightly more than 60% of executives surveyed were
more optimistic about the prospects for the global economy than
they were a year ago.
Two-thirds said they expect to increase FDI to precrisis levels
by 2016.
The report also reveals rising interest in Europe as a
destination for investment. Fifteen of the countries in the top 25
are European, up from 11 in 2014 and seven in 2013. All of the
European countries in the top 25 apart from Switzerland and Sweden
have moved up in the ranking this year.
Overall sentiment toward the region is somewhat muted, though.
Just 36% of respondents were more optimistic about Europe's
economic prospects than they were last year, compared with 46% for
the Asia Pacific region and more than 50% who are more optimistic
about the Americas' regional outlook.
The report paints a bleak picture for sub-Saharan Africa,
however. Almost 30% of the respondents described themselves as more
pessimistic about the region's prospects this year and only 19%
said they were more optimistic.