UAE up in global FDI Confidence

The UAE moves up one place to claim 14th position in the latest AT Kearney Global Foreign Direct Investment Confidence Index (FDICI).

A cautiously optimistic outlook based on realigned expectations, as well as the United States returning the top of the rankings, are the themes of the 2013 AT Kearney FDICI, a regular measure of senior executive sentiment at the world's largest companies.

Conducted regularly over the last 15 years by global management consulting firm AT Kearney, the Index provides a unique look at the present and future prospects for international direct investment flows. The 2013 FDICI was released at AT Kearney's Global Business Policy Council CEO Retreat, an annual gathering of global executives and thought leaders held this year in Marrakesh, Morocco.

Moving up one place from last year's position, the UAE (#14) recorded $7.7bn in inflows in 2011, up 40 per cent from 2010, The Emirates' well-developed infrastructure, strategic location, and tax-free base offer international investors easy access to fast-growing African and Middle Eastern markets. A long-anticipated law allowing foreigners to own more than 49 per cent of businesses in certain sectors outside of designated free zones is awaiting cabinet approval.

"With strengths in logistics, tourism, and hospitality, the UAE remains the pocket of strength for regional investments in the Middle East. FDI could increase in coming years as the UAE eases foreign ownership laws," said Anshu Vats, Partner at AT Kearney Middle East.

Overall, this year 70 per cent of corporate investors surveyed expect near-term recovery of their companies' FDI levels. Half see their budgets as already returned to pre-crisis levels and 20 per cent expect a return by 2014. If this were to happen, the FDI swell could provide a knock-on effect to global growth as macroeconomic clouds clear away. However, almost one-third are still taking a "wait and see" approach to FDI.

"While investors are still in a holding pattern as they have been since the recession, they seem more optimistic and less jittery than they have in recent years," said Paul Laudicina, chairman emeritus of A.T. Kearney and chairman of its Global Business Policy Council, which helps business leaders identify global growth opportunities and manage business risks. "There's been a leveling effect this year between developed economies and developing nations in terms of foreign investment. The world seems to be slowly finding its footing."

The world's developed countries make a surprisingly strong showing in this year's FDICI, with Canada, Australia, Germany, and the United Kingdom joining the United States in the top eight positions. Overall, developed economies comprise more than one-half of the FDICI's top 25 countries, indicating that flows to these regions are likely to keep accelerating. According to the survey, investors are guardedly optimistic and seem to be basing their decisions on varying signs of economic recovery around the globe. While for the first time since 2001, China did not top the FDICI rankings as enthusiasm for the US resurgence pushed it to second in investors' minds. Despite Europe's debt crisis and gloomy outlook on recovery, seven European countries ranked in the top 20, with Germany placing highest at number 7.

A shift in optimism

A variety of factors including high-impact weather events, the Eurozone crisis and stagnation in economic recovery, China's rising labor costs, and the US’s own slow recovery in the face of fiscal uncertainties in Washington continue to make corporate investors jittery about the short-term future. Half of respondents said they are more optimistic about the global economy than they were a year ago. Still, just 34 per cent of corporate investors expected the global economy to recover to pre-recession levels by 2014. When asked that question for the 2010 FDICI, 73 per cent of respondents expected recovery within two years.

Investor optimism has shifted most positively for Brazil, with investors 40 per cent more positive compared to the 2012 FDICI. The US (39 per cent more positive), China (38 per cent) and India (36 per cent) followed closely behind. Reflecting overall improved investor sentiments, countries in the top 25 rankings received higher scores across the board as compared to those scores in 2012.

Most respondents have calibrated their expectations toward slow, steady growth across the world over the next three years. The outlook for emerging markets is rosiest, with 78 per cent expecting growth in some form. "Rather than a temporary safe haven during economic upheaval, emerging markets are developing into a complement, instead of an alternative, to the developed world," noted Erik Peterson, managing director of A.T. Kearney's Global Business Policy Council.

‘Looking ahead: A more level playing field’

The traditional view of emerging markets as high risk/high return is shifting as developed economies become more volatile and less predictable. In factor after factor, including macroeconomic volatility, consumer demand, regulatory barriers, and taxation, corporate investors responding to the FDICI now see emerging markets having essentially the same level of risk as developed markets. The only category in which emerging markets are perceived to be significantly riskier is political volatility. Increased risk in developing markets is influencing FDI decisions. For example, 77 per cent of respondents said the fiscal disarray in the US has or will impact their investment decisions, and 55 per cent said the Eurozone crisis had already impacted their investment decisions in Europe.

Nonetheless, US moves to first

The United States reclaimed first place in this year's FDICI for the first time since 2001. Like investments in the rest of the world, US inflows are still below their 2008 peak of $306bn, but the country has made a gradual rebound mirroring that of the rest of the world. Inflows during 2011 were up 15 per cent from 2010, reaching $226.9bn and making the United States the world's number one recipient of foreign direct investment for the sixth consecutive year. US manufacturing productivity has been on the rise since the recession. After downturn-induced cutbacks, companies made the best of a bad situation by investing in productivity-enhancing tools and equipment. Coupled with a weaker dollar and rising wages in developing countries, these gains have the potential to bring long-term benefits to the U.S. economy. However, 77 per cent report that their investments have been affected by the current uncertainty and political brinkmanship surrounding the US federal budget.

China slipped to the number two position in the Index this year for the first time since 2001. Higher labor costs in China raise questions about the longer term attractiveness of China's development model and create the potential for restoring certain manufacturing to customer markets. Yet, the vast majority of respondents (73 per cent) are staying in China despite rising labor costs. While 6 per cent said they do not perceive rising labor costs, 36 per cent said they will remain in China but seek to increase productivity. 28 per cent of respondents said they would move to other markets to avoid rising labor costs in China. Only 6 per cent of respondents intend to move operations back to higher cost markets.

"With many of the gains in productivity of the past few years now exhausted, companies themselves will need to generate efficiency gains by improving communication and processes, enhancing speed and flexibility, implementing new technologies, and developing talent. FDI could play a role in these efforts," Laudicina observed.

Brazil maintained its third place position in the FDICI this year. In 2011, its FDI hit $66.7bn, its highest level ever and a 37 per cent increase since 2010. More inflows are likely on the way, with the 2014 World Cup and 2016 Olympics needing transportation and infrastructure investments of $200bn. Manufacturing remains the recipient of nearly half of Brazil's FDI, with European, Scandinavian and Chinese investors all adding billions to its economy.

MUST READ:

Follow Emirates 24|7 on Google News.