What Countries Are Most Attractive to FDI? What Makes Them Attractive?
The global economy is struggling with some success to recover from the turmoil of the last two years. Attorneys, investment bankers and other professionals now are trying to predict where global mergers and acquisition activity will begin to increase. What markets are likely to first benefit from the return of global FDI?
Earlier this year, the United Nations Conference on Trade and Development (UNCTAD) released its World Investment Prospects Survey for 2009-2011 (WIPS). WIPS provides an outlook on future trends in FDI by the largest multinational business enterprises. WIPS compiled the results obtained from a sample of 241 company executives of the large non-financial multinationals and from 20 direct interviews.
WIPS predicted the top 15 countries that will receive FDI for 2009 - 2011:
- China
- United States
- India
- Brazil
- Russian Federation
- United Kingdom
- Germany
- Australia
- Indonesia
- Canada
- Vietnam
- Mexico
- Poland
- France
The United States improved its position by one step over last year’s survey, replacing India in the number 2 slot. Brazil moved past Russia, achieving the 3rd place position.
The reasons underlying the selection of these countries were predictable and included:
- market size
- market growth
- availability of less expensive labor
- access to natural resources
- quality of the business environment
Of even greater interest, however, is the distribution of the responses from the survey participants. First, the top 15 countries accounted for 74% of the total responses. This is close to the 80/20 phenomenon seen in other measure of voluntary market participant choices—such as favorite websites or favorite books—in which 80% of the respondents pick the same 20% or less of available choices. Second, as shown in the accompanying chart from WIPS, China, the United States and India appear to have more favorable responses than do the other twelve nations. This type of sharp drop off from highest to lowest in frequency of choice is referred as a power law curve. The power law curve is an algebraic graph plotting data in which the N position has 1/Nth of the first position’s rank. This distribution occurs where the responses represent free choices and is at odds with a normal bell curve distribution.*
Then, what are those attributes that make a country attractive to FDI. WIPS recites:
- “For market growth, developing and transition economies are generally favored, such as China, India, Brazil, the Russian Federation, Indonesia, Vietnam, Poland and Thailand.
- For market size, the largest economies are favored, either developed ones such as the United States, Germany and Canada, or emerging ones such as China, the Russian Federation and Brazil.
- For access to regional markets, countries that are integrated into large markets, or which are close to large and growing economies, are favored, such as Mexico, Germany, Vietnam and Poland.
- For presence of suppliers, mostly developed countries are favored, such as the United Kingdom, Germany and France, and, to a slightly lesser extent, some developing countries such as India.
- For their business environment (including government effectiveness, stability and quality of infrastructures), developed countries such as the United States, Germany and Australia are favored. France is frequently mentioned for the quality of its infrastructure.
- For skills and talent, developed countries such as the United States, Germany, the United Kingdom and France are favored, but also some developing countries, such as India and Thailand.
- Cheap labor is cited for favoring developing countries, mostly in Asia, such as China, India, Vietnam, Indonesia and Thailand.
- For access to natural resources, countries well endowed with them, such as Canada, Australia and Indonesia, are favored.
- Access to capital markets is frequently mentioned as an asset for the United States, the United Kingdom and Canada.
- Incentives is frequently mentioned for Australia, Vietnam and Brazil.”
WIPS concludes on an optimistic note, expressing the view of its respondents that a progressive recovery will start slowly in 2010 and gain momentum in 2011. The basis for the optimism is that the growing internationalization of business enterprises will lead to a new wave of international investment projects as the recovery takes hold. When and if that occurs, these key factors are likely to play a major role in deciding where FDI is targeted.
Implicit in these findings, and in the power curve as well, is a warning for the United States. The United States could fall behind its competitors for any one or more reasons – a slower recovery, unfavorable tax policies, protectionist trade practices or restrictive regulation of which investments, to name just four. The power curve is a slippery slope. If the U.S. falls to 4th or 5th place, it will fail to receive substantial amounts of FDI and may be unable to require the 1st or 2nd position for years to come.
*For a compelling discussion of the power law curve and its application in the context of social media, see Clay Shirkey's Here Comes Everybody: The Power of Organizing Without Organizations.
