Foreign direct investment (FDI) totalled $1.26 trillion in 2014, well down on the 2007 peak of around $2 trillion, a report from A.T. Kearney shows. The consulting firm finds that while investment in developing markets has reached record levels, investors remain jittery from, amongst other, the macroeconomic situation of modest global growth. In the medium term, confidence that FDI will return to pre-crisis levels remains high, with 83% of respondents expecting to be back at pre-crises levels by 2017.
In its yearly analysis, run since 1998, A.T. Kearney’s ‘Foreign Direct Investment Confidence Index’, uses primary data from a proprietary survey administered to senior executives of the world’s leading corporations. In its 2015 edition ‘Connected Risks: Investing in a Divergent World’ the consulting firm explores the global value of FDI as well as current trends affecting investors’ future investment behaviour.
Optimism in the global economy remains lacklustre, with an expectation of a ‘new normal’ in terms of GDP growth at around 3-4% globally. Of the respondents, 15% say they are more optimistic than a year earlier and 46% say they are somewhat optimistic, the combined optimism of 61% is well down on 2014’s reported optimism for the future at 79%.
Following the economic crisis and recovery, FDI levels have fluctuated. The level of FDI in 2014 was down 8% to $1.26 trillion on a year earlier, and down from its $2 trillion peak in 2007. There has also been a change in trend, away from investment in developed economies (down 14%) toward an increase in developing economies – now at a new high of $700 billion, or 56% of the global share.
Regionally, the drop in investment is particularly pronounced in the US, where there was a drop off from $302 billion to $139 billion. Europe however saw a relative increase in investment, almost back to its 2012 levels, up from $225 billion in 2013 to $305 billion in 2014. Developing Asia takes the biggest slice of investors’ money, up from $427 billion to $492 billion in 2014.
Investors continue to be less confident in their investment activity than before the crisis, with the absolute value of investments still well below the 2007 peak. There is however a continued upward trend in investment confidence. Of the companies surveyed, 19% say they are already investing at pre-crisis levels, while 18% expect to do so within the coming year. The biggest group of respondents (29%) say that in 2016 they will be investing again at pre-crisis levels, while 17% say it will take until 2018 or later. This represents a considerable softening of expectation from the previous survey, where 86% expected to reach pre-crisis levels by 2016 – now only 66%.
The biggest reasons for the low confidence in FDI comes from uncertainty in the macroeconomic situation, as cited by 42% of respondents, while a lower risk tolerance is indicated by 31% as an issue. The lack of quality targets is only an issue for 21% of respondents, while a lack of funds holds back 17% of respondents.
In terms of ‘wild card’ events that could turn confidence further, around 45% of investors mention an increase in geopolitical tensions in the Americas and Europe. An economic crisis in emerging markets and developing markets is rated by investors at between 25-31% and a decrease in political tension in the Americas, Europe and Asia is seen a likely to occur by 16%, 11% and 15% respectively.