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8/13/2019 FDI Confidence Index
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FDI Confidence IndexGlobal Business Policy Council
2005, Volume 8
8/13/2019 FDI Confidence Index
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The Global Business Policy Council is a strategic service that assists chief
executives in monitoring and capitalizing on macroeconomic, geopolitical,
socio-demographic and technological change worldwide. Council member-
ship is limited to a select group of corporate leaders and their companies.
The Councils core program includes periodic meetings in strategically
important parts of the world, tailored analytical products, regular member
briefings, regional events and other services.
Global Business Policy Council
A.T. Kearney, Inc.
333 John Carlyle Street
Alexandria, Virginia 22314
U.S.A.
1 703 739 4714 TELEPHONE
1 703 739 4741 FAX
www.atkearney.com
8/13/2019 FDI Confidence Index
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A.T. Kearney | FDI CONFIDENCE INDEX 1
Emerging market countries are the 1st and 2nd
most attractive foreign direct investment (FDI)
locations in the world. Led by China and India,
emerging markets have achieved unprecedented
levels of investor confidence.
The United States dropped to 3rd place on
corporate investors lists, but remains a strong
FDI magnet. (It is too early to assess the possi-
ble impact the controversy over the Dubai ports
deal will have on the U.S. FDI market.) Western
Europe, other than the United Kingdom, lost
FDI confidence due to increasing competition
from emerging markets. But again, recent signs
of intra-European market protectionism may
have a negative impact on overall European FDI
attractiveness. The FDI prospects for Eastern
Europe appear brighter as investor confidence in
Poland, Russia, Hungary, the Czech Republic,
Turkey and Romania is rising. All of these coun-
tries, except Poland, climbed to record high
positions in the Index. Brazil and Mexico have
regained lost ground.
Investments in cross-border corporate deals
rose 2 percentthe first increase since 2000.
However, the FDI recovery may be clouded by
corporations that want to continue to save money
rather than invest it as concerns about the global
economy rise to the surface. Companies have
accumulated record amounts of cash due to linger-
ing fears of another possible economic down-
turn, new interdependent business risks, and
pressure from shareholders. However, this may
change as the penchant for holding cash bumps
against the pressure to expand overseas as the pace
of cross-border mergers and acquisitions quickens.
As companies make overseas investments, par-
ticularly in R&D, several factors dominate their
location decisions, including lower costs, higher-
quality labor, protection of intellectual-property
rights, reliable educational systems and sophisti-
cated IT infrastructures. Developing countries in
Asia and Eastern Europe are experiencing the larg-
est increases in R&D investments as these coun-
tries become integral to multinational companies
global innovation processes. R&D investments
in the industrialized world will continue, but at
a less robust pace. The pace of offshoring will
intensify, as all corporate functions, including
R&D, shift overseas.
These are among the major findings in
A.T. Kearneys year-end 2005 FDI Confidence
Index survey, which tracks the impact of likely
political, economic and regulatory changes on
the foreign direct investment intentions and
Foreign Direct Investment (FDI) is on the rise again. But the corporatesavings overhang and investor pessimism about the global econ-
omy could dull the recovery of cross-border corporate investment.
Concerns over corporate financial health, an unexpected economic
downturn, shareholder activism, and the risks associated with engaging
in FDI have caused investors to hoard cash over the past four years. As
investors face more intense competition and the lure of higher returnsoverseas, they are cautiously unloading their accumulated war chests.
8/13/2019 FDI Confidence Index
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FDI CONFIDENCE INDEX | A.T. Kearney2
preferences of the leaders of top companies around
the world (see figure 1).1
Over the past seven years, we have queried
CEOs, CFOs and other key decision-makers of
the worlds largest 1,000 firms about their opin-
ions of various FDI destinations and their invest-
ment intentions. Responses from participating
executives about their views of 68 countries,
which receive more than 90 percent of global
FDI, reveal likely foreign direct investment flows
and point to the factors that drive corporate
decisions to invest abroad. Companies included
in our survey are responsible for about 70
percent of global FDI flows and generate more
than $27 trillion in annual revenues. These com-
panies represent all major regions and sectors.
1 Foreign Direct Investment (FDI) includes investments in physical assets, such as plant and equipment, in a foreign country. Holdings of 10 percent or moreequity in a foreign enterprise is the commonly accepted threshold between direct and portfolio investment as it demonstrates an intent to influence managementof the foreign entity. The main types of FDI are acquisition of a subsidiary or production facility, participation in a joint venture, licensing, and establishmentof a greenfield operation. The last is defined as a direct investment in new facilities or the expansion of existing facilities.
Figure 1
FDI Confidence Index
*First time in Index
**Central Asia includes Azerbaijan, Belarus, Kazakhstan and Turkmenistan Source: A.T. Kearney
Top 25, December 2005
China
India
United States
United Kingdom
PolandRussia
Brazil
Australia
Germany
Hong Kong
Hungary
Czech Republic
Turkey
France
Japan
Mexico
SpainSingapore
Italy
Thailand
Canada
Dubai/UAE
South Korea
Central Asia**
Romania 1.017
1.030
1.036
1.039
1.040
1.050
1.055
1.0721.075
1.080
1.082
1.097
1.133
1.136
1.157
1.208
1.267
1.276
1.336
1.3411.363
1.398
1.420
1.951
2.1971
2
3
4
56
7
8
9
10
11
12
13
14
15
16
1718
19
20
21
22
23
24
25
(1)
(3)
(2)
(4)
(12)(11)
(17)
(7)
(5)
(8)
(19)
(14)
(29)
(6)
(10)
(22)
(13)(18)
(9)
(20)
(16)
(*)
(21)
(27)
(42)
(#)
Maintained ranking
Moved up
Moved down
2004 ranking
Values calculated on a 0 to 3 scale High confidenceLow confidence
8/13/2019 FDI Confidence Index
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A.T. Kearney | FDI CONFIDENCE INDEX 3
Major FindingsIndia Joins China at the Center of the
FDI Radar Screen
Investor enthusiasm for China and India is at
an all-time high, with roughly 45 percent of
global investors more upbeat about China and
India compared to last year.2 This is nearly twice
the number recorded for the next three most
positively viewed marketsBrazil, Poland and
Russia. China achieved its highest-ever score in
this years Index, while Indias score has been
surpassed only by China and the United States
in previous years. China and India took the 1st
and 2nd positions across nearly all broad sector
categories (see figure 2).
While China has held the top spot since
2002, strong investor interest in India is a more
recent development. Despite Indias successful
positioning as a business-processing and IT out-
sourcing hub, these activities often translate into
service-sector exportsrather than FDI flows
2 All references to last year in this paper refer to 2004. FDI flow figures are the latest statistics available from the United Nations Conference on Trade andDevelopment (UNCTAD) for the year 2004.
gure
China and India are the top FDI locations across all broad sectors
Source: A.T. Kearney
Percentage of investors with a more positive outlook
Percentage of investors with a more positive outlook
Manufacturing and primary
Financial and non-financial services
Telecommunications and utilities
Wholesale and retail
UnitedKingdom
UnitedKingdom
Japan
Hong Kong
Germany
Germany
Germany
Spain
Spain
Singapore
Mexico
Australia
Australia
United States
United States
United States
United States
RussiaPoland
Poland
Poland
Poland
Hungary
United Kingdom
Czech Republic
Brazil
Brazil
ItalyGermany
India
India
India India
China
China
China
25%
25%
50%
Canada
Italy
France
China
Investor attractiveness Investor attractiveness
0%
0%
1.0 1.5 2.0 2.5 2.0 1.5 1.0
8/13/2019 FDI Confidence Index
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FDI CONFIDENCE INDEX | A.T. Kearney4
into India. Last year, India received just $5.3
billion in FDI, compared with Chinas $60.6
billion. This is partly because China attracts
more capital-intensive manufacturing and logis-
tics functions (see figure 3). India has yet to build
critical mass in FDI, mostly because it did not
initiate investment-attracting reforms until 1991.
By contrast, Chinas pro-FDI regime has been in
place since 1979. Indeed, Chinas entire compet-
itive manufacturing base has been largely estab-
lished by foreign multinational companies. We
expect this trend to continue over the next three
years as more functions are sent overseas.
India appears to be on the cusp of an FDI
takeoff. We expect the countrys attractiveness
to increase as long as the government maintains
its focus on reforms, overcomes narrow business
interests, and continues to address the countrys
infrastructure, logistics and regulatory barriers.
The United States Drops to 3rd Place
For the first time since our study began in 1998,
the United States dropped from 2nd to 3rd most
attractive future FDI location, as investors in the
financial services and light manufacturing sectors
express less interest in the U.S. market. Although
the U.S. financial sectors FDI inflows have been
robust in recent years, the United States dropped
to 6th place (from 2nd place last year) among
investors from this sector. Roughly one-third of
global insurance carriers are more negative about
the U.S. market, perhaps due to the more than
$70 billion in costs resulting from the countrys
destructive hurricane season. Investors from the
highly competitive light manufacturing segments
(including electronics, food and textiles) are less
likely to commit FDI in the United States, prefer-
ring lower-cost, faster-growing emerging markets.
China, India, Brazil, Russia, Poland, Mexico and
Hungary take the first seven positions in the light
manufacturing sector, with the U.S. coming in
8th, down from 3rd place last year.
In 2004, the United States was the largest
FDI recipient in the worldcapturing $96 bil-
Figure 3
China dwarfs India in FDI, in part because China attracts more capital-intensive functions
Source: A.T. Kearney
IT (design, supportand services)
Contact centers (callcenters, web centers)
Business processes(HR, finance, accounting)
R&D and engineering
Knowledge management
Manufacturing
Distribution and logistics
$60.6
$0
$10
$20
$30
$40
$50
$60
$70
$5.3
China India China India
Foreign direct investment ($ billions) Breakdown by business function
0%
10%
20%
30%
40%
50%
70%
100%
90%
80%
60%
Capital-intensivefunctions
8/13/2019 FDI Confidence Index
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A.T. Kearney | FDI CONFIDENCE INDEX 5
lion. This was a strong rebound from the $56.8
billion the United States received in 2003. Based
on estimates for the first half of 2005, the United
States could again achieve 2004 levels of FDI.
Indeed, the U.S. economy is unparalleled, having
produced $12.5 trillion in GDP, three times that
of Japan (the next largest market) and weather-
ing unprecedented current-account deficits and a
season of natural disasters. Investors in the primary
sector, in telecom and utilities, and heavy manu-
facturingspecifically high-technology and com-
puter equipment firmsrank the United States
among their top 5 most attractive FDI locations.
The strength of the U.S. economy, particularly
reflected in higher U.S. dollar exchange rates, is
underscored by U.S. companies that are directing
more investments overseas than ever before. Last
year, U.S. companies sent approximately $229
billion overseas, thereby reinforcing the United
States role as the primary source of FDI.
For the first half of 2005, U.S. FDI outflows
were nearly $60 billion, down from $108 bil-
lion over the same period in 2004. This decline
may be due to U.S. companies taking advantage
of tax breaks on repatriated earnings under the
Homeland Investment Act. Because the United
States accounts for nearly one-third of total
global FDI outflows, these tax-driven repatria-
tions could have a moderating effect on global
FDI flows in 2005.
FDI Prospects Dim for Western Europe
Not since 1999 have so few Western European
countries been among the top 10 FDI loca-
tions. Between 2000 and 2004, Western Europe
held between 3 to 5 spots in the top 10; this year
only two countriesthe United Kingdom and
Germanyremain in the top 10. While the
United Kingdom held onto 4th place, Germany
declined from 5th to 9th place, France moved
from 6th to 14th, Italy went from 9th to 19th,
and Spain dropped from 13th to 17th place.
Manufacturing investors reported the strongest
decline in preference for Western Europe and are
looking instead to China, India, Brazil, Russia,
Poland and Mexico.
In 2004, the EU-15 countries witnessed a
40 percent decline in FDI inflows experiencing
a six-year low of just $196 billion. Contributing
to the decline were sluggish growth, disinvest-
ments and substantial repayments of intra-firm
credits by foreign affiliates to their parent firms
overseas. This shift in investor sentiment may
have been due, at least partly, to the rejection of
the EU constitution by the electorates of France
and the Netherlands, two founding members
of the European Union, and to the shifting
political environment in Germany at the time
of the survey.
Investment confidence soars for
Eastern Europe
Eastern European markets are enjoying a sharp
increase in FDI confidence levelswith Poland
(5th), Russia (6th), Hungary (11th), the Czech
Republic (12th), Turkey (13th) and Romania
Investor enthusiasm for China and Indiais at an all-timehigh, with roughly 45 percent of global investors more
upbeat about China and India compared to last year.
8/13/2019 FDI Confidence Index
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FDI CONFIDENCE INDEX | A.T. Kearney6
(25th) all rising in the rankings. All of these coun-
tries, except Poland, registered historic highs.
Investors rank Poland, Russia, Turkey, the Baltic
States and the Czech Republic among the top 10
countries with the most upbeat outlooks. Entry
into the European Union means greater market
access, fewer trade and investment barriers, and
increased market stability. Also, in anticipation of
EU entry, investor confidence extends to aspirant
countries such as Romania and even Turkey
both of which rank among the top 25 markets for
the first time this year. Increased investor inter-
est in the region might also be attributed to rela-
tively faster growth rates, lower corporate taxes,
and favorable productivity levels that help offset
rising costs.
Communications industry investors are the
most bullish on Eastern Europe ranking Poland
1st, Hungary 2nd, the Baltic States 4th, the Czech
Republic 5th, Slovakia 7th, Turkey 9th and Croatia
15th. FDI prospects in the Eastern European
telecommunications industry have been bolstered
by industry liberalization and deregulation, low
penetration rates of mobile phones, and grow-
ing consumer markets. Although suffering some
declines in cost competitiveness vis--vis other
developing regions of the world, Eastern European
locations score well as FDI moves up the value
chain to more knowledge-intensive investments.
Eastern Europe is also viewed positively as
an R&D location, offering both low costs and
strong scientific and engineering capabilities.
Nearly one-third of global investors are planning
R&D-oriented FDI in Eastern Europe over the
next three years.
Brazil and Mexico Regain Lost Ground
Brazil reentered the 10 most attractive markets,
taking 7th place in 2005 (up from 17th a year ear-
lier). The countrys economic recovery and rising
income levels have fueled interest from whole-
sale and retail investors who rank Brazil as their
3rd most preferred destination globally. Financial
services, telecommunications and utility inves-
tors who previously soured on Brazil in the face
of macroeconomic and regulatory instability are
now rethinking the market. With debt and infla-
tion under control, financial services investors
rank Brazil 14th while telecommunications and
utility investors rank it 16th.
Electronics manufacturers put Brazil in 6th
place last year; this year, they consider the coun-
try the 3rd most attractive market, behind China
and India. Automotive companies maintain a
strong interest in Brazil, ranking it 6th globally,
although it fell one spot from 2004. Investors
who are eager to meet global demand for a
wide range of commodities are more confident
in the Brazilian market. Their industries include
chemicals, fabricated metal, industrial machinery,
computer equipment, mining and raw material
manufacturing.
On one hand, global investors want to hold cash surpluses toweather the lean yearsand maintain shareholder confidence;
on the other, they do not want to forgo higher-return growth
opportunities overseas.
8/13/2019 FDI Confidence Index
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A.T. Kearney | FDI CONFIDENCE INDEX 7
Mexico climbed to 16th place in the Index
this year, up from 22nd in 2004a rise pri-
marily attributed to manufacturing investors.
This year, Mexico ranks 6th and 8th among
light and heavy manufacturers, up from 21st
and 15th in 2004. Mexico is benefiting from
a surge in global demand for commodities, as
raw-material investors name Mexico their 8th
preferred FDI location.
The countrys most notable improvement is
in the electronics sector where the country soared
to 4th place from 21st. Throughout 2005, global
electronics manufacturing firms were acquiring
facilities and land along the U.S. border. This
suggests the improvement in FDI into the maqui-
ladora sector, recorded in 2004, will continue.
Overall, Mexican FDI inflows increased from
$11.8 billion in 2003 to $17.9 billion in 2004.
The Savings Glut Will Cloud
Global FDI Recovery
Optimism concerning the global economy has
waned. This year, 36 percent of executives say they
are more optimistic about the global economy
compared to 31 percent who are not. Last year,
nearly 70 percent were more bullish on the global
economy and 12 percent were negative.
Since September 11, 2001, 65 percent of
global investors from the worlds largest firms
indicate they are building up significant cash
reserves. In fact, U.S. companies alone accumu-
lated more than $1 trillion in cash reserves during
this period. The top reasons cited for piling up
cash is a desire to improve corporate balance
sheets, followed by creating a cushion for the
next economic downturn and limited invest-
ment opportunities. More than one-third (36
percent) of respondents cite shareholder pressure
as the primary reason for increasing corporate sav-
ings, while 18 percent attribute it to the difficulty
in evaluating FDI risk (see figure 4).
The top-line growth imperative is again
pushing many companies overseas. Global FDI
inflows rose by 2 percent to $648 billion in 2004,
which is the first positive change in FDI since
2000. This year, 54 percent of executives say they
are planning to increase their foreign investments,
the largest number since 2000. Nearly half are
building war chests for future investment oppor-
tunities, which, if unlocked, could lead to an FDI
surge. With a rise in cross-border mergers and
acquisitions, pressure to identify overseas growth
opportunities is conflicting with the rationale for
Figure 4
Primary reasons for increasing cash savings
Improve balance sheet
Cushion againstnext downturn
Limited investmentopportunities
Shareholder pressure
Increase in perceivedinvestment risks
Rising costs
Corporate governanceconcerns
Volatility inenergy prices
U.S. economicuncertainty
Difficulty evaluatinginvestment risk
Increased government
regulation
Lack of new tech-nology or innovation
Weaker demand
Concerns aboutsecurity and terrorism
Concerns aboutexcess capacity
Percentage of total respondentsSource: A.T. Kearney
60%
38%
38%
36%
30%
20%
20%
19%
19%
18%
15%
14%
13%
11%
10%
8/13/2019 FDI Confidence Index
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FDI CONFIDENCE INDEX | A.T. Kearney8
holding cash. Global investors face a more com-
plex FDI decision-making climate. On one hand,
they want to hold cash surpluses to weather the
lean years and maintain shareholder confidence;
on the other hand, they do not want to forgo
higher-return growth opportunities overseas.
Increased R&D Spending Will Occur in
Developing Asian and Eastern European
Countries
Nearly half (48 percent) of global investors plan
to increase R&D spending over the next three
years, and only 3 percent plan to decrease such
spending (see figure 5). Almost three-quarters of
the increased R&D spend will be allocated to
developing countries in Asia and Eastern Europe.
Roughly one in five global investors plans to
increase R&D investments in North America
and Western Europe, with about the same
number planning to reduce R&D investments
in the region. About 10 percent of global exec-
utives plan to boost R&D spending in Latin
American markets.
More R&D money is expected to go over-
seas. Investors from North America and Western
Europe are the most eager to invest their R&D
capital in developing Asia and Eastern Europe.
As a result, the most significant cuts will occur in
their home territories.
Cost and Quality Will Drive R&D Foreign
Investments
More than half of global investors choose R&D
investment locations based on three attributes:
lower R&D costs, availability and quality of local
R&D labor, and intellectual-property protection.
The quality of universities and research centers, and
IT infrastructure came in 4th and 5th respectively.
About one-third of investors consider regu-
latory environment, reputation for creativity and
innovation, and the ability to tailor products and
services as the top attributes when considering an
R&D investment location. Roughly 28 percent
consider market size critical, while 26 percent
view government R&D as the most important
factor (see figure 6).
Figure 5
Global R&D expenditures will shift to developing markets
Are you planning moreor less R&D investmentsover the next three years?
Investors planning more or less R&D expenditures overthe next three years, by region
More R&D expenditures
Less R&D expenditures
Source: A.T. Kearney
Asia Pacific(excluding
Japan)
EasternEurope
NorthAmerica
WesternEurope
LatinAmerica
JapanMore Less MiddleEast and
Africa
48% 50%
22%20%
18%
10% 9%7%
0%
10%
20%
30%
40%
50%
0%
10%
20%
30%
40%
50%
3%5%
3%
23%
18%
2%3%3%Percentageo
ftotalrespondents
Percentageo
ftotalrespondents
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A.T. Kearney | FDI CONFIDENCE INDEX 9
Globalization of R&D Will Be a Balancing Act
China and India are the top two countries for
future R&D investments, with slightly more
than 40 percent of CEOs expecting to make such
investments in these markets over the next three
years. Almost one-third of global investors cite
Eastern European locations for R&D activities
with Poland and Russia leading the way. Investor
preference for these slowly maturing R&D loca-
tions says much about Eastern Europes future
talent base, intellectual-property protection, the
quality of educational and research communities,
as well as infrastructure.
The United States, the United Kingdom,
Japan and Germany trail China and India as
preferred future R&D investment locations. As
of 2003, the combined gross domestic expen-
diture on R&D of these four industrialized
countries amounted to approximately $520 bil-
lion, compared with an estimated $26 billion
spent in China and India. The United States
and other developed nations will likely remain on
the frontier of innovation in most fields, while
certain features of the corporate R&D process
will move to developing countries. One in 10
new R&D investments will likely go to Japan,
which is second only to the United States in total
national expenditure on R&D.
Figure 6
The most important attributes in determining R&D investment locations
Source: A.T. Kearney
Lower R&D costs
Availability and quality of local R&D labor
Intellectual property protection
Quality of universities and research centers
IT and local infrastructure
Regulatory environment
Reputation for creativity and innovation
Ability to tailor products and services
Proximity to customers
Presence of supporting industries
Local market size
Government R&D incentives
Openness to international trade
Presence of industry competitors
Proximity to manufacturing
Local firms R&D assets (such as patents)
Local firms R&D absorption capacity
Quality of life and environment
Bilateral investment treaties
Other
52%
51%
50%
46%
42%
36%
35%
29%
28%
28%
28%
26%
25%
19%
19%
16%
16%
15%
9%
3%
Percentage of total respondents
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FDI CONFIDENCE INDEX | A.T. Kearney10
Offshoring Intensifies, but the FDI Impact
Will VaryThe move to offshore destinations continues:
Nearly 80 percent of global investors plan to
locate corporate functions overseas over the next
three years, compared to 66 percent in 2004
and 50 percent in 2003. Corporate investors will
pursue offshoring opportunities more aggressively
across all major functions (see figure 7).
Information technology and call-center
functions will see the highest levels of off-
shoring activity, with 67 percent and 50 percent
of global investors expecting to offshore these
functions, respectively. These are followed by
business processes (for example, accounting, HR
and R&D) at 41 percent. The business models
for moving corporate functions offshore will
include captive and joint venture (both of which
result in FDI), as well as third-party outsourcing
and other non-FDI options (see figure 8).
Concerns over quality control and IP pro-
tection mean that some business processes and
functions, including R&D, knowledge manage-
ment and analytic functions, will occur primarily
through captive business models or joint ventures.
Nearly 70 percent of future R&D offshoring will
be through FDI, while the remaining offshore
R&D activity will occur through third-party out-
sourcing agreements or other non-FDI channels.
The ability to protect intellectual property rights
is central to whether or not the developing world
can actually attract R&D investments.
When sending certain business processes
and functions offshorespecifically, informa-
tion technology, call centers, distribution and
logisticsglobal investors prefer to rely on
third-party outsourcing contacts and other non-
FDI operating models. For example, about 55
Figure 7
IT and contact centers remain the highest areas for corporate offshoring
Source: A.T. Kearney
Information technology
Percentageo
ftotalrespondents
Distribution and logistics
Knowledge management
Research and development
Business process outsourcing
Manufacturing
Contact centers
0%
10%
20%
30%
40%
50%
60%
70%
2003 2004 2005
8/13/2019 FDI Confidence Index
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A.T. Kearney | FDI CONFIDENCE INDEX 11
percent of global investors plan to work with
an outside provider when offshoring their IT
functions. Despite the rapidly growing business
process outsourcing (BPO) market, only 28 per-
cent of global investors expect to turn to out-
side service providers to handle functions such
as human resources, and finance and account-
ing. Nearly 60 percent of investors favor using
a captive or joint-venture business model to
handle BPO functions.
Offshoring is not a simple site-provider
selection process, particularly when it comes to
sophisticated and sensitive functions. Of global
investors who have sent business processes off-
shore, 60 percent say their expectations have been
met or exceeded, 17 percent have been disap-
pointed, and the rest are unsure. This may explain
why roughly 75 percent of investors think estab-
lishing and monitoring performance measures
in offshore locations is the most critical success
factor in the offshore migration process.
In addition to performance metrics, investors
cite other less-measurable requirements for off-
shore success. For example, 77 percent cite gaining
senior-level commitment and rigorously research-
ing and selecting an offshore location or vendor
as extremely important to a successful offshore
operation. Empowering members of the program
management team and holding them accountable
for offshore initiatives is also important.
Investors See Diminished Macro Risks,
but Growing Micro Risks
Traditional operational risks such as government
regulation, and financial, political and social insta-
bility, appear to be less threatening in 2005 com-
pared to previous years. Just 38 percent of investors
consider political and social disruptions as risks to
Figure 8
Which operating model do you expect to use when offshoring?
Source: A.T. Kearney
R&D and engineering
Knowledge management and analytics
Business processes (HR, finance, accounting)
Manufacturing and assembly
Distribution and logistics
Contact centers (call centers, web centers)
IT (design, support and service
0% 20% 40% 60% 80% 100%
Non-FDI FDI
Other Third party Joint venture Captive
8/13/2019 FDI Confidence Index
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FDI CONFIDENCE INDEX | A.T. Kearney12
operations. Just two years ago, this number was
62 percent. Investors also indicate that country
financial risk is less menacing.
The risks have become more recognizable
and most executives have developed a variety of
sophisticated risk hedging, repackaging and shar-
ing tools to deal with them. Nonetheless, these
risks are inherently unpredictable and the limits
of coping mechanisms mean that the traditional
macro risks remain among the leading hazards
to operations.
Micro risks, however, are becoming more
threatening. Corporate governance, IT disruption,
product quality, safety problems and employee
fraud have all gained importance. Anxiety gener-
ated from Sarbanes-Oxley and the Basel II Accord
have mixed with rising fears about information
security.3 More than one-third of investors are
worried about governance issues compared to 25
percent who were worried two years ago. Nearly
one-third of investors consider IT disruption as
a threat to operations compared to only 19 per-
cent in 2004 and 17 percent in 2003. In addition
to the ongoing battle against computer viruses, a
series of high-profile cases where customer infor-
mation has been compromised has heightened
investors concerns over information security. With
companies aggressively outsourcing their IT and
other functions to third parties, executives are
encountering the downside of such arrangements,
including less oversight and less control of quality
and security.
Regional FindingsThe Americas
The United States dropped one spot to become the
3rd most attractive FDI location, losing ground
mainly in the light manufacturing and financial
services sectors. However, the United States ranks
among the top 5 most attractive FDI locations
among investors in the primary sector, telecom and
utilities, and heavy manufacturing (specifically in
high-technology and computer equipment firms).
Canada has not benefited from the growth in
global cross-border M&As. Foreign investment in
Canada has declined significantly since the peak
of the global M&A boom in 2000, when FDI hit
a record high of $67 billion. In 2004, Canadian
FDI was $6.3 billionan ebb not seen since
1993. However, companies from Canadas next
leading sources of FDIthe United Kingdom,
France and the Netherlandsare more eager to
commit to the market. In fact, after the United
States, the European Union is Canadas most
important trade and investment partner, with
one in four Canadian FDI dollars coming from
European companies.
Investors express more confidence in Latin
America as it enjoys continued economic recovery.
FDI inflows to Latin America increased after
four years of declinesreaching $68.9 billion
in 2004 up from $48 billion in 2003. The FDI
recovery was driven mainly by activities in the
manufacturing and the primary sectors. Still, with
the winding down of privatizations and M&A
deals, FDI has yet to return to the peak levels of
1999 when the region received $107.4 billion.
United States. Last year, the United Stateswas the largest FDI recipient in the world, cap-
turing $96 billiona strong rebound from the
3 The Sarbanes-Oxley Act, Pub. L. No. 107-204, 116 Stat. 745 (July 30, 2002), is a United States federal law also known as the Public Company AccountingReform and Investor Protection Act of 2002. Basel II Accord is the second Basel Accord and represents recommendations by bank supervisors and central bankers
from 13 countries to revise the international standards for measuring the adequacy of a banks capital.
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$56.8 billion received in 2003. Several major
cross-border deals in the financial services sector
drove this performance. For example, Canada-
based Manulife Financial Group acquired John
Hancock Financial for $11.1 billion, which was
the second largest deal in 2004.
Although FDI in the U.S. financial sector has
been high in recent years, investors appear to have
cooled on the U.S. financial market. This year,
financial services investors rank the United States
6th, down from 2nd place in 2004. More than
one-third of global insurance carriers are more
negative on the U.S. market, which is likely due
to the countrys destructive hurricane season.
Investors from the highly competitive light
manufacturing segments, such as electronics, food
and textiles, are less likely to commit FDI to the
United States than to lower-cost, faster-growing
emerging markets. China, India, Brazil, Russia,
Poland, Mexico and Hungary take the first 7
spots in the light manufacturing rankings, with
the United States coming in 8thdown from
3rd place last year.
The U.S. economy remains a behemoth,
producing $12.5 trillion in GDP, three times
that of Japan, which is the next largest market.
Having weathered unprecedented current-account
deficits, massive natural disasters and interest rate
hikes, U.S. economic growth remains robust.
Underlying the strength of the U.S. economy are
U.S. companies that poured more investments
overseas than ever before in 2005approximately
$229 billionreinforcing the countrys role as
a primary source of FDI.
The Homeland Investment Act (HIA) could
affect the final tally of global FDI recorded in
2005. When the HIA expired in 2005, so did
the tax break for U.S. companies on repatriated
foreign affiliate earnings. The U.S.-Europe inter-
est rate differential and the HIA have helped
strengthen the dollar in the face of massive U.S.
deficits. With U.S. companies taking advantage
of the one-time tax break, U.S. FDI outflows
are estimated to be nearly $60 billion for the first
half of 2005 down from $108 billion over the
same period in 2004.
Canada.Canada dropped from 16th to 21st
place in the Index this yearits lowest recorded
ranking. In particular, U.S. investors, who account
for 65 percent of the countrys FDI inflows, put
Canada 8th among their most attractive FDI
locations, compared to 4th place in 2004. If the
diminished outlook among U.S. companies con-
tinues, it could mean future declines in overall
FDI for Canada. Globally, manufacturing and
financial services investors were less interested in
the Canadian market in 2005.
Food and kindred products companies are
more attracted to the Canadian market and con-
sider it their 4th most preferred FDI location.
One-third of executives in these sectors view
Canada more positively than they did a year ago.
The Canadian food market is shifting toward
packaged and convenience fooddriven by a rise
in the number of single people, longer work hours,
and dual-income households. Beer accounts for
half of all beverage consumption, with quality-
conscious Canadians demanding premium alcohol
products. Brazils Ambev acquired Canadas John
Labatt Ltd. for $7.8 billion, making it the fifth
largest cross-border deal in 2004.
The surge in prices and global demand
for commodities (particularly oil and gas) has
helped move Canada up a notch (from 14th to
13th place) in the primary sector. Canada ranks
9th among mining companiesup from 11th
in 2004. Since the 1990s, the leading sources of
Canadian job growth have gradually shifted from
cars and computers to mining and construction.
Investments in the resource-rich Western prov-
inces of Alberta and British Columbia are on the
rise, as is investment in rail systems and ports,
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which help fuel the construction sector.
Brazil. Brazil shot up 10 spots to 7th place
from its all-time lowest ranking in 2004. FDI
in Brazil increased 79 percent, reaching $18.2
billion in 2004. Much of the optimism is due
to the countrys healthy macroeconomic perfor-
mance, resulting from increased exports to China,
higher commodity prices, rising incomes and
increasing demand.
Wholesale and retail, telecom, financial and
non-financial services, primary and manufacturing
sector investors all expressed increased confidence
levels in Brazil.
Brazils natural resource markets are heat-
ing up. The mining sector posted some of the
strongest improvements in the countrys rank-
ings, moving Brazil to 7th place from 22nd.
Investments in the raw materials sector were also
positive, moving Brazil to 4th place from 14th.
Investors are encouraged by continuing strong
global demand for a wide range of commodi-
tiesfrom iron ore to soybeans.
In the chemicals sector, Brazil ranks 5th, up
from 9th in 2004. The Brazilian pharmaceuti-
cal sector has posted positive sales performance
since 2003. Many foreign companies are apply-
ing for licenses to produce generic drugs in Brazil.
In 2004, a wholly-owned Brazilian subsidiary of
Indias Glenmark Pharmaceuticals Ltd. acquired
Laboratories Klinger, a local pharmaceutical firm,
and obtained approved product registrations,
most of which were generics, in the process.
Global investors rank Brazil 9th most attractive
R&D investment location.
The Brazilian consumer is returning and
helping to fuel the countrys economic perfor-
mance. The wholesale and retail sectors are invest-
ing in Brazil againeager to tap into a domestic
market with rising incomes, increasing purchasing
power, and growing interest in premium brands.
In 2004, Wal-Mart (U.S.) acquired Royal Aholds
(Netherlands) local subsidiary, Bompreo, and
quickly expanded into Brazils Northeast region
where growth in real income has been the highest.
Meanwhile, Interbrew SAs (Belgium) acquisition
of Braco SA for $4 billion was the largest cross-
border M&A in Latin America.
Automotive and transportation equipment
investors rank Brazil slightly lower this year
(moving Brazil from 6th to 5th place in the
Index). But both sectors remain optimistic as vehi-
cle sales increase due to lower interest rates, higher
incomes and government-sponsored tax conces-
sions. Global automotive companies, including
Fiat (Italy), General Motors (U.S.), Mitsubishi
Motors (Japan) and Hyundai (South Korea),
plan future investments in Brazil. However, the
strengthening of the real is hurting export compet-
itiveness and encouraging manufacturing investors
to pursue domestic market opportunities.
Since 2000, many companies, particularly
in the telecom, electricity and financial sectors,
divested across South America due to economic
stagnation, regulatory uncertainty and macro-
economic instability. Looking ahead, however,
financial services and telecom investors are
rethinking the Brazilian market. With debt and
inflation under moderate control in 2005, finan-
cial services investors rank Brazil 14th, while
telecommunications and utilities investors rank
the country 16th. Indeed, Citigroup Brazil plans
to add 62 new branch banks, and Goldman
Sachs (U.S.) is in talks to create a joint venture
with Banco Pactual SA.
Despite renewed investor enthusiasm and the
governments economic pragmatism, Brazil still
has considerable obstacles. For example, Brazil
suffers from one of the most rigid labor markets
in the world, high business costs, heavy bureau-
cracy, and slow implementation of public-private
partnerships needed to address infrastructure
bottlenecks.
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Mexico. Mexico climbs up the Index from
22nd in 2004 to 16th in 2005 among global
investors. Mexicos turnaround is led by increased
FDI interest spurred by recent bilateral economic
agreements and increased confidence among
manufacturing investors.
Japanese investors rank Mexico their 5th
most attractive market, up from below the top 25
last year. The Japan-Mexico Economic Prosperity
Agreement (EPA), effective in April 2005, offers
Japanese companies new opportunities in Mexico.
The Mexican governments strategy to reduce
dependence on the United States by pursuing a
constellation of free-trade agreements in Europe
and Asia could be paying off.
The maquila sector is helping Mexicos FDI
inflows rebound. Mexican FDI inflows jumped
from $12.8 billion to $17.9 billion. The economic
recovery in the maquiladora sector, supported by
U.S. demand for imports, helped spur a return of
manufacturing investors. Mexico suffered a steep
drop in maquila FDI between 2001 and 2003.
BBVA (Spain) purchased its local affiliate for $3.8
billion and Holcim Ltd (Switzerland) acquired its
local affiliate for $591million. Combined, these
deals accounted for more than one-quarter of
overall FDI inflows to Mexico in 2004.
Manufacturing investors see brighter pros-
pects in Mexico. In 2005, heavy and light man-
ufacturers rank Mexico 8th and 6th respectively,
up from 15th and 21st a year earlier. Since
January 2004, Volkswagen (Germany) and Ford
(U.S.) have announced more than $3 billion
in multiyear investments. Electronics investors
are similarly optimistic about Mexico, ranking
the country 4th, up from 21st a year earlier.
Throughout 2005, leading electronics manufac-
turers, such as Motorola, acquired facilities and
land along the U.S. border, suggesting a continu-
ing FDI improvement in the maquiladora sector.
Despite rising energy prices and demand,
oil and gas investors lost confidence in Mexico,
ranking the country 16th this year, down from
7th a year earlier. As the country prepares for
the July 2006 presidential elections and as con-
tinued high oil prices help fill the states coffers
via state-run PEMEX, the much-needed energy
sector reforms are less likely in the short term.
Mexicos business climate will continue to face
higher costs and it may soon become a net oil
importer if infrastructure and technology invest-
ments to upgrade oil, gas and electricity sectors
are delayed further.
Transport services investors are optimistic
about the Mexican market. Investor confidence in
transportation services increased in 2005 as air-
line holding company Cintra SA announced plans
to sell off Mexicos two main airlines, Mexicana
and Aeromxico. With several aviation investors
eyeing the Mexican market, and as the airline
sector opens up to competition, the aviation
market could undergo a transformation over the
next few years.
A gap in human capital may limit Mexicos
R&D potential. Mexico ranks as the 15th most
attractive R&D location globally. Compared to
Investors express more confidence in Latin Americaas itenjoys continued economic recovery. FDI inflows to Latin
America increased in 2005 after four years of declines.
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help boost consumption because people are
concerned over the future of publicly funded
pensions and health-care costs. The rejection of
the EU constitution by the French and Dutch
electorates (two founding members of the EU)
and the shifting political scene in Germany have
increased the uncertainty.
Although many European firms have improved
their balance sheets and reduced debt, business
confidence remains sluggish and continues to be
a drag on growth. With the bulk of European
investment derived from other European markets,
this will likely mean diminished FDI prospects
in Western Europe. Investment outflows from
the European Union declined from $372 billion
in 2003 to $280 billion in 2004.
However, Eastern European markets are ben-
efiting from a sharp increase in FDI confidence
levelswith Poland, Russia, Hungary, the Czech
Republic, Turkey and Romania all experiencing
more FDI confidence. Countries with the most
positive outlookPoland, Russia, Turkey, the
Baltic States and the Czech Republicall rank in
the top 10.
FDI flows to the 10 new EU markets increased
from $12 billion in 2003 to $20 billion in 2004.
As a result, FDI inflows as a share of gross capi-
tal formation rose from 11 percent to 16 percent
in these countriessurpassing the average level
of the EU-15. Industry consolidation and cor-
porate restructuring across Europe are benefiting
Eastern European markets. EU membership has
removed obstacles for small- and medium-size EU
firms that were previously deterred from investing
due to border controls and just-in-time delivery
requirements.
Despite rising costs and more regulations,
new EU members are relatively more attractive
to global companies. This is due to higher levels
of productivity and better tax rates. The average
corporate tax rate among the new EU members is
20 percent, but reaches 31 percent for the EU-15.
Poland, the Czech Republic and Hungary
benefited from double-digit growth in the first
half of 2005. These countries are experiencing
strong export demand from Russia, Ukraine and
the Balkan States, which compensates for less
export demand from Western Europe. Higher
oil prices, which are eroding growth in Western
Europe, are actually fostering stronger demand
in oil-producing countries such as Russia and the
Commonwealth of Independent States (CIS). The
shifting trade patterns between West and East are
acting as a shock absorber for Eastern European
markets. Russia, Turkey and Romania also made
significant gains in FDI attractiveness this year,
further reflecting higher FDI prospects in Eastern
and Southern Europe.
United Kingdom. The United Kingdom held
steady in 4th place in 2005, behind China, India
and the United States.4 French, Canadian and
U.S. investors maintained the highest levels of
FDI confidence in the U.K. market in 2005
ranking the country their 4th, 7th and 4th most
attractive FDI destination, respectively. In 2004,
FDI inflows to the United Kingdom hit $77.6
billion, up from $27.4 billion in 2003. This was the
third largest FDI inflow to the United Kingdom
and was driven largely by a few major cross-border
M&A deals, including Santander Central Hispano
SAs (Spain) acquisition of Abbey National for
$15.8 billion, and GEs (United States) purchase
of Amersham plc for $9.6 billion.
The United Kingdom, among the worlds
leading financial markets, continues to attract
investors from banking, insurance and other
financial services sectors. Global bankers say the
United Kingdom is their 3rd most attractive
4 UNCTAD preliminary figures for 2005 puts the United Kingdom in the number one position, having attracted more than $200 billion in FDI, an increaseof 182 percent.
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FDI location, while insurance companies rank
the United Kingdom 4th. London is the worlds
largest market for cross-border bank lending
responsible for nearly one in five dollars lent
overseasas well as over-the-counter derivatives,
foreign exchange trading, and marine and avia-
tion insurance.
Business servicesmostly software, engi-
neering, accounting, research and management
companiesrank the United Kingdom their
3rd most attractive FDI location globally. Silicon
Glen (Central Belt of Scotland), Silicon Fen
(Cambridgeshire), Thames Valley/M4 Corridor,
Greater Manchester and the Midlands represent
highly advanced software clusters supporting
the United Kingdoms rapidly growing software
industry, which is estimated to be worth $40.5
billion as of 2004.
In part, the United Kingdoms strong perfor-
mance in business services is related to the coun-
trys attractive R&D capabilities. Global investors
rank the United Kingdom their 4th most attractive
R&D location globally, behind India, China and
the United States. The country boasts advanced
technical and engineering skills, strong ties
between industry and academia, and operates on
the cutting-edge of new product research, design
and development in many fields.
The largest share of U.S. and Japanese R&D
operations located in Europe are based in the
United Kingdom. Telecom and utilities investors
rank the United Kingdom, their 6th most attrac-
tive market. Although the U.K. mobile market
quadrupled between 1998 and 2003, growth
rates will slow in the coming years as penetration
rates exceed 90 percent. But content innovation
through third-generation networks (3G) allow-
ing internet access, video and data transmission
will provide further room for growth on a per user
basis. The United Kingdom is the current global
leader in 3G technology.
Telecom regulator, Ofcom, is forcing domi-
nant BT to provide greater market access to rivals
and encouraging new entrants to help improve
service, reduce prices and expand consumer inter-
net access. In a clear sign of increasing competi-
tion, Carphone Warehouses Talktalk and Onetel
are wooing customers away from BT.
Poland. Poland jumped from 12th to 5th
place in the Indexits highest ranking since
2000driven by increased interest from U.S.
and European investors. U.S. investors rank
Poland their 7th most attractive FDI location (up
from 12th a year ago), while European investors
rank Poland 3rd, up from 6th in 2004.
Most enthusiasm in Europe comes from
U.K. and Dutch investors. Both countries rank
Poland their 3rd most preferred investment
location worldwide. Italian and Swiss investors
rank Poland 5th and 6th, respectively. Notable
European investments are Germanys MAN AG,
which invested $123 million in a new factory
to start producing trucks in 2007, and Frances
Michelin, which is expanding its existing plant
in the northeast in a $306 million deal.
About one in four global investors is more
optimistic about the Polish marketonly India,
China and Brazil achieved higher levels of inves-
tor enthusiasm worldwide. One in 10 global
investors indicated they will make first-time
investments in Poland. Polands full membership
in the EU has meant the adoption of EU laws,
greater regulatory stability and reduced risk pre-
miums. Similarly, EU Structural Funds are aimed
at improving infrastructure, human resources,
competitiveness and enterprise development.
In 2004, Poland received $12.6 billion
FDI inflowsup from $4.6 billion in 2003.5
5 UNCTAD preliminary figures for 2005 reveal that FDI inflows to Poland decreased by 31 percent to $8.7 billion.
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Nearly 60 percent of these flows were attributed
to greenfield investments (new investments by
entrepreneurs, as well as profits posted to pre-
vious greenfield investments). Nearly 1 in 10
greenfield investments in the European Union
went to Poland in 2004. From a sector perspec-
tive, manufacturing accounted for most FDI,
with automotive, chemical and metal invest-
ments leading the way.
Looking ahead, global communications inves-
tors are the most bullish on Polandranking it
their number one market worldwide. Poland repre-
sents the largest communication market in central
Europe. With a large population and lower mobile
phone penetration rates than the Czech Republic
and Hungary, Poland offers solid market oppor-
tunities. Vodafone (U.K.), TDC (Denmark), and
T-Mobil (Germany) are increasing their invest-
ment stakes in two Polish mobile operators.
Polands fixed-line operator, TPSA (the former
state-owned monopoly), faces little competition
and the market remains fragmented. However,
consolidation among other fixed-line competi-
tors is expected to boost growth and improve
service. Further improvements to the telecom
infrastructure would reduce consumer costs and
foster greater broadband internet access. Already,
Poland has more internet users than Bulgaria, the
Czech Republic, Hungary, Romania and Slovakia
combined.
Electric and gas investors rank Poland their
2nd most preferred investment location. Although
privatization in the electricity sector has been
slow, EU entry will require liberalization. As the
country moves away from energy-intensive indus-
tries and pursues environment-friendly policies,
coal production has declined in favor of mostly
imported natural gas. Polska Gornictwa Naftowa
i Gazownictwa (PGNiG), the state-owned gas
storage, distribution and trade company, is being
restructured and opened to foreign investors.
After joining the European Union, food
restrictions on the EU-15 markets were elimi-
nated, thus making Poland a major European
agricultural player. Food, tobacco, textiles and
apparel investors rank Poland their 5th most
attractive market, while investors in agriculture,
forestry and fishing place Poland 3rd. The food-
processing market is growing fast and the industry
is moving up the value chain.
Poland ranks 5th among fabricated metal,
industrial machinery and computer equipment
investors. The worlds largest PC maker, U.S.-
based Dell, plans to build a PC assembly factory in
Lodza move expected to generate 12,000 new
jobs and further increase the supplier market.
Polands offshoring potential is also rising.
Investors are attracted by the special economic
zone in Lodz, with Philips (Netherlands) trans-
ferring its European financial and accounting
operations there. The zone has become a hub for
on-shore call centers of domestic firms. For exam-
ple, telecom incumbent TPSA, mobile Polkomtel
and Bank Pekao all operate customer service
centers from Lodz.
Europeans rank Poland their 4th most attrac-
tive R&D investment destination globally. German-
based Siemens expanded its Wroclaw research and
development center and increased staff by 40 per-
cent. In 2002, Polands gross domestic expenditure
on R&D was $1.1 billionmore than any other
new EU member and about one-third of the com-
bined spend of the 10 new EU countries.
Russia. After tumbling from 8th place in
2003 to 11th place in 2004, Russia places 6th
in the Index. French, German and Swiss inves-
tors express the most confidence in the Russian
market, ranking it 3rd, 4th and 7th respectively.
Russia is the 4th most preferred location for first-
time investors.
Russia received $12.5 billion in 2004, up
from the $8 billion received in 2003, marking an
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make it difficult to expand beyond the major
cities of Moscow and St. Petersburg. While Russia
boasts notable investors such as IKEA (Sweden),
the absence of major U.S. companies is a striking
characteristic of the countrys retail boom.
Russia ranks 11th among telecom and util-
ities. This is a significant jump from below the
top 25 in 2004. Mobile penetration rates have
nearly doubled annually for the past four years,
making Russia one of Europes fastest-growing
mobile markets. Energy, finance and commer-
cial sectors are demanding both IT services and
an improved infrastructure. Some of the largest
cross-border deals in Russia last year were in the
telecom sector. For example, Alfa Telecom Ltd.
bought Vimpelcom OJSC for $1.4 billion and
Access Industries, Inc. (U.S.) acquired Svyazinvest
JSC for $625 million.
Rising wages, however, are stifling growth in
sectors outside energy. Without an overall strat-
egy to diversify beyond the energy sectors, Russia
could continue to suffer from Dutch Disease
and deindustrialization.
Germany. Germany fell from 5th to 9th
placeits lowest ranking since 1999. French,
Swiss, U.S., Italian and Dutch investors expressed
less interest in the German market. FDI inflows
dropped from $27.2 billion in 2003 to negative
$38.6 billion in 2004, the result of lower equity
capital and substantial repatriations of intra-
company loans. Equity capital declined from
$40.5 billion in 2003 to $21.6 billion in 2004,
while intra-company loans soaredfrom nega-
tive $8 billion to negative $46.2 billionover
the same period.
In part, the steep decline was due to revisions
to the German tax code intended to encourage
foreign companies to transfer their corporate loans
into equity capital. The tax change made it less
attractive for foreign companies to retain liquid
reserves at their German affiliates. Moreover,
the large negative intra-company loan flow was
influenced by one major $24.5 billion transaction
in the telecom sector.
Manufacturing investors soured on Germany
this year. Heavy manufacturing investors rank
Germany 10th, down from 4th place, while light
manufacturing investors rank it 15th, down from
4th place a year earlier. The desire to move closer
to export markets combined with Germanys high
payroll and compliance costs is driving manufac-
turing firms to emerging markets, including China
and Eastern European countries. Domestically,
Germanys automotive market, which is Europes
largest, suffered from sluggish growth between
2001 and 2003 and expanded only modestly last
year. Transportation equipment investors are sig-
nificantly less interested in the German market.
Germany ranks 11th among financial ser-
vices investors. Italys Unicredit created head-
lines by acquiring Germanys third-largest bank,
HVB Group, for $18.5 billion in June 2005.
The consumer finance market is becoming more
sophisticated, evident in a rise in non-mortgage
consumer loans and credit-card activity. We
expect to see a rise in corporate bonds and
equities. The elimination of state guarantees in
July 2005, has led to an increase in bank bor-
rowing costs, causing banks to lend less money
and encouraging corporations to shift to cap-
ital markets. The future, however should be
brighter. Legislation cutting future pension liabil-
ities and creating incentives to encourage private
savings will likely spur growth of retirement
savings products and services. The life insurance
business is also expected to grow due to concerns
over the public pension system.
Germany ranks 3rd among chemicals and
allied products companies. In June 2005, Novartis
(Switzerland) acquired Hexal, the generic drug
maker, while Torrent (India) purchased Heumann
Pharma. In 2004, Roche (Switzerland) poured
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money into two biotech plants in Bavaria, while
GlaxoSmithKline (U.K.) invested in a second
vaccine plant in Dresden.
Other notable chemical deals in 2004
include: Air Liquide SAs (France) acquisition of
Messer Griesheim-Ind Gas Ops for $3.4 billion,
Rockwood Specialties Groups (U.S.) purchase of
Dynamit Nobel AG by for $2.7 billion, and The
Blackstone Groups (U.S.) purchase of Celanese
AG for $2.2 billion.
Hungary. Hungary climbed to 11th from
19th place in the Index. Investment in Hungary is
buoyed by increased confidence among Western
European investors. German, Swiss, Dutch and
U.K. investors express the most enthusiasm
for the Hungarian market. Despite heightened
macroeconomic risk and one of the worlds
strongest currencies last year, Hungarian FDI rose
from $2.1 billion to $4.6 billion in 2004.
Wages rose sharply and unit labor costs in
U.S. dollar terms nearly doubled from 2000 to
2003, but slowed in 2004. Still, Hungary offers
some of the lowest wages in Eastern Europe (31
cents on the U.S. dollar compared to the EU-15
average). Hungarys recent EU-entry, rising pro-
ductivity, and a multilingual, skilled and motivated
workforce act as magnets for foreign investors.
Hungary ranks 2nd among communications
investors and 7th among electronic and electrical
equipment investors. Investments by Nokia and
Elcoteq (Finland) and Flextronics (Singapore) are
helping to position the country as a major European
hub for manufacturing mobile handsets. However,
in the price sensitive and highly competitive elec-
tronics industry, Hungarys rising wage costs and
currency appreciation have negatively affected the
market. Already, Flextronics and IBM have moved
some production from Hungary to China.
Hungary ranks 10thup from 17th last
yearamong chemicals and allied products
investors. The country inherited a solid pharma-
ceutical industry from the Communist era that
has evolved into a European platform for low-cost
production of patented compounds and branded
generic substitutes. Local pharmaceutical compa-
nies are also engaged in R&D activities.
Czech Republic. The Czech Republic is the
12th most attractive FDI locationan all-time
high in the Index. U.S. investors rank the Czech
Republic 14th (up from 20th), displaying the
largest improvement in FDI confidence this year.
European investors express the strongest levels
of FDI confidence in the Czech market, with
Germany ranking it 7th, the United Kingdom
9th and France 11th. FDI inflows more than
doubled in 2004, reaching $4.5 billion.7
Insurance, real estate and holding compa-
nies rank the Czech Republic 7th up from 13th
place in 2004. A series of central bank interest
rate hikes may dampen strong growth in the tra-
ditional banking sector, but new opportunities
are emerging in insurance and asset management.
Socit Gnrale (France) and Allianz (Germany)
are jointly expanding insurance operations in
the country, while Aegon (Netherlands) is enter-
ing the market. Concerns from the 1990s about
minority shareholder rights, asset stripping and
insider trading could be fading as wealth man-
agers launch new products to benefit from rising
Czech incomes.
The Czech Republic ranks 9th among trans-
portation equipment firms. Automakers are keen
on the market and are expected to make additional
investments over the next few years. Car exports,
mainly destined for other European countries,
comprise 23 percent of all Czech exports. And
although car ownership in the country is higher
than anywhere else in Central Europe, it is still
7 UNCTAD preliminary figures for 2005 reveal that FDI inflows to the Czech Republic increased 181 percent to $12.5 billion.
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low compared to developed countries.
Hyundai (South Korea) is leaning toward the
countrys Ostrava region for a planned $1.2 bil-
lion production plant, after building a Kia Motors
subsidiary in Slovakia. Toyota Peugeot Citroen
Automobile (an auto consortium) is expected to
ramp up production at its plant near Prague.
Telecom and utilities investors rank the
Czech Republic 7th. The country has one of the
most advanced information and communications
technology (ICT) sectors in Central and Eastern
Europe. When Telefnica (Spain) acquired Cesky
Telecom in 2005, it crowned a decade of efforts
by Czech authorities to privatize the sector.
Earlier, Vodafone (U.K.) acquired major mobile
operator Oskar. With Germanys T-Mobil and
Frances Orange, the countrys entire mobile net-
work is now foreign-owned. Another promising
area of growth is in broadband services, driven by
internet use and internet shopping. In fact, one in
six Czechs shops online.
There is rising demand for professional inter-
net, e-commerce, web design and systems inte-
grator services, particularly within the banking
and government sectors. U.S. firms dominate the
software market: Microsoft, Novell, Corel, Lotus
Symantec, Sybase, Oracle and Sun Systems are all
active in the countrys IT and software sector.
Turkey. Turkey jumps to 13th place from
below the top 25. The potential for EU acces-
sionalbeit uncertainand reforms under the
International Monetary Fund stabilization pro-
gram have helped push Turkey up the Index.
The interest is buoyed by the central banks
adoption of inflation targeting strategies early in
2006, part of the last phase in a four-year process
of reforming the countrys monetary policy.
Turkey ranks 7th among countries consid-
ering first-time investments over the next three
years. In 2004, the country had $2.7 billion
in FDI inflows, a 56 percent increase over the
previous year.8 European investors are the most
optimistic about Turkey, ranking it 7th (up
from 21st), with Italian investors ranking Turkey
their number one FDI location, ahead of China
and India.
Turkey jumps to 11th place (from 20th) in
the banking sector. After the 2001 financial crisis,
the Turkish government poured capital into the
failing banking system and is now seeking FDI
through privatization. Recently, Turk Dis Ticaret
Bankasi was acquired by Fortis Bank (Dutch-
Belgium) for $1.3 billion.
Turkey ranks 12th among telecom and util-
ities investors. A consortium of Telecom Italia
(Italy) and Oger Telecom (Saudia Arabia) plans
to purchase a 55 percent stake in Turk Telekom
for $6.55 billion, while TeliaSonera (Sweden)
and Alfa Group (Russia) are expected to invest in
Turkeys wireless market.
Also, Turkey ranks 12th among heavy manu-
facturers and 9th among light manufacturers (a
jump from below 20th place). In the automobile
sector, companies consider the country a viable
export platform for Europe. General Motors
(U.S.) plans to restart its production facilities in
Turkey, and Hyundai is expanding its already-
significant investment there to meet growing
demand in Europe.
France. France drops from 6th to 14th place
in the Index. Last year, FDI inflows into France
declined 43 percent. Looking ahead, France may
see fewer FDI commitments: German, U.S.,
Dutch, Swiss and Italian investors all express less
interest in the French market, with manufactur-
ing investors the most pessimistic.
Frances brewing economic patriotism has
surprised investors. For example, PepsiCos (U.S.)
8 UNCTAD preliminary figures for 2005 reveal that FDI inflows to Turkey increased 77 percent to $4.8 billion.
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bid for Groupe Danone, the French food and
beverage firm, and HPs decision to shed work-
ers from its French subsidiary produced strong
responses from the government. They also inten-
sified the countrys ongoing debate over main-
taining its social model amid globalization. The
government expanded its list of strategic sectors
that are off limits to foreign investors, and passed
legislation that restricts shareholder rights and
helps French firms defend against hostile take-
overs. In 2004, the government helped thwart
Novartis (Switzerland) from acquiring Aventis
and government intervention blocking an Italian
takeover bid for Suez SA further fanned investor
concerns.
French FDI inflows declined last year due
to lower equity and intra-company debt trans-
actions. However, the actual number of FDI
projects in the country increased, according to
Invest in France, the economic development arm
of the government. This reveals a decline in the
number of large M&A deals, possibly due to
rising political and public sentiment opposing
such transactions.
France ranks 7th among wholesale and retail
investors, up from 10th place. FDI confidence in
France is strongest among food and apparel retail-
ers. And despite a rise in oil prices, consumer
confidence has not waned. BC Partners Ltd (U.K.)
spent $1.7 billion to acquire Picard Surgeles SA,
Frances top frozen food retailer. The French cloth-
ing market is expected to be worth $46 billion by
2009. An increase in the working-age population
combined with more women in the workforce is
expected to spur growth in this segment.
Electric and gas investors rank France 11th
in the Index, down from 10th place. Weak public
finances and sluggish growth have pressured the
government to sell key companies. In 2005, the
government sold stakes in France Telecom and
Gaz de France and expects to move forward with
the partial-privatization of Electricit de France.
However, investors initial enthusiasm for owning
shares in the nations utilities has waned, with the
government reducing the original sale price and
now planning to retain 85 percent ownership.
Spain. FDI continues to play a major role in
the Spanish economy. Market liberalization and
EU accession, which began in the late 1980s,
have led to macroeconomic stability, growth and
restructuring of the industrial base. Despite the
global FDI recession since 2000, FDI inflows to
Spain have held strong in recent yearshitting
an all-time high of $44 billion in 2002.
Increasing competition, however, undermines
the countrys future FDI potential. Facing stiffer
competition from Eastern Europe and Asia,
Spains ranking dropped for a third year in a
rowfalling from 7th place in 2002 to 17th in
2005. FDI inflows to Spain declined from $29
billion in 2003 to $18 billion in 2004, with many
foreign companies liquidating previous invest-
ments. Labor costs are part of the problem. Wages
in Spain are more than three times higher than in
Poland, the Czech Republic and Hungaryand
the country is not achieving higher productivity
rates to justify its higher wages. In fact, Spain is
the only OECD country to record negative pro-
ductivity growth rates over the past decade. Heavy
manufacturing investors downgraded Spain from
9th to 14th place.
Wholesale and retail investors rank Spain
their 10th most attractive market globally
up from 12th in 2004. Retailers are attracted
to Spains rising incomes per capita and retail
growth rates that surpassed the EU average for
most of the 1990s. The recent housing boom is
supporting growth as well. Decathlon (France),
IKEA (Sweden), Ahold (Netherlands), Carrefour
(France), Auchan (France) and Toys R Us
(U.S.) have helped transform the retail business
landscape in Spain. Although the market remains
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fragmented, Spain will likely see further consol-
idation and more large-scale malls, supermarkets
and retail outlets.
Telecom and utilities investors rank Spain
their 10th most attractive investment location
down from 9th in 2004. The entrance of Vodafone
and Frances Orange stirred-up the Spanish tele-
com market and gained the attention of foreign
corporate investors and private equity firms.
In November 2005, private equity investors
financed local operator Onos acquisition of Auna
to form a new company to challenge incumbent
Telefnica. France Telecom purchased Amena,
Spains third-largest mobile operator, which was
spun-off from Auna.
Spains R&D spending as a share of GDP is
the lowest in Western Europeeven the Czech
Republic invests more in R&D than Spain. Global
investors prefer India, China, Poland, Brazil and
Russia over Spain as an R&D location. Limited
access to seed capital and a high regulatory burden
have stifled new enterprises and entrepreneurial
activities.
In addition, Spain is slow to innovate. While
Spain has highly trained scientists and engi-
neers, they have limited links to industry and
ICT investments. To help address this prob-
lem, the Catalan government is sponsoring the
Barcelona Biomedical Research Park to recruit
both Spanish and foreign scientists and link
them with biotech venture capitalists in the
United States and Europe.
Italy. Foreign investment in Italy has risen
slightly from $16.4 billion in 2003 to $16.8 bil-
lion in 2004.9However, this is relatively low by
Western European standards: On a GDP basis,
FDI is three times higher across the EU-15 than
in Italy. Global investors rank Italy the 19th most
attractive FDI location compared to 9th place in
2004. Although North American and European
investors express less interest in the Italian market,
German investors put Italy in 10th place. The
government has implemented reforms for labor
and pension, but not for professional services.
Italy ranks 16th among financial services
investors. The Central Banks intervention in
the bidding war between Banca Popolare Italiana
and ABN AMRO (Netherlands), which are both
seeking to acquire Banca Antonveneta, could be
undermining foreign investor sentiment.
Electric and gas investors consider Italy the
3rd most attractive FDI destination globally. Italy
is among Europes largest importers of electric-
ity, but increasing demand is putting a strain on
the power grid links to France and Switzerland,
leading to blackouts and shortages. Since 2002,
when the Italian government liberalized its
electric and gas market, foreign investors have
been entering the market, led by Electricit
de France (France) and Electrabel (Belgium).
The government is expediting liberalization and
investment approval for more thermoelectric
Traditional operational risks such as government regulation,and financial, political and social instability,appear to be
less threatening in 2005 compared to previous years.
9 UNCTAD preliminary figures for 2005 reveal that FDI inflows to Italy decreased to $13 billion.
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generation plants, and is expected to sell an addi-
tional 10 percent of its stake in Enel, the state
electricity firm.
Transport services investorsair, sea and
land carriers and logistics services firmsview
Italy as their 8th most attractive FDI location
again this year. Italys robust tourism industry
continues to draw in these investors. The
expected privatization of the countrys freight and
intercity travel markets, and continued liber-
alization of roadways, will improve efficiency
and likely increase investments. The creation of
independent authorities to oversee the countrys
19 ports and privatization of port services have
helped position Italy as a more competitive hub
in the Mediterranean region.
Romania. Romania enters the top 25 most
attractive FDI locations for the first time, rank-
ing 25th. Italian and Spanish investors are the
most bullish on Romania, ranking it their 4th
and 6th most preferred FDI location, respectively.
Romania ranks 5th among electric and gas inves-
tors, as liberalization continues to offer acquisi-
tion opportunities. E.On Energie (Germany),
Enel (Italy) and CEZ (Czech Republic) are
moving into the distribution market. Investors
are attracted to Romanias substantial oil and gas
reserves and large-scale, well-developed refining
industry. Petrom was acquired by the regional
oil player OMV (Austria), the countrys largest
post-communist privatization. Gaz de France
recently won the tender for the countrys major
gas distribution and supplier Distrigaz Sud. The
anticipated privatization of electricity generators,
Termoelectrica and Hydroelectrica, may also be
spurring investor interest.
Romania ranks 10th among light manu-
facturing investors, up from below the top 25.
The electronics, paper and furniture segments are
keen on Romania and want to benefit from its
low-costs and skilled labor force.
Asia
Asias FDI inflows reached $155.5 billion, an
unprecedented $48.6 billion increase over the
year before. Asia is attracting nearly one in four
global FDI dollars compared to only one in 10
in 2000. The top five host economiesChina,
Hong Kong, Singapore, South Korea and India
account for 80 percent of the flows to the region.
Although greenfield investments continue to be
the dominant form of FDI to the region, merg-
ers and acquisitions are playing a more important
role. In 2004, cross-border M&A deals amounted
to $25 billionup from $22 billion in 2003
and were primarily concentrated in China, South
Korea and Hong Kong.
China and India are considered the worlds
1st and 2nd most attractive FDI locations
globally. China held the top spot for the forth
year in a row and India rose from 3rd to 2nd
place, surpassing the United States. Hong Kong
and South Korea dipped slightly from 8th to
10th and 21st to 23rd, respectively. Singapore
and Thailand maintained their positions at 18th
and 20th place.
Despite an additional 1.5 billion people in
the developing world (from 1981 to 2001), the
number of extremely poor people in these coun-
tries declined by more than 375 milliona feat
unimaginable two decades ago and largely the
result of progress in China and, to an extent,
India. China and India are attractive to CEOs
worldwide due to their strong growth rates, grow-
ing consumer populations, and low-cost but
highly educated labor pools. Pro-FDI reforms
and accelerated integration into the worldwide
IT network have made both countries more
attractive to investors.
China. China maintains its lead in the Index
for the fourth consecutive year. China attracted
$60.6 billion in FDI in 2004, the highest among
all developing economies. Although total inflows
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to China are much lower than to the United
States, China has a much higher number of green-
field FDI projects. The United States had 578
such projects in 2004, while China had 1,529.
The Chinese economy continues its robust
development, growing by 9.5 percent in the
second quarter of 2005. Total growth in 2005
exceeded expectations at nearly 10 percent, with
robust growth expected into 2006.
Once again, China is the top FDI location
for first time-investors, with more than half (55
percent) of investors expected to make first-
time investments there over the next three years.
This is significantly higher than the 43 percent
of investors that expected to invest in China for
the first time in 2004. One in five FDI dollars
for first-time investments will be committed to
the Chinese market. China has successfully over-
come the perceived risk associated with first-time
market entry, which is typically the biggest barrier
to generating new FDI.
Implementation of World Trade Organization
(WTO) requirements is fueling investor interest,
as is continued liberalization and deregulation
in banking, insurance, telecommunications, and
wholesale and retail segments. Policy changes to
increase foreign ownership and reduce or elimi-
nate geographic restr