According to a recent study by A.T. Kearney, “Investing in a Rebound” – Foreign Direct Investment Confidence Index 2010, Mexico improved from position #18 in 2009 to #8 in 2010.
In the two years old A.T. Kearney study, the firm examines the future prospects for international investment flows in the context of the recent tumultuous times.
The study says: “While conditions have improved, senior executives at the world’s largest companies remain wary of investing during the current climate, and few expect a full turnaround before 2011.”
The Foreign Direct Investment (FDI) Confidence Index tracks the impact of likely political, economic and regulatory changes on the foreign direct investment intentions and preferences of the leaders of top companies around the world.
With responses from executives from 44 countries and 17 industry sectors, the survey offers a unique window into present and future prospects for international investment fiows.
Following are excerpts of some of the major findings of the 2010 FDI Confidence Index survey pertinent to Mexico and its close competitors for FDI.
THE A.T. KEARNEY RANKINGS
The consulting firm’s study points out: “Amid the economic downturn of the past two years, several emerging markets remain attractive to foreign investors.
China, India and Brazil are in the top five of the 2010 Foreign Direct Investment (FDI) Confidence Index, while emerging markets with large consumer bases, such as Indonesia and Vietnam, also rank highly.”
“However, some smaller, more open emerging economies dropped in the rankings. For example, Hong Kong, a globalized economy”, according to the A.T. Kearney Globalization Index, “fell to 14th.”
“In Asia, investors are confident about China and India, the 1st- and 3rd-ranked countries, respectively, but the more advanced economies, Japan and South Korea, both fell out of the Index for the first time since its inception in 1998.”
“Meanwhile, Brazil continues to benefit from strong demand for major commodities such as iron ore and soybeans and sound economic management, and the largest economy in Latin America now ranks as the 4th most attractive destination for FDI. To the north, Mexico faces a number of domestic economic problems, including declining oil production and the loss of manufacturing jobs to Asia, yet it rises to 8th in the new Index as it remains a top destination for light industry and American companies seeking lower costs. In Europe, Poland and Romania move up to 6th and 16th, respectively, while Russia slips to 18th amid concerns that its pre-crisis boom times are now over.”
“Meanwhile, the developed world has benefited as investors seek cover during the worst recession since World War II. In particular, a fiight to safety has drawn investors to the United States, which moves from 3rd to 2nd place in the Index, highlighting the paradox in how international investors view the United States. Overall, the United States’ role as an investment safe harbor is clear, as the bullish ranking suggests. Investors made large purchases of U.S. Treasury securities during the height of the economic crisis, temporarily driving up the value of the dollar. On one hand, investors see lucrative investment opportunities in the United States. On the other hand, the longer-term attitude about the United States today is more pessimistic than in the 2007 survey.
In fact, more executives have a negative long-term outlook for the United States than for any other country”, explains the A.T.
Exhibit #1 shows the top 20 current year’s rankings of the firm’s FDI Confidence Index and their relative dynamics since last year.
THE AMERICAS The study indicates: “The United States continues to be the brightest investment destination in the Americas, as it has been since the first FDI Confidence Index in 1998. Latin American stalwarts Brazil and Mexico are always on investors’ radar screens, and both move forward to take 4th and 8th place, respectively. Brazil has weathered the economic storm well, and the government’s economic stewardship has been met with admiration by investors. In North America, Canada moves ahead into 9th place.”
The A.T. Kearney study points out: “After a brief stint out of the Index’s top 10, Mexico moves up to 8th this year and remains a top destination among light industry investors. Despite GDP contraction of 7.1 percent in 2009 and its worst economic performance since the 1930s, investors remain relatively upbeat about Mexico. After 15 years of NAFTA membership, Mexico ranks highly among middle-income countries, with a $1 trillion annual GDP. NAFTA has also deepened Mexico’s dependence on the United States, which consumes 85 percent of Mexican exports and is the source of half of its FDI. As the United States fell into recession, FDI fiows to Mexico plummeted. UNCTAD estimates that 2008 infiows of $21.9 billion fell to $13 billion in 2009.”
“Mexico may benefit in the wake of the crisis, as firms contemplate moving manufacturing facilities from the United States to Mexico to cut costs. Companies that have pursued this “near-shore” strategy (or have announced tentative plans to do so) include Whirlpool, Panasonic and Dell. European financial services companies have also made significant investments, including La Caixa of Spain, which acquired a 20 percent share of Grupo Financiero Inbursa for $2.2 billion, and France’s AXA SA, which purchased ING Seguros SA de CV for $1.5 billion. In the primary sector, Canada’s Goldcorp has made new investments of close to $2.2 billion in various mining projects.”
RECOVERY IN INVESTMENT FLOWS?
A.T Kearney is not overly optimistic about FDI fiows. The study explains:” Forty-eight percent of the companies in our survey are postponing investments, with the largest share of companies planning to wait between one and two years. Based on expectations for a slow recovery, many investors will bide their time until 2011, when most believe recovery will finally be complete and capacity can be added for a new period of economic expansion. Only 36 percent of companies, however, say they are building up capacity today to prepare for this rebound.”
“The recession is a driving factor for postponing investments, and it is clear that reduced FDI fiows are based on problems in the economy. Two-thirds of respondents cite uncertain future market opportunities as the major obstacle; other major obstacles include insufficient credit from banks (29 percent), company liquidity problems (28 percent) and difficulties getting credit outside of banks (23 percent). While the downturn has been felt in terms of employment and consumption, it is evident now that the supply side has also been hit, as FDI fiows are being delayed and investment is down.”
STAYING CLOSE TO HOME
The trend of “Regionalization” versus “Globalization” continues to map the plans of investors. Logistics costs are driving the world away from global manufacturing and services footprints to regionalized locations to better serve the markets.
Following is what the A.T. Kearney study found about this phenomenon: “Investors from Asia-Pacific, Europe and North America make up the majority of survey participants, and respondents from each of these groups rank China, India and the United States highly among top investment locations. However, each group also demonstrates a clear preference for near-abroad locations.
Asia-Pacific investors select China and Vietnam as their top two location choices, respectively, with India (4th), Hong Kong (5th), Indonesia (6th); Australia (8th) and Thailand (9th) trailing close behind. The United States also moves up among Asia-Pacific investors, to 3rd place from 7th, demonstrating the view that the United States is a center of relative stability.”
“For European executives, China, the United States and India are the top three destinations, but neighbors Germany (4th), Romania (6th), Italy (7th), France (8th), Poland (9th) and Russia (10th) are right behind. Russia falls among European investors, slipping from 3rd in 2007, while Germany makes a great leap. European investors see Germany with great favor this year: 69 percent of respondents who indicate a “high likelihood” of investing there are from Europe, the highest home region preference of any country in the ranking and an indication of confidence in its ability to adjust and recover.”
“North American investors see the United States as the leading investment location, and North American Free Trade Agreement (NAFTA) partners Mexico and Canada are 5th and 8th, respectively.”
Exhibit #2 of the A.T. Kearney FDI Confidence Index study shows the investor respondents’ top ten regional location preferences to invest.