2017 Foreign Direct Investment (FDI) Confidence Index
04 May 2017
- Australian Economy
- International Investment
This article was written in conjunction with Kathryn Gillies.
AT Kearney’s FDI Confidence Index for 2017 shows that investors’ confidence in Australia remains strong. The Index ranks Australia in the top 10 for the seventh year in a row (ninth place this year, down from seventh place last year). Australia has only been outside the top 10 twice since the Index began in 1998.
The US retains its first place for the fifth year running, and Germany has overtaken China for the second place spot – its highest ranking in the history of the Index. The UK and Canada both retain their top 5 rankings for the third consecutive year (although individual rankings have changed slightly).
Although Australia’s overall ranking has slipped slightly this year, the outlook remains positive. Our economy is now in its 26th year of uninterrupted economic growth, and Australia also now holds the record among OECD countries for the longest period of recession-free growth. Further, the IMF is also now optimistic about the Australian economy, improving its forecast for Australia’s GDP to grow by 3.1 per cent in 2017 and 3.0 per cent in 2018, driven largely by accommodative monetary policies, supportive fiscal policies or infrastructure investment, improving sentiment following the upturn in commodity prices, and less drag from declining investment in the commodity sector.
Investors from Asia are particularly confident in investing in Australia, ranking Australia third in terms of markets where they are likely to invest in the next three years. Australia’s strong economic ties with Asia – with $408.7 billion in two-way trade with Asian Economies in 2015-16, led by China ($150.1 billion) our largest two-way trading partner – gives some explanation for this confidence.
In addition to the overall FDI Confidence Index, AT Kearney also ranks countries by investors’ optimism about the economic outlook. Here, Australia’s economic strength has helped to also support investor optimism about our economy, and place Australia in the top five economies about which investors are most bullish this year. Over a third (35 per cent) of investors are now more optimistic about Australia’s economic outlook for the next three years than they were a year ago. This is an improvement on last year’s report where 32 per cent stated they were more optimistic, and 2015 when just 28 per cent were more optimistic.
AT Kearney further reports the top three most important factors for investors when choosing where to invest are ‘General security environment’, ‘Efficiency of legal and regulatory processes’ and ‘Tax rates and ease of tax payment’. Australia is relatively strong on these factors, as highlighted in Austrade’s Benchmark Report for 2017 – we rank fifth in the world for overall economic freedom; our quality of judicial processes is rated the best in the world; our quality of governance is ranked among the best in the world; and we are ranked within the top 10 globally in terms of legal rights, strength of finance and banking regulations and risk of political instability. Australia’s tax burden is also relatively low compared to other developed countries, being the sixth lowest-taxing country in the OECD, in terms of tax revenues as a proportion of GDP.
How does this forward looking outlook compare to our international rankings on actual FDI inflows? According to preliminary results from the United Nations Conference on Trade and Development (UNCTAD), Australia was a top 10 destination for FDI in 2016. Estimated FDI inflows more than doubled in 2016, reaching an estimated US$44 billion and placing Australia in ninth position of all FDI host economies globally. Globally, UNCATD expect FDI flows to increase by about ten per cent in 2017.
The AT Kearney FDI Confidence Index is based on an annual survey, conducted by AT Kearney since 1998, that ranks which markets are likely to attract the most investment in the next three years. Respondents include over 500 global C-level business executives and regional and business leads in companies headquartered in 30 different countries with annual revenues of US$500 million or more. The selection of countries is based on United Nations Conference on Trade and Development (UNCTAD) data, and account for more than 90 percent of the global flow of FDI in recent years.
The Index provides a forward-looking analysis of which markets investors intend to target for FDI in the coming years. The Index is calculated as a weighted average of responses to questions on the likelihood of making a direct investment in a market over the next three years – high, medium or low. Countries are then ranked on a scale of 0 to 3 based on their attractiveness for foreign direct investments, where a score of 3 represents the highest level of confidence. Higher Index values indicate more attractive investment targets.
The full results are available online at www.atkearney.com/gbpc/foreign-direct-investment-confidence-index