Asia receives the highest FDI and China is the most preferred FDI location

Standard & Poor's Ratings Services last week issued a report that finds that the flow of foreign direct investment (FDI) into emerging market economies (EMEs) should continue over the next few years. Among the EMEs, Asia received the highest FDI in nominal terms for the seventh year in the row and China continued to be the most preferred FDI location.

The report, entitled "Recent And Expected FDI Trends In Emerging Market Economies," says that these FDI inflows reflect robust global growth, deepening globalization trends, rising competition and subsequent pressures for mergers and acquisitions, and ongoing improvements in the business environments of many EMEs.

According to Standard & Poor's credit analyst Helena Hessel, the rates of growth are unlikely to be as impressive as in the past three years (2004-2006), which followed a severe three-year drop (2001-2003) and reflected a particularly conducive global economic environment. "Nevertheless, we project that, in the absence of a significant geopolitical backlash, total global FDI inflows will reach US$1.5 trillion in 2008, surpassing the peak of US$1.4 billion achieved in 2000 and rising to US$1.7 trillion by the end of this decade," said Mrs. Hessel.

The report notes that, despite a continuing slump in FDI to developed countries, the impressive growth of inflows to EMEs resulted in a recovery in global FDI inflows in 2004. However, this trend has since reversed and the growth of FDI inflows to developed economies strongly outperformed that to EMEs in 2005-2006.

Being part of the EMEs, Asia received US$178 billion of FDI, representing 38% of total FDI inflows to EMEs in 2006. China, one of the fastest growing countries in Asia, attracted about US$70 billion of FDI in 2006 for the second year in a row. Until the end of the decade, China is likely to continue to attract the most FID inflows among EMEs in nominal terms.

Elsewhere in Asia, the rate of growth of FDI inflow to Hong Kong slowed to just 4.3% in 2006 after rising by 150% to US$34 billion in 2004 and 16.8% to US$39.7 billion in 2005. Singapore reported an increasing level of FDI in 2006 after a decline in 2005.

On the other hand, FDI to India increased by 43.9% to US$9.5 billion, reflecting its strong economic growth and increasingly liberal foreign investment policies. Thailand received US$7.9 billion in FDI in 2006, up 114.7% year-on-year, but this upward trend has changed dramatically after the military coup and the fast-deteriorating investment climate. Looking forward, China, Hong Kong, Singapore and India will remain the biggest beneficiaries of FDI inflows during 2007-2010.

Mrs. Hessel explained that the tendency of faster-growing inflows to developed countries compared to EMEs is expected to continue over the next few years. "The commodity boom that underpinned considerable FDI to resource-rich EMEs has reached a plateau," noted Mrs. Hessel.

"In addition, since the concentration of FDI into EMEs is relatively high, their absorptive capacity will diminish, reflecting the completion of large privatization programs (e.g., in Egypt, Morocco, and some Eastern European countries), maturation of their economies, declining competitiveness, and various institutional and business constraints (in Turkey and India)," she concluded.