Investors will Prioritize the Safety of Developed Markets, Fleeing Emerging Economies Post-COVID

Foreign direct investment will plummet in the year ahead as a result of COVID-19 and the nature and timeline of recovery remain highly uncertain, according to The 2020 Kearney Foreign Direct Investment (FDI) Confidence Index® from global strategy and management consulting firm Kearney.

The survey was in the field as COVID-19 was starting its deadly spread across the globe, with market shocks just beginning to emerge, and it captures a moment in time in which the world was on the brink—as it was entering a great storm.

At the outset of the survey period, before the spread of the virus, business leaders were reasonably bullish about the global economy and the future of direct investment.

COVID-19 appeared to be contained in Asia. However, as investors realized they were “entering the storm” in the last two weeks of the survey, investor confidence predictably declined across the board—for developed, emerging, and frontier markets alike, mirroring the rapid outbreak of the pandemic.

Between the first two weeks of the survey and the last two weeks, scores for each of these categories of markets all fell 25-33 percent.

Paul A. Laudicina, Founder of The FDI Confidence Index

“The pandemic and its subsequent economic shocks show just how quickly and profoundly the external operating environment can change.

Some markets will recover faster than others, and this likely explains why there appeared to be a return to the fundamentals—to large, more stable markets with more predictable political and regulatory structures.

Developed markets will continue to do well this year, likely because they show strength in the factors that investors tend to prioritize, including an attractive investment environment and strong technological infrastructure,” says Paul A. Laudicina, founder of the FDI Confidence Index and Kearney’s Global Business Policy Council.

These preferences also explain the enduring appeal of the United States to foreign investors, which continues its longest run in the top position on the Index, dating back to 2013.

The country offers a business-friendly regulatory environment, market size, and technological infrastructure.

Investors rank the availability of quality targets as the most important factor behind increasing FDI while pointing to macroeconomic stability as a top hindrance.

These responses suggest that investments will likely occur in developed markets where these factors are generally stronger—and where the damage from COVID-19 is expected to be comparatively lower.

Erik Peterson, Managing Director of The Global Business Policy Council

Adds Erik Peterson, managing director of the Global Business Policy Council and co-author of the study: “Emerging and frontier markets will suffer much more at the hands of COVID-19.

A confluence of factors is at play, including inadequate medical infrastructure, limited fiscal options, a significant debt overhang, and higher levels of poverty overall.

Many of these countries struggle with limited fiscal space and economic flexibility as well as high exposure to exchange rate fluctuations, which are exacerbated by US-denominated debt levels.”

As a result, only three emerging markets rank on the Index this year: ChinaBrazil, and the United Arab Emirates—their lowest share in the Index, but the same as last year. And while China remains the highest-ranked emerging market on the Index—a distinction it has held consistently since 1999—this year it slipped to its lowest-ever rank in the history of the Index.

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