Global Investing

Where will the FDI flow?

For years the four mighty BRIC nations have grabbed increasing shares of world investment flows. But the coming years may not be so kind.  These countries bring up the bottom of the Economic Freedom Index (EFI) for 2012. Compiled by Washington D.C.-based think-tank The Heritage Foundation the EFI measures 10 freedoms —  from property rights to entrepreneurship – and according to a note out today from RBS economists, there is a strong positive link between a country’s EFI score and the amount of FDI (foreign direct investment) it can secure. So the more “free” a country, the more FDI inflows it can expect to receive — that’s what an RBS analysis of 2002-2008 investment flows shows.

So back to the BRICs. Or BRICS if you add in South Africa (part of the political grouping though not yet included in the BRIC investment concept used by fund managers). The following graphic shows Russia languishing at the bottom of the EFI, China just above Russia and India third from bottom.  Brazil is sixth from bottom while South Africa ranks two places higher.

At the other end of the spectrum is tiny Singapore. Its EFI score is double that of Russia and between 2002-2008 it attracted FDI equivalent to 50 percent of its economy. Russia in contrast saw negative net FDI (outflows exceeded inflows)

What comes next will be interesting. China grabbed the most FDI in absolute terms in the past decade (around $1.3 trillion or almost half the $2.1 trillion flows to the 21 leading EMs) but RBS notes this is slowing. That’s because China’s low-value manufacturing base is becoming less competitive relative to the rest of Asia and stringent restrictions remain in place in many sectors. Corruption, red tape and general business-unfriendliness prevail. ”The decreasing allure of China from a manufacturing perspective means the country is at risk of suffering a decrease in FDI inflows in coming years,” RBS writes. The bank also notes the nature of FDI into China is changing: half the 2011 flows went to real estate.

On the other BRICS:

India: RBS sees the FDI outlook clouded by a poor business backdrop, restrictions on foreign participation in many sectors, slow reform and  the lack of commodities.

from MacroScope:

Yet more lagging from Italy and Greece

At this stage in the euro zone crisis, we probably don't need to be reminded how uncompetitive the peripheral economies are. (Arguably, of course, they would not be economically peripheral if they were more competitive, but that is for tautologists to debate).  The United Nations, in the form of UNCTAD, has just pinpointed another weakness, however -- huge underperformance  in foreign directed investing, or FDI.

The numbers it has just released only go as far as 2010, so the real crisis cauldron has yet to come.  But they show that Greece and Italy have been punching way below their weight.

Greece has attracted a relatively small amount of foreign direct investment compared to other countries in the European Union (EU). In 2010, Greece’s share in the EU’s GDP was 1.9 per cent. In the same year, however, the inward FDI stock of Greece amounted to €26.2 billion ($35.0 billion), or less than 0.5 percent of the combined FDI stock of EU countries. Similarly, Greece’s share in the total outward FDI stock of EU countries was 0.4 per cent.