Global investors appear to be shunning emerging markets. This is true not only for “hot money” flows in financial markets in recent weeks, but also for longer-term foreign direct investment (FDI) flows. Emerging markets account for their lowest-ever share of positions on this year’s A.T. Kearney FDI Confidence Index. Investors we surveyed are instead laser focused on opportunities in developed markets. But this focus is misplaced. Emerging markets present compelling investment opportunities in the current environment—if you know where to look.
Economic and demographic trends highlight the long-term FDI opportunities in emerging markets. Although economic growth in both developed and emerging markets has accelerated recently, developed markets are expected to slow again after this year. In contrast, emerging markets will keep accelerating. And, longer term, populations in emerging markets will continue to expand—providing both a growing labor force and increasing numbers of consumers—while developed market populations will stagnate or contract.
Investors seem to recognize these strengths. While 37 percent of investors plan to maintain their current emerging market investments, 44 percent report that they are seeking new investment opportunities in emerging markets. Notably, this is higher than the 40 percent seeking new opportunities in developed markets. It is clear therefore that investors are broadly interested in investing in emerging markets.
But only four emerging markets make it onto the list of the top 25 markets for investor intentions over the next three years: China, India, Mexico and Brazil. This suggests that, beyond the largest most obvious economies, investors do not agree on which of the dozens of emerging markets present the most promising opportunities. This may in part be due to risk aversion thanks to nearly a decade of sub-par global economic growth and rising geopolitical tensions. But it also seems like investors are facing a choice paradox.
Which other emerging markets should be on investors’ radar? A high-level regional analysis of the top factors that investors tell us they consider when choosing where to invest reveals 14 emerging markets that are worth a second look.
Regulatory transparency and lack of corruption is the most important factor that investors considering when choosing to make their investments. It is therefore not surprising that developed markets dominate the FDI Confidence Index this year. But many emerging markets also have relatively transparent and business-friendly regulatory environments. Eastern Europe is the region that on average performs best on regulatory quality in the World Bank’s Worldwide Governance Indicators. Poland and Georgia are particularly strong on this measure—and they also lead the region on control of corruption.
The second most cited factor that investors consider when choosing where to invest is tax rates and ease of tax payment. One region that stands out in this regard is the Middle East and North Africa. The average time to pay taxes is the lowest of any emerging market region, according to data from the World Bank’s Doing Business indicators. And average tax rates are also low. The standout performers in the region are Qatar, Saudi Arabia, and the United Arab Emirates.
Investors also point to cost of labor as an important consideration. Although many emerging markets are competitive on this measure, two regions stand out. The first is Sub-Saharan Africa, which has the lowest per unit labor costs and the strongest labor force growth projections of any region in the world. Investors should take into account labor productivity as well as cost when choosing where to invest, though. Of the region’s largest economies, those with the strongest growth in output per worker over the past five years according to the International Labour Organization are Ethiopia, Tanzania, and the Democratic Republic of the Congo.
The second missing region on this year’s FDI Confidence Index to explore for labor cost considerations is Southeast Asia. While labor costs are higher than in Sub-Saharan Africa, these markets’ proximity to China and their integration in the Chinese value chain makes them attractive for FDI—particularly as labor costs within China continue to rise. Among the most competitive economies in the region on labor cost are the Philippines, Vietnam, Laos, and Cambodia.
Security is the final factor that rises to top of investors’ calculations this year. While many emerging markets are more secure today than in past decades, the region with the highest average score on the World Bank’s political stability and absence of violence indicator is Latin America. And, perhaps more so than for any of the other three factors, an economy’s neighborhood matters when it comes to its security environment. Chile and Argentina score the highest on this measure among the eight economies that account for more than 90 percent of the region’s output.
With so many investors focused on a small number of developed markets, competition is likely to be fierce and investment returns may not live up to expectations—particularly as economic growth cools. In contrast, many emerging markets that present compelling opportunities for FDI appear to be getting overlooked. Investors should take a second look at the emerging markets space for specific economies that fit the criteria they use in their FDI decisions. Long-term investments in strongly-performing emerging markets could provide companies with an opportunity to differentiate themselves from their competitors while simultaneously diversifying their sources of future growth.
Courtney Rickert McCaffrey manages thought leadership for A.T. Kearney’s Global Business Policy Council and is an author of the 2018 A.T. Kearney FDI Confidence Index.
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