Rise of the Green Dragon: China Tops 2012 Foreign Direct Investment Confidence Index

non-Imperial Chinese dragon, Shanghai"It's little surprise that emerging markets fare well in the rankings, considering the economic turbulence in the developed world." -- A.T. Kearney 2012 FDI Confidence Index

Sounding a note of cautious optimism, A.T. Kearney, a global management consultancy, has released their 2012 Foreign Direct Investment (FDI) Confidence Index, saying that the "prospects for near-term recovery are still shaky more than three years since the onset of the global economic crisis, and debt crises loom large." China holds on to the top spot.

Launched in 1998, the FDI Confidence Index is based on statistics provided by the United Nations Conference on Trade and Development (UNCTAD) and data collected from surveys of executives from companies spanning 17 industry sectors across 27 countries, representing over USD 1 trillion in annual global sales. The survey has had a good track record: One year after the release of the index, the top five nations on average receive 35 percent of global FDI inflows, while the top ten capture at least half of that investment.

MODEST OPTIMISM AS DEVELOPING WORLD GAINS MOMENTUM

"FDI flows have picked up slightly in the past two years as investors cautiously reenter the markets," A.T. Kearney said in a statement. "However, this modest optimism could quickly revert to retrenchment as investors weigh potential upside opportunities against downside risks."

Of the top 10 nations in the index, half are developing nations. First-place China assumed industrialized country status last year, according to the International Monetary Fund's World Economic Outlook Report, which was released in April 2011. The five developed nations in the top 10 are Germany (5), Australia (6), Singapore (7), the United Kingdom (8) and the United States, which slipped from second to fourth place. Canada fell out of the top 10, slipping from 9 to 20.

EMERGING MARKETS: A MIXED BAG OF SUSTAINABLE FINANCE

While the United Nations Department of Economic and Social Affairs (UN DESA) noted in the July 2011 report "The Great Green Technological Transformation" that "ountries such as China, India and Brazil are already playing a leading role in developing, manufacturing, deploying and exporting (including to developed countries) various green technologies (such as solar panels, wind turbines and biofuel technologies)," the emerging markets of the developing nations in the top 10 -- India (2), Brazil (3), Indonesia (9) and Malaysia (10) -- represent a bit of a mixed bag in terms of sustainable development and green investment.

Having remained a surprisingly calm archipelago amidst the global financial storm and surging with a GDP growth rate over 6 percent, Indonesia is well-poised to be a model of sustainability for the developing world. Malaysia is also experiencing strong growth at 7.2 percent, but though the government allocated an additional USD 100 million towards the Green Technology Financing Programme, deputy Finance Minister Donald Lim Siang Chai slammed his nation's banks for their lack of interest in approving financing for green investment.

And while offering a large and growing middle class market familiar with a Western way of life -- around 50 million, growing to over 580 million by 2025, according to McKinsey & Company -- India also presents a prickly patch for the sustainable investor. A 2009 TERI-Europe report found that the nation "has limited domestic sustainable investment market or infrastructure in the listed equity space." During the four-year period leading up to 2008 (the most recent year with available data), the Indian government spent a mere USD 57 million in RD&D (research, development and deployment) on renewable energy sources, while the United States government spent nearly USD 700 million during the same period. In July, United Nations Under-Secretary-General for Economic and Social Affairs Sha Zukang said that India would require a staggering USD 50 billion for the appropriate incremental green investment. It is clear that the private sector is going to have to pony up a majority of that amount if the world's biggest democracy is going to participate in the overall global transition to a low carbon economy.

THE GREEN DRAGON ROARS, SUSTAINABLY

China dominates the world on total public and private spending on energy-related RD&D. From 2004-2008, it spent almost USD 15 billion, compared to Brazil's USD 1.6 billion and India's USD 1.8 billion. In 2010, China represented a third of the world's public market investment in clean energy, with USD 5.9 billion, according to the World Economic Forum. In comparison, the American public market invested USD 2.9 billion, representing only 17 percent of the global total. For investors looking to make an impact in cutting-edge solutions in the areas of renewable energy, energy efficiency and electricity transmission, distribution and storage, the lure of China's green dragon will be hard to resist, especially considering the continuing fiscal travails of Europe and the United States.

Regarding the falling FDI confidence in the American market, A.T Kearney notes that "the political gridlock on fiscal policy and continued uncertainty about the economic outlook weigh heavily on investor sentiment. For similar reasons, Europe also suffers from poor investor morale." Could the world's emerging markets drive the global green economy? Considering the fundamental importance of the American and European economies, probably not for some time. But if the West doesn't get its finances in order, it will be green with envy as FDI and domestic public and private capital investments pour into emerging markets.

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NOTES

Laudincina, Paul, and Erik Peterson, Johan Gott and Amanda Kozlowski. 2012 A.T. Kearney Foreign Direct Investment (FDI) Confidence Index. New York: A.T. Kearney, December 6, 2011.
Ibid.
Ibid.
Ibid.
International Monetary Fund. World Economic Outlook: Tensions from the Two-Speed Recovery. Washington, DC: International Monetary Fund, April 2011.
A.T. Kearney. 2012 A.T. Kearney FDI Confidence Index, Fig. 1. New York: A.T. Kearney, December 2011.
United Nations Department of Economic and Social Affairs, World Economic and Social Survey 2011: The Great Green Technological Transformation. July 2011.
Forbes Magazine, "Best Countries for Business - Malaysia." October 2011.
CleanBiz Asia, "Another $100 million for Malaysia's green tech but banks lack interest." May 5, 2011.
Farrell, Diana, and Eric Beinhocker. "Next big spenders: India's middle class." Newsweek International, May 19, 2007.
International Finance Corporation. Sustainable Investment in India. May 2009.
Ibid., 7.
PTI News, "India needs USD 50 bn for incremental green investment." July 5, 2011.
Ibid., 7.
World Economic Forum, Green Investing 2011: Reducing the Cost of Financing. January 2011.
Ibid., 1.

image: non-Imperial Chinese dragon, Shanghai (credit: Leonard G., Wikimedia Commons)

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