Top five emerging markets capture foreign investors’ attention

The promise of high economic growth over the next four years and access to skilled workers made Brazil, Russia, India and China, the so-called BRIC countries, among the hottest emerging economies for foreign investment this year, research by global business consulting firm Grant Thornton suggests. But buoyed by a growing – and increasingly wealthy – consumer population, China was the most attractive emerging market to foreign investors this year, according to quarterly surveys. Thirty-one per cent of the 3,200 global businesses polled for Grant Thornton’s international business report said they considered expanding into China in 2012. India came in second with 24%. Brazil was third (21%); Russia was fourth (18%); and Mexico was fifth (15%).

Foreign investors still prefer Western Europe (38%) and the US or Canada (33%), but the top five emerging market hot spots combined were attractive to more than half of all businesses polled.

The BRIC countries also topped Grant Thornton’s index of high-growth economies, which ranked 27 markets by size, economic growth, import and export activity, and standard of living.

But several so-called “frontier markets” also stood out among the 27 foreign investment hot spots on the index, all for moving up in attractiveness in the past two years: Nigeria moved up nine places to 17th; Peru moved up five to 15th; Romania (18th) and Bangladesh (24th) moved up three spots; and Indonesia (seventh), Chile (12th) and the Philippines (23rd) moved up two spots.

The surveys also found evidence that a promising rank on the index may actually result in foreign investments. “Many businesses in mature economies are hoarding cash as a buffer against further economic shocks,” according to the Grant Thornton report that combines the survey results and the index.

But in emerging economies, investment activity bodes well for future growth prospects, the report says. “Healthier growth rates and higher levels of confidence are encouraging businesses in emerging markets to spend, take risks and grow their operations.”

The International Monetary Fund projected that a sluggish economic recovery in the US and the lingering sovereign debt crisis in the euro zone will slow the growth of mature markets to 1.5% next year.

Lower European demand is also affecting emerging and developing markets, but the IMF still projects those markets will grow 5.6% next year. Projections are even higher for developing markets in Asia, which includes China and India. The region is expected to generate 7.2% growth next year.

Over the next four years, the IMF projects that growth rates will increase to 6.2% in emerging and developing markets and 2.6% in mature markets.

Also, Grant Thornton’s survey found that many more businesses in emerging markets plan to invest in research and development, production plants and machinery, and buildings over the next 12 months than businesses in mature markets. And nearly twice as many businesses in emerging markets expect to step up hiring next year.

The surveys also determined:

• Latin America: Businesses in Spanish-speaking countries are interested in Brazil (45%), Mexico (40%) and other Latin American countries (53%). US companies are also looking closely at Brazil (42%), Mexico (39%) and other Latin American countries (44%).

• Developing Asia: China is particularly attractive to businesses based in mature markets (45%). Indian and Japanese businesses with international expansion plans are interested in Southeast Asian countries (45% from India, 74% from Japan).

• Middle East: The Middle East is very attractive to companies from Turkey (71%) and India (50%).

• Russia: Businesses looking to invest in Russia are most likely to be from Turkey (49%) and Germany (42%).

• Africa: 80% of South African companies are looking to expand in other parts of Africa, but Africa is also attractive to businesses in the United Arab Emirates (34%) and Turkey (33%).

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—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.