Foreign investors, attracted by stronger economic growth in developing countries while mindful of risks, remain relatively optimistic about these destinations in the short term, according to the results of a survey released Thursday in a report by the World Bank’s Multilateral Investment Guarantee Agency (MIGA).
The report, World Investment and Political Risk, notes that half of the survey’s respondents plan to increase investment in developing countries in the next 12 months.
This sentiment dovetails with Foreign Direct Investment (FDI) trends that show developing-country flows continue to account for a substantial share of global FDI: in 2012 they are estimated to be 36 percent of inflows and 14 percent of outflows.
FDI to developing countries is expected to rebound in 2013 to exceed pre-2008 highs.
New challenges, especially the ongoing sovereign debt crisis and recession in the euro zone, have slowed the flow of FDI from traditional sources.
However, FDI from new investors based in developing countries has risen significantly in recent years, and is expected to reach a record level this year.
Notably, about a quarter of developing countries’ outward FDI currently goes into other developing countries (“South-South” investment).
“Our report points to an important factor that has positive implications not only for developing countries, but also for the global economy,” said Izumi Kobayashi, MIGA’s Executive Vice President. “FDI into developing countries has remained a significant engine of growth even as the global economic picture has weakened.”
The fourth annual MIGA-EIU Political Risk Survey reveals that investors are concerned about the ongoing weakness in the global economy and this remains a top constraint for their plans to expand in developing countries in the short term.
According to the report, this picture would change over the medium term, as foreign investors rank political risk as the most significant constraint to investing in developing countries over the next three years.
Significantly, the report found that both sovereign default risk and expropriation – among other political risks – remained dominant issues for foreign investors deciding their investment plans.
According to the survey, for the Middle East and North Africa in particular, political instability has taken a toll on investment intentions and has elevated perceptions of political risk.
“This is true not only for the Arab Spring countries, but also for other countries in the region,” said the report.
Political and economic stability are inducements for corporate investors to return, but the findings of MIGA’s survey indicate market opportunities are more important.
By examining trends in the political risk insurance industry in general, the survey found that, between 2008 and 2011, issuance of political risk insurance increased by 29 percent for Berne Union members, an increase that has exceeded that of FDI flows into developing countries over the same time period.
Aggregate premium rates have remained remarkably stable.
“This report calls attention to different dimensions of political risk and investment insurance’s role in keeping FDI on track,” said Kobayashi.