In the immediate aftermath of the global financial crisis, one obvious truth is that locus of growth has shifted east. While the world frets over the stuttering recoveries in the USA and EU, most Asian economies have rebounded well, including a pick-up of FDI into and from these markets. The latest IMF World Economic Outlook expects growth in developing Asia to be 9.4% in 2010 and 8.4% in 2011. Contrast this with estimates for the USA of 2.6% in 2010 and 2.3% in 2011, and for the EU 1.7% in 2010 and 1.5% in 2011. A similar story will be found in the Global Economic Prospectsreport from the World Bank Development Economics Group to be launched on January 12.
A central question remains, however: Are these high growth rates and the high returns to investment, risk-neutral vis-à-vis investing in developed markets? Or other emerging-market regions? This question is pertinent for both commercial and political risk – but it is the latter to which I now turn.
MIGA (The Multilateral Investment Guarantee Agency, the political risk insurance arm of the World Bank Group) – recently released its annual World Investment and Political Riskreport. This report highlights that political risk remains a major determinant of FDI flows. The report also shows the importance of FDI into Asia, from Asia, and within Asia.
If we take two recent high profile publications from the World Bank Group (Doing Business and Investing Across Borders) – the evidence on the relative political risk of Asia is mixed. Doing Business 2011 shows East and South Asia as two of the most reforming regions when it comes to facilitating business enterprises. In the areas of ‘rotecting investors’ and ‘enforcing contracts’ (two key political risks) – East and South Asia are the second and third most hospitable regions to investors.
Whereas, Investing Across Borders shows Asia performing poorly versus other regions and the global average when it comes to key risks for foreign investors: investing across sectors; starting a foreign business; and access to industrial land; arbitrating commercial disputes.
In sum, Asia provides investors with huge markets and high growth rates - which explains the rapid investment flows (portfolio and FDI) into these economies seeking higher returns. While the Doing Business indicators show Asia as a relatively safe investment destination, Investing Across Borders indicates that the region is not particularly hospitable to foreign direct Investment. Global investors should be aware of the distinction when deciding where to make long-term investments.