UNCTAD’s World Investment Prospects Survey 2014-2016 provides an outlook on future trends in foreign direct investment (FDI) by the largest transnational corporations (TNCs) and investment promotion agencies (IPA).

As reported in the World Investment Report 2014 (WIR14), UNCTAD projects FDI flows to rise in 2014-2016, mainly driven by investments in developed economies as their economic recovery starts to take hold and spread wider. However, the fragility in some emerging markets and risks related to policy uncertainty and regional conflict could still derail the expected upturn in FDI flows. Moreover, this prediction does not take into account megadeals such as the $130 billion buy-back of shares by Verizon (United States) from Vodafone (United Kingdom) in 2014, which will reduce the equity component of FDI inflows to the United States and affect the global level of FDI inflows.

Results from the World Investment Prospects Survey 2014-2016 (WIPS) support this cautiously optimistic scenario. According to this year’s WIPS, transnational corporations (TNCs) are aware of persistent downturn risks to the global economy and thus expressed uncertainty about the investment outlook for 2014 but had a bright forecast for the following two years. For the year 2016, almost half of the respondents had positive expectations and virtually none felt pessimistic about the investment climate.

As TNCs adopt a cautious optimism for the global outlook, FDI could rise in 2014-2016. However, the fragility in some emerging markets and risks related to policy uncertainty and regional conflict could still derail the expected upturn in FDI flows.

Responses to this year’s survey revealed that firms − mostly based in developed economies − are still cautious about recovery prospects in home economies and possible political uncertainties in emerging markets. This translated into a high share of investors (68 per cent) stating that they were neutral or undecided about the state of the international investment climate for 2014. However, almost half of the respondents (46 per cent) were confident about a positive global climate already for the year 2015, and 48 per cent of them expressed themselves as optimistic for the year 2016. The very low share of pessimistic answers suggests that while investors take into account possible risks in their investment plans they do not believe risks of a global recession can effectively upset the investment climate.

Investment promotion agencies (IPAs) were more optimistic in their assessment of the global investment climate and followed a similar pattern. While for 2014, IPAs also showed a high degree of uncertainty, with 45 per cent of respondents selecting neutral or undecided for the year, for the medium-term years, their expectations turned decidedly positive with almost 90 per cent of respondents being optimistic for 2016. Although the different perspectives on global investment climate largely reflect differences in the geographical coverage of the two surveys, IPAs tend to be more confident of their economic growth perspectives in spite of fragilities and recent political uncertainties.

The positive outlook on the investment climate is backed by confidence in the economic recovery. When asked about the principal factors positively and negatively affecting FDI flows in the medium term, TNCs in the survey put the state of the economy of both developed and emerging economies at the top of their list of positive factors. The state of the economy in the United States tops the positive factors list, followed by the economic conditions in BRICS (Brazil, Russian Federation, India, China, and South Africa) and other emerging economies, and in the 28 European Union economies (EU-28). This marks a big turnaround in investor sentiment especially with respect to the state of the European economy that last year was, in fact, at the top of their concerns. Other factors ranked among the most positively affecting FDI flows are the process of outsourcing and offshoring of manufacturing functions, regional integration, and changes in corporate tax regimes.

At the same time, uncertainty among investors about the global investment climate is related to a number of risks and political factors such as the rise of trade and investment protectionism, sovereign debt concerns, natural disasters, the threat of terrorism and the unwinding of quantitative easing measures that is behind much of the financial volatility in emerging economies (WIR14). The fact that political factors such as sovereign debt concerns are at the top of investors’ negative factors list corroborates the idea that firms are still not fully confident about the solidity and sustainability of the economic recovery, especially in their home countries.