Foreigners are increasingly cautious about investing in developing countries amid continued global economic and political turbulence, according to a World Bank survey.
The World Investment and Political Risk 2013 report found macroeconomic instability and political risk ranking neck-and-neck as top concerns for investors as they plan over the short and medium terms.
The top three factors in investment decisions are economic stability, access to qualified staff and political risk.
Despite the misgivings, the survey said nearly half of respondents expect to increase their investment in developing countries over the next 12 months, with the figure rising to 70% when the horizon is extended to three years.
The fifth annual survey said breach of contract and regulatory risks once again topped political risk concerns, based on actual experience as well as sentiment.
The report described the continued level of investor caution as a boon for the political risk insurance industry. The dramatic rise in political risk insurance issuance of recent years has continued, up 33% in 2012 and on track for similar growth in 2013.
Growth in political risk insurance has once again exceeded the rise in foreign direct investment (FDI) in developing economies over the same period.
Political risk not only affects foreign investment intentions based on investor perceptions, but also the companies that have actually invested abroad.
For example, the 2013 Association for Financial Professionals Risk Survey found political risk ranked fourth among 20 factors expected to have the greatest impact on earnings over the next three years.
Due to the retrenchment in FDI to the large economies, overall FDI in 2013 is showing marginal improvement, with East Asia and the Pacific remaining the biggest-gaining region in the developing world with an estimated US$320 billion.
The gain is only 2% on 2012, however, as growth in many of the top recipient countries moderated. China, with $253 billion in 2012, was again the top FDI destination among developing countries, though that figure marked a 9% decline from the previous year.
Europe and Central Asia saw the biggest declines as economic growth stalled.
The World Bank projects an overall FDI decline in 2014 and a rebound of 12% in 2015, as developing countries continue to offer favourable medium-term growth.
The 2015 recovery would be driven by economic improvement in the euro zone and resource-rich countries in light of rising commodity prices.
Rallying GDP in high-income economies like Japan, a traditional investor in East Asia and the Pacific, is expected to contribute to an estimated inflow of $345 billion to the region in 2015.
While not likely to affect the top-line FDI number, better growth prospects for Asean members and new investment opportunities emerging in Myanmar and Laos also bode well for the region.
Thailand ranks eighth among developing countries by multinational firms invested.