India tops the chart in terms of its attractiveness to foreign investors among the list of 110 countries, while China is ranked 65th and US is placed at 50th on the issue of favourable conditions for global investments, according to latest study based on the profitability index.
The ranking takes into consideration three factors for measuring the baseline profitability index (BPI) which ultimately leads to the success of a foreign investment. First, how much the value an asset grows the safeguards to preserve the value of the asset and the ease of repatriation of sale proceeds of the asset in question.
The BPI study combines all the measures for each of these parameters which indicate the degree of attractiveness for foreign investment.
In the 2014 index, India was ranked sixth and Hong Kong topped the BPI chart.
“Where exactly should the investors put their money? The BPI is back for its third year with some answers, and Narendra Modi’s India is the place to start,” says Daniel Altman, creator of the index and an adjunct professor at New York University’s Stern School of Business, in a write up in the Foreign Policy magazine.
Favourable factors are the key
He clarifies that economic growth alone doesn’t determine the return on investment for there are factors like financial stability, corruption, physical security, expropriation by government, capital controls, exploitation by local partners and exchange rates, all of which do play their roles in shaping the climate for global enterprises.
“Thus putting all of these factors together gives a better idea of how big the return will be when it finally reaches your pocket,” he writes.
The big story in the BPI in 2015 is “India coming out on top, with growth forecasts up, perceptions of corruption down, and investors better protected following the election of a government led by Prime Minister Narendra Modi.”
Local policies, practices do matter
A high ranking indicates high returns on investments and also the improved economic institutions in that country.
The BPI study also compares how local policies and conditions affect the investment in different countries.
And the value of the principal and the return will change depending only on where the investment is made.
Local factors like bureaucratic hassles and corruption can erode profits. These include payment of bribes and kickbacks, the risk of which is compared across countries using the Transparency International’s Corruption Perceptions Index, a measure for the perceived levels of public-sector corruption worldwide. In 2014, the country was at the 85th position out of 175 countries as compared to its ranking of 94 out of 177 in 2013.
World Bank index
BPI calculation also uses an index of investor protection compiled by the World Bank. In 2014, the average BPI score across all countries was 0.99; this year it is 1.03 — meaning the expected returns over the next five years are about three-quarters of a per cent higher a year.
The calculation of the BPI is an imperfect exercise fraught with assumptions, Mr. Altman says.
“For example, how does a survey about perceptions of corruption translate into likelihoods of having to pay bribes, and how big might those bribes be?” he wrote when he first introduced the index.
In 2014, the average BPI score across all countries was 0.99; this year it is 1.03 — meaning the expected returns over the next five years are about three-quarters of a per cent higher a year.