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Claude Lopez lores
Claude Lopez
Director, International Finance and Macroeconomics Research
Banking and Capital Flows and Capital Markets and Finance and Global Economy and Systemic Risk
Dr. Claude Lopez is director of research at the Milken Institute, leading the international finance and macroeconomic research team. She investigates the linkages between the financial sector and the real economy,focusing on three core areas: systemic risk, capital flows, and investment. 
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2016 Global Opportunity Index and more….

By: Claude Lopez
September 16, 2016
   
   

In his keynote speech for the G20 summit in Hangzhou, Chinese President Xi Jinping, stressed the need for member nations to build “an open global economy and continue to promote facilitation and liberalization of trade and investment.” Cross-border capital flows play a key role in supporting investment, and ultimately, in sustaining the broad-based economic growth called for in Xi’s remarks.

Until recently, regulators tended to favor foreign direct investment (FDI) because direct investment in the country’s productive assets has traditionally been viewed as more stable than portfolio flows. Yet recent strengthening of portfolio flows to emerging markets and an investment gap in many countries are forcing a reassessment: Market-based investment cannot be ignored and could help develop public-private partnerships to facilitate a more diversified and even allocation of international financial resources.

In this context, having a better understanding of the underlying factors that shape nations' attractiveness to foreign investors becomes a necessity. The 2016 edition of the Milken Institute Global Opportunity Index (GOI) tracks countries’ performances around five categories:

  • Economic Fundamentals
  • Financial Services
  • Business Perception
  • Institutional Framework
  • International Standard and Policy

Going beyond the ranking itself, the latest GOI report focuses on Asia and provides a closer look at the composition of the region’s capital inflows — with a particular emphasis on FDI and portfolio investment.

Global capital flows by destination region

charts GOI

Sources: IMF International Financial Statistics; authors’ calculations. 

Why Asia?

Well, in the last two years, Asia has replaced Europe as the main destination for FDI after showing remarkable resilience to the global financial crisis. Yet, the region’s economic heterogeneity contrasts with its numerous trade agreements and highlights the need for financial integration to maintain and strengthen regional growth. Furthermore, the financial integration and development of Asia is important not only for the region itself but for the world. As the fastest-growing region for the near future, Asia may be not only the global driver of growth, but the lender of tomorrow for many developed economies.

What are the main outcomes?

Asia, home to top global performers such as Hong Kong, Japan, South Korea and Singapore, ranks very well when compared to the rest of the world. Yet Asian countries’ performance is quite heterogeneous when compared to Europe and North America. 

Distribution of global and sub-category rankings
all regions asia2

Europe N America2

A closer look at the capital flows throughout the region confirms the differences in the ability of various countries to attract foreign investors. ASEAN provides an interesting illustration, with Singapore and Malaysia playing a key role in attracting foreign investment and in investing in the 10-member economic community.

Naturally, the region would benefit from harmonization in the financial infrastructure and support systems and from a deepening of its financial markets. Consideration of countries’ comparative advantages and their complementarity (for example in terms of market size and stage of demographic transition as well as in areas of comparative advantage) is a good starting point when designing the steps.

Finally, several barriers to financial integration remain, including the potential resurgence of currency mismatch, rising corporate and household debt, and lack of coordination on capital controls and financial regulations.

In the coming weeks, Currency of Ideas will dig deeper into Asia’s capital flows to explore the compositions and patterns illustrated in our report “2016 Global Opportunity Index — Beyond FDI: Lessons from Asia.”

 


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