New Delhi: India, overtaking the US, is now the most attractive foreign direct investment destination after China shows the global annual survey by consultancy firm AT Kearney.(See: India may overtake the US in global FDI reveals AT Kearney survey)

Last year in its 2004 AT Kearney Foreign Direct Investment Confidence Index, India had ranked third after China and the US (displacing Mexico), moving up from the sixth spot in the 2003 survey global FDI destinations.

Till last year the US was the second-most favoured destination for foreign direct investment in the world after China in the AT Kearney FDI Confidence Index. AT Kearney says India, along with China and Eastern Europe, will increasingly challenge traditional R&D locations in the industrialised world.

Writing in the Financial Times, UK, Peter Marsh and Bo Johnson say, "While China has held the top spot since 2002, an increase in interest in India is a more recent development that coincides with a renewed push by reformers in New Delhi to offer a warmer welcome to FDI as a source of capital, technology and knowhow."

India has gone up on the FDI scale because of the opening up of the sectors like telecomm, aviation, banking and media. FDI inflows to India surpassed the $5 billion mark, which is still far behind $ 60.6 billion for China.

Helping spur likely future FDI, corporate investors see macroeconomic and political risks as less threatening and perceive greater profit opportunities, and reduced risk, in the world's leading emerging markets. A fundamental shift in investor outlook and risk perception is underway, which could presage the return to positive growth in global FDI flows. Yet, a complicated mix of operational risks could undercut investors' renewed interest in venturing overseas.

The vice-president and managing director of AT Kearney's global business policy council, Paul Laudicina, said, "India is on the cusp of an FDI takeoff. However, for the country to harness manufacturing investor interest and evolve into an FDI capital-intensive hub, the government must maintain its reform orientation and overcome narrow business interests, addressing the country's infrastructure, logistics and regulatory barriers".

Says Satyajit Lahiri, marketing manager of AT Kearney, "Foreign investors have a lot of confidence on retail sector in India. But the political debate currently going on regarding FDI in retail is likely to delay the inevitable opening up."(See: CII-Kearney survey sees MNCs investing more in India.)

The AT Kearney report also reveals that apart from China and India emerging as the first and second as the most attractive FDI locations in the world, roughly 45 per cent of global investors - nearly twice that for the next three markets, Brazil, Poland, and Russia - are more upbeat on China and India than they were last year

The US this year has lost ground in the light manufacturing and financial services sector.

India is also expected to get 42 per cent of selected offshore functions going overseas over the next three years, compared with 17 per cent for China. Other likely destinations for offshore investments are Eastern Europe (11 per cent), the US (5 per cent), and the UK and Singapore (3 per cent each). (See: India leads in top locations for 'offshore' work: 2005 AT Kearney survey)

Globally, offshoring is on an upsurge as nearly 80 per cent of global investors say they plan to locate corporate functions overseas in the next three years, compared with 66 per cent in 2004 and 50 per cent in 2003.

This year, 54 per cent of executives said that they were planning foreign investment increases, the highest since 2000. Global FDI inflows rose by 2 per cent to $648 billion in 2004, the first positive change in FDI since 2000.

China and India have also emerged as the most-preferred countries for future research and development investments, with slightly more than 40 per cent of CEOs indicating they will likely make such investments in these markets over the next three years.

AT Kearney's confidence index is an annual survey of executives of the world's largest companies.