Europe dominates the leaderboard of the Milken Institute’s annual FDI attractiveness ranking for the first time, ending Hong Kong’s five-year reign in top spot and reinforcing the region’s resilience post-Brexit.

Sweden took pole position in the think tank’s latest Global Opportunity Index, which measures how friendly and supportive 145 countries’ institutions and policies are towards foreign investors. The UK placed second, followed by the US, the Netherlands and Switzerland rounding out the top five.

Hong Kong and Singapore had been the top performers since 2017, testament to their efforts to attract capital inflows. But they recently lost their edge to Europe’s more well-rounded, high-income countries thanks to their stability, strengthening business frameworks and economic merits. 

“It’s the fact that they are perceived as a safe bet,” said Claude Lopez, head of the Milken Institute’s research department. “Leaving Brexit to the side, Europe has been relatively strong and stable.”

The region’s front-runners performed well in all five areas covered by the rankings: economic fundamentals, financial services, business perception, institutional framework, and international standards and policy. “They were always among the top countries, but [this year] is a validation of their strengths and consistency across the different categories,” Ms Lopez added. 

Switzerland has climbed 20 spots since 2017, and the Netherlands 18 spots. Meanwhile, Denmark has risen 17 spots to rank sixth and Finland 13 spots to place eighth. 

No new global order

China’s growing influence finally caught up with Hong Kong, which has tumbled to number 17 in the wake of waning political autonomy, social unrest and a contracting economy. Last year, the number of foreign companies with offices in Hong Kong fell for the first time since 2009.

Advanced economies continue to occupy the top 30 spots, which is further evidence of the timeless appeal of a predictable investment climate. Oscar Contreras, international finance economist at the Milken Institute, believes developed countries will likely continue to be the most attractive for international capital flows. “In an environment of huge global uncertainties, many of the weaknesses of non-developed countries become more apparent and the strengths of developed countries become clearer,” he said.

Africa is the lowest-ranking region overall; however, its business perception — the measure of regulatory ease of starting and operating a business — has improved. Mauritius is consistently the continent’s best performer, followed by South Africa. 

Latin America’s failure to fully-capitalise on its potential largely stems from rule of law issues and weak legal systems. “We have seen huge improvements in terms of macroeconomic frameworks in the region since the early 90s, but other important issues like the institutional frameworks were left for later. That ‘later’ probably has to be now,” said Mr Contreras. Chile has maintained its grip as the region’s leader, ranking 12 places ahead of its nearest competitor Uruguay. 

Protectionism bites

Some 70% of this year’s ranking changes are driven by the international standards and policy category, which measures how open and integrated a country is with the international community. “This is the first time that we’ve seen this, [but] it is really not a surprise,” said Ms Lopez, pointing to the rise of protectionist policies which began pre-pandemic. “It does create a lot of change in terms of a country’s attractiveness for international investors, in terms of having common standards versus more barriers.” 

This category is largely responsible for France, Peru, Colombia and Kazakhstan’s overall declines. Covid-19 has accelerated the rise of nationalism and some countries’ retreat from the international stage, suggesting this category will continue to drive movement in the rankings for years to come.