Once upon a time, Americans invested about 90 percent of their money at home. Now, individuals and businesses in the United States and many other countries have tempting opportunities to dip into markets around the world. But how much of the returns do they get to keep, and how much can they actually bring home? These two questions don't receive enough attention, especially among investors chasing high returns in emerging markets. Corruption, conflict, crises, and more can eat away at the bottom line. The Baseline Profitability Index (BPI), published here for the first time, takes several of these into account to suggest where investors should really put their hard-earned cash.
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The inaugural version of the index includes 102 countries across six continents and redraws the typical economic map of the world. China, for instance, is well known for its rapid economic growth, but the difficulties of doing business there can cut into a foreign investor's return; it ranks 21st in the BPI. Chile may not be such a big or fast-growing market, but its friendly climate for business can make it a more attractive place to invest; it ranks eighth.
Hong Kong and Singapore, which regularly top indexes like the World Bank's Doing Business rankings and the World Economic Forum's Global Competitiveness Report, also take two of the first four spots in the BPI. But three of the top 10 are African countries -- Botswana, Rwanda, and Ghana -- where high returns are accessible and, to a great degree, retrievable. India is the only BRIC country in the top spots; Brazil and Russia languish near the bottom. And Eastern Europe, though perhaps a less glamorous destination to investors, compares favorably to the tigers of East Asia.
So how does the BPI work?
Three factors will affect the ultimate success of a foreign investment: how much an asset's value grows, the preservation of that value while the asset is owned, and the ease of bringing home the proceeds from selling the asset. Each of these factors requires a different kind of assessment. It's not enough to worry only about rates of return, corruption, political stability, investor protection, or exchange rates alone; as I've written before, you have to worry about all of them.
Until now, however, no index has combined these factors into a summary statistic that conveys a country's basic attractiveness for investment. Even as a first attempt, the BPI sends a clear message: Look seriously at frontier markets that offer high returns and improving economic institutions. Six of the top 20 countries in the BPI are African. With the World Economic Forum on Africa taking place this week, the time is ripe for investors to shift their focus.
The calculation of the BPI is, of course, an imperfect exercise fraught with assumptions. 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? The more country-specific assumptions you make to answer questions like these, the less comparable countries will be within the confines of an index. Also, an asset's returns may depend on tax treaties between the investor's home country and the country where the investment is based; there are so many possible permutations of this pairing that I've decided to leave taxes out of my calculations.
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