India is threatening to displace the United States as a destination for foreign direct investment, according to the latest FDI Confidence Index, an annual survey of executives from the world's largest companies conducted by management consulting firm AT Kearney.

In its list of top 25 FDI destination for 2004, A T Kearney has placed India at number three. While China is at the top, the US is at the second spot, with a FDI Confidence Index that is only slightly better than that of India. In 2003, India was ranked sixth on the list.

"Although it remained the second most attractive FDI location, the gap between the US and India may be closing.

As China and India forge their leading positions in the global economy, the US and the rest of the world will face severe competitive pressures from these two dynamic and rapidly evolving economies," AT Kearney said in a release.

For the first time, India displaced the US in the index to become the second most attractive FDI location among manufacturing investors. The US slipped to third place.

Telecom and utility investors upgraded India from the fifth to the second most attractive FDI destination, while dropping the US from the first to the fourth place.

China and India dominate the top two positions in the AT Kearney findings for most positive investor outlook, likely first-time investments, and most preferred offshore investment locations for business processing functions and infotech services.

Compared to other large emerging markets, China and India are cited by CEOs as the most attractive FDI destinations in the short term (next three years) and well into the future, beating markets like Brazil, Mexico and Poland for medium-term attractiveness 10 years out.

The AT Kearney report says global investors view China and India as distinctly different markets: China as the world's leading manufacturer and fastest-growing consumer market and India as the world's business process and infotech services provider, with longer-term market potential.

When asked what kinds of activities will be offshored to China and India, investors indicated that China leads for manufacturing and assembly, while India leads for infotech, business processing and research and development investments.

The survey suggests that investors favour China over India for its market size, access to export markets, government incentives, favourable cost structure, infrastructure and macroeconomic climate.