The report once again highlighted Hong Kong as a "front-runner" economy, following high rankings in both its Inward FDI Potential and Performance Indexes.

Hong Kong attracted FDI valued at US$42.9 billion last year, up 28% on 2005, and the second highest amount it has ever recorded.

Together with Mainland China, which was the largest FDI recipient, the two economies accounted for over half of FDI inflows into the region last year. Mainland China attracted FDI worth US$69.5 billion, a 4% fall on 2005, the first drop in seven years.

Director-General of Investment Promotion, Mike Rowse said that the report confirms Hong Kong's position as a highly attractive market for FDI. To be second in Asia and seventh in the world is an impressive feat for a city economy of 7 million people, he added.

"These results confirm Hong Kong's status as an international location in Asia for foreign companies and capital. Equally, the report shows that Hong Kong continues to act as a two-way springboard for overseas companies and capital into Mainland China, and for Mainland companies expanding into international markets," Rowse stated.

"Beyond the numbers, this investment also brings new skills, products, services and job opportunities that contribute substantially to our economic development and competitiveness," he added.

The FDI inflow into Hong Kong soared more than 30% on a year earlier, to US$27.1 billion for the first half of this year.

However, Rowse cautioned that Hong Kong could not rest on its laurels, as the city is at the heart of a competitive, high-growth region, and investors have more and more choices.

"Looking ahead, Hong Kong has three key challenges. We need to focus on the high cost of office premises, on improving our air quality and on increasing the number of international school places. The Government is aware of these issues and is working to address them," he added.

According to the report, the next largest FDI recipients among Hong Kong's neighbouring economies were Singapore (US$24.2 billion), India (US$17 billion), Thailand (US$9.8 billion) and Taiwan (US$7.4 billion).

Hong Kong was ranked second globally in both the Inward and Outward FDI Performance Indexes.

For the third consecutive year, global FDI inflows rose substantially. Total FDI flows reached US$1.306 trillion, up 38% from 2005, and approaching the peak of $1.411 trillion reached in 2000. The rise was driven by increasing corporate profits worldwide and buoyant stock markets, which raised the value of cross-border mergers and acquisitions.

The report predicted that FDI flows would continue to rise this year, although at a slower pace. It further suggested that mergers and acquisitions would drive cross-border investment, with such activities in the first half of this year already valued at US$581 billion, up 54% on last year.