The survey of 300 global executives by global consulting firm A T Kearney found that the US was ranked top destination in the world for foreign direct investment.
India was ranked second for three years in 2005, 2007 and 2012 and was placed on the third spot in 2010.
India attracted $25.5 billion in FDI inflows in 2012, down from $31.6 billion in 2011, according to 2014 A T Kearney Foreign Direct Investment Confidence Index released on Monday.
This is the lowest ranking for India since 2001. The US moved to the top position last year displacing China as Washington made progress towards sustainable and steady economic growth.
"The cooling-off in investor sentiment we foresaw last year appears to have taken shape, with a two-place drop from 5th to 7th - its lowest rank since 2001," the report said.
In 2013, the then ruling UPA government raised limits on FDI in telecommunications, asset reconstruction, credit information, aviation, and defence production, the report said adding that foreign investment in oil refining and single-brand retail, currently capped at 49 per cent, will now be granted automatic approval.
AirAsia India, a joint venture between Malaysian budget airline AirAsia and Indian conglomerate Tata Sons, has been given the nod by Foreign Investment Promotion Board.
The initial investment of $50 million makes AirAsia the first foreign airline to set up a subsidiary in India.
German luxury tableware brand Villeroy & Boch has established a joint venture with marketer Genesis Luxury, opening its first store in Mumbai and planning to grow to 16 stores in the next five years.
This partnership comes after two years of struggling to clear administrative hurdles and acquire real estate without a local partner, the report said.
"In a long-awaited decision reached in late 2012, the Indian government permitted partial foreign ownership of supermarkets and department stores, a major step for the country's highly underdeveloped retail market," it said.
"Until late 2013, however, no foreign companies moved to enter, daunted by complex requirements, including one for 30 per cent content from small and medium-sized Indian enterprises," the report added.