TWN Info Service on Finance and Development (Jan11/04)
22 January 2011
Third World Network

Global FDI flows remained stagnant last year
Published in SUNS #7069 dated 19 January 2011

Geneva, 18 Jan (Kanaga Raja) -- Global inflows of foreign direct investment (FDI) saw a marginal rise of 1%, from $1,114 billion in 2009 to almost $1,122 billion in 2010, the United Nations Conference on Trade and Development (UNCTAD) has estimated.

On a positive note, UNCTAD said that for the first time, developing and transition economies received more than half of global FDI flows.

FDI inflows to developing and transition economies in 2010 is estimated to total $596 billion, as compared to $527 billion to the developed economies.

In its latest Global Investment Trends Monitor (No. 5 of 17 January 2011) that highlighted global and regional FDI trends last year, UNCTAD said that a strong rebound in FDI flows to developing Asia and Latin America offset a further decline in inflows to developed countries.

China's performance was emblematic, exceeding the $100 billion mark, it added.

At a media briefing on Monday, Mr James Zhan, Director of the UNCTAD Division on Investment and Enterprise, said that despite the global economic recovery and the full recovery of trade and industrial output to pre-crisis levels (the three-year average from 2005 to 2007), FDI flows remain stagnant and are still at their lowest levels.

However, he said, for the first time in history, FDI flows to developing and transition economies exceeded the FDI flows to developed countries -- FDI flows to developing and transition economies accounted for 53% of the total FDI flows in 2010.

As to the prospects for FDI for this year, Zhan said: "We still have this cautious optimism". While FDI won't recover to the pre-crisis level, it will probably increase to between $1.3 to $1.5 trillion, he added.

He explained that the reason for this optimism is an improvement in the macroeconomic conditions in 2010 that has strengthened the TNCs' corporate profits and boosted stock market valuations. The policy environment in general is still conducive to FDI, he said.

He however pointed to some risk factors, namely, a "rough" global economic recovery and a slowdown of economic growth that is being seen this year.

He also highlighted other risk factors relating to investment protectionism, sovereign debt and currency volatility which will continue to affect the global FDI recovery.

The UNCTAD official stressed that the key issue in the global recovery of FDI flows is that this will depend very much on steady economic and FDI recovery of the developed economies.

"So if we say FDI flows to developed economies stopped declining and start to recover, then global FDI will have a steady and healthy recovery. And we haven't seen that yet," he said.

"For the time being, it is developing countries [that are] driving the process of holding the FDI to the current level," he added.

According to the UNCTAD Global Investment Trends Monitor, global FDI inflows remained stagnant in 2010 at an estimated $1,122 billion, compared to $1,114 billion in the previous year. However, they showed an uneven pattern among regions, components and modes of FDI.

While FDI inflows to developed countries contracted further in 2010, those to developing and transition economies recovered, surpassing the 50% mark of global FDI flows. The improvement of economic conditions in 2010 drove up reinvested earnings, while equity capital and intra-company loans remained relatively subdued. Cross-border M&A (mergers and acquisitions) volume rebounded in 2010, whereas greenfield investments continued to decline.

The quarterly fluctuations during 2010 indicate that the worldwide FDI recovery is still hesitant, although after an unexpectedly weak second quarter, global FDI flows registered an increase in the third quarter of 2010.

UNCTAD said that its FDI Global Quarterly Index jumped upwards, reaching 121 for the quarter, its highest reading in 2010. Preliminary data for the fourth quarter suggests that global FDI flows continue to struggle to establish a sustainable growth path.

"FDI flows in the quarter are likely to be flat, or slightly down, compared to the third quarter. While reinvested earnings will be helped by higher corporate profits, weak equity capital flows - from cross-border M&As and greenfield investments - will continue to keep FDI flows in a holding pattern during the quarter."

In particular, said UNCTAD, cross-border M&As registered a fall in value and in number during the fourth quarter. The high level of announced deals in the latter half of 2010, however, indicates that the fourth quarter's lull may be temporary and that M&A volumes are likely to improve in early 2011.

Developed countries did not return to FDI growth in 2010, said UNCTAD, noting that its latest estimates show that FDI flows to this group of economies fell some 7% to $527 billion, despite the robust recovery in some countries.

Most notably, FDI in the United States surged by more than 40% over 2009 levels, an increase worth $56 billion, the single biggest increase in FDI among the major economic regions. This rise is largely due to a significant recovery in reinvested earnings of foreign affiliates.

Europe stood out as the subregion where flows fell most sharply, explained largely by two groups of countries.

First, the Netherlands and Luxembourg saw significant declines. Negative FDI flows in the former country were caused by more volatile flows related to transactions of financial affiliates.

Second, uncertainties about sovereign debts caused drops in FDI, with the largest impacts seen in Ireland and Italy (Greece and Spain are less significant FDI recipients). FDI in the region's major economies (France and Germany) fell only slightly.

Within the group of developed countries, said UNCTAD, declining FDI flows were also registered in Japan due to a number of large divestments (for example, Liberty Group and Ford).

According to the Global Investment Trends Monitor, FDI flows to developing economies rose some 10% to $525 billion in 2010, thanks to a relatively fast economic recovery and increasing South-South flows. The value of cross-border M&As doubled -- an increasingly important mode of FDI entry into developing countries.

However, it noted that behind this general increase lie significant differences: while Latin America and South, East and South-East Asia experienced strong growth in FDI inflows, West Asia and Africa continued to see declines.

Inflows to Africa, which peaked in 2008 driven by the resource boom, appear to continue the downward trend of the previous year. For the region as a whole, UNCTAD estimates show that FDI inflows fell by 14% to $50 billion in 2010, although there are significant regional variations.

While the downward trends of inflows to North Africa appear to have stabilized, in sub-Saharan Africa, inflows to South Africa declined to barely a quarter of the 2009 level, contributing to the large fall of FDI inflows in the subregion.

Cross-border M&As, mainly in extractive industries, registered an increase of 49%, while the number and value of greenfield projects -- normally the main mode of FDI in Africa -- suffered a decline of about 10% in 2010.

"The rise of FDI from developing Asia and Latin America to Africa was not yet enough to compensate for the decline of FDI from developed countries which still account for the lion's share of inward FDI flows to many African countries."

Thanks to its position as a leader of the global economic recovery, said UNCTAD, FDI flows to South, East and South-East Asia have picked up markedly, outperforming other developing regions.

After a 17% decline in 2009, inflows to the region rose by about 18% in 2010, reaching $275 billion, due to booming inflows in Singapore, Hong Kong (China), China, Indonesia, Malaysia and Viet Nam, in that order. FDI flows (in the non-financial sector) to China, for example, reached more than $100 billion.

Breaking this general upward trend, South Asia experienced a 14% drop in FDI, mainly due to declines in flows to India.

FDI flows to West Asia, at $57 billion, continued to be affected by the global economic crisis, despite the steady economic recovery registered by the economies of the region. Sizeable increases in government spending by oil-rich countries helped push their economies forward, but conditions in the private sector remained subdued.

UNCTAD pointed to the surge in cross-border M&As as the main factor explaining the significant increase in FDI flows to Latin America and the Caribbean, which attained the level of $141 billion.

Compared with negative values in 2009, M&As reached $32 billion in 2010, nearly reaching the high values registered in the region during the 1990s.

"The targets of these deals were mainly in the oil and gas, metal mining and food and beverages industries. Strong economic growth, spurred by robust domestic and external demand, good macroeconomic fundamentals and higher commodity prices, explain the quick recovery of FDI flows to the region."

Nearly all the big recipient countries saw inward flows increase, with Brazil remaining the largest destination for the fourth consecutive year, said UNCTAD.

The transition economies of South-East Europe and the Commonwealth of Independent States (CIS) registered a marginal increase in FDI inflows, of roughly 1%, in 2010 to $71 billion, after falling more than 40% in the previous year.

UNCTAD said that FDI flows to South-East Europe continued their decline with a further negative 31% due to sluggish investments from European Union countries (traditionally the dominant source of FDI in the subregion).

In contrast, the CIS economies saw flows increase by 5% on the back of stronger commodity prices, a faster economic recovery and improving stock markets.

UNCTAD also found diverging patterns in FDI components and modes of entry.

Stagnant FDI flows in 2010 were accompanied by diverging trends in the components of FDI flows (equity, intra-company loans and reinvested earnings) and by modes of entry (M&A and greenfield investments).

Improved economic performance in many parts of the world and increased profits of foreign affiliates, especially in developing countries, lifted reinvested earnings to nearly double their 2009 level.

This increase compensated for the decline in equity capital flows (down slightly despite an up-tick in cross-border M&As) and in other capital flows (mainly intra-company loans) which saw a significant drop, it said.

Cross-border M&As, which typically react more quickly to changing economic conditions, jumped 37% in 2010, reflecting both the growing value of assets on the stock market and the increased financial capability of potential buyers to carry out such operations.

International greenfield investments, however, still registered a drop in both value and number during the year.

UNCTAD noted that the project value of greenfield investments has held up better since the crisis than that of cross-border M&As. While the value of M&As equalled or exceeded greenfield investment before the crisis, it is now significantly lower.

As to prospects for FDI this year, UNCTAD estimated FDI flows to be between $1.3 trillion and $1.5 trillion.

It said that improved macroeconomic conditions in 2010 strengthened TNCs' corporate profits and boosted stock market valuations. These favourable conditions coupled with rising business confidence in 2011 will help translate TNCs' record levels of cash holdings (in the order of $4-5 trillion among developed country firms alone) into new investments.

It further noted that TNCs will also face increasing pressure to make strategic investments to cement their business plans for the post-crisis period. Worldwide M&A activity (domestic and cross-border M&As combined) is also expected to rise further in 2011.

"The current overall favourable policy climate for foreign investors further supports the positive prospects for FDI flows in 2011."

UNCTAD however pointed to a number of risks to this positive scenario. Worldwide GDP growth, after the "recovery-boost" in 2010, will slow down. In addition, risks related to currency volatility, sovereign debt and investment protectionism could still derail the expected FDI upturn.

"A strong global FDI recovery depends much on the steady economic and FDI recovery of the developed economies," it stressed. +