TWN Info Service on Finance and Development
8 August 2011
Third World Network
Global FDI flows saw modest rise last year
Published in SUNS #7203 dated 3 August 2011
Geneva, 2 Aug (Kanaga Raja) -- Global foreign direct investment (FDI)
inflows rose modestly by 5 percent to reach $1.24 trillion in 2010,
and are predicted to continue their recovery to reach some $1.4-1.6
trillion in 2011.
This is the assessment of the UN Conference on Trade and Development
(UNCTAD) in its latest World Investment Report 2011.
According to the report, released last week, for the first time, developing
and transition economies together attracted more than half of global
FDI flows. Outward FDI from those economies also reached record
highs, with most of their investment directed towards other countries
in the South.
In contrast, FDI inflows to developed countries continued to decline.
As international production and, more recently, the weight of global
consumption shift towards developing and transition economies, both
efficiency-seeking and market-seeking projects in those economies are
on the increase, said UNCTAD.
Half of the top 20 host economies for FDI in 2010 were developing and
transition economies. Their outward FDI also rose sharply in 2010, climbing
by 21 percent. These economies now account for 29 percent of global
FDI outflows. Six developing and transition economies were among the
top 20 investors.
The report says that as stimulus packages and other public fiscal policies
fade, sustained economic recovery becomes more dependent on private
investment. At present, transnational corporations (TNCs) have not yet
taken up fully their customary lead role as private investors.
Global FDI inflows rose modestly in 2010, following the large declines
of 2008 and 2009. At $1.24 trillion in 2010, they were 5 percent higher
than a year before. This moderate growth was mainly the result of higher
flows to developing countries, which together with transition economies
- for the first time – absorbed more than half of FDI flows.
While world industrial production and trade are back to their pre-crisis
levels, FDI flows in 2010 remained some 15 percent below their pre-crisis
average, and 37 percent below their 2007 peak.
According to the report, the moderate recovery of FDI flows in 2010
revealed an uneven pattern among components and modes of FDI. Cross-border
mergers and acquisitions (M&As) rebounded gradually, yet greenfield
projects - which still account for the majority of FDI - fell in number
The report notes that increased profits of foreign affiliates, especially
in developing countries, boosted reinvested earnings - one of the three
components of FDI flows - while uncertainties surrounding global currency
markets and European sovereign debt resulted in negative intra-company
loans and lower levels of equity investment - the other two components
of FDI flows.
While FDI by private equity firms regained momentum, that from sovereign
wealth funds (SWFs) fell considerably in 2010.
FDI inward stock rose by 7 percent in 2010, reaching $19 trillion, on
the back of improved performance of global capital markets, higher profitability,
and healthy economic growth in developing countries.
UNCTAD predicts that FDI flows will continue their recovery to reach
$1.4-1.6 trillion, or the pre-crisis level, in 2011. In the first quarter
of 2011, FDI inflows rose compared to the same period of 2010, although
this level was lower than the last quarter of 2010. They are expected
to rise further to $1.7 trillion in 2012 and reach $1.9 trillion in
2013, the peak achieved in 2007.
The record cash holdings of TNCs, ongoing corporate and industrial restructuring,
rising stock market valuations and gradual exits by States from financial
and non-financial firms' shareholdings built up as supporting measures
during the crisis, are creating new investment opportunities for companies
across the globe.
However, says the report, the volatility of the business environment,
particularly in developed countries, means that TNCs have remained relatively
cautious regarding their investment plans.
In addition, risk factors such as unpredictability of global economic
governance, a possible widespread sovereign debt crisis and fiscal and
financial sector imbalances in some developed countries, rising inflation
and apparent signs of overheating in major emerging market economies,
among others, might derail FDI recovery, the report cautions.
Global FDI inflows in 2010 reached an estimated $1,244 billion - a small
increase from 2009's level of $1,185 billion. However, there was an
uneven pattern between regions and also between sub-regions.
FDI inflows to developed countries and transition economies contracted
further in 2010. In contrast, those to developing economies recovered
strongly, and together with transition economies - for the first time
- surpassed the 50 percent mark of global FDI flows.
FDI flows to developing economies rose by 12 percent (to $574 billion)
in 2010, thanks to their relatively fast economic recovery, the strength
of domestic demand, and burgeoning South-South flows.
The value of cross-border M&As into developing economies doubled
due to attractive valuations of company assets, strong earnings growth
and robust economic fundamentals (such as market growth).
The report notes that the rise of FDI to developing countries hides
significant regional differences. Some of the poorest regions continued
to see declines in FDI flows. In addition to least developed countries
(LDCs), landlocked developing countries (LLDCs) and small island developing
States (SIDS), flows to Africa continued to fall, as did those to South
In contrast, major emerging regions, such as East and South-East Asia
and Latin America experienced strong growth in FDI inflows.
FDI flows to South, East and South-East Asia
picked up markedly, outperforming other developing regions. Inflows
to the region rose by about 24 percent in 2010, reaching $300 billion,
rising especially in South-East Asia and East Asia.
Similarly, strong economic growth, spurred by robust domestic and external
demand, good macroeconomic fundamentals and higher commodity prices,
drove FDI flows to Latin America and the Caribbean
to $159 billion. Cross-border M&As in the region rose to $29 billion
in 2010, after negative values in 2009.
In contrast, inflows to Africa, which
peaked in 2008 driven by the resource boom, continued the downward trend
which started in 2009. Inflows to South
Africa declined to little more than
a quarter of those for 2009.
North Africa saw its FDI flows fall
slightly (by 8 percent) in 2010; the uprisings which broke out in early
2011 impeded FDI flows in the first quarter of 2011.
FDI inflows to developed countries contracted moderately in 2010, falling
by less than 1 percent to $602 billion.
Europe stood out as the sub-region
where flows fell most sharply, reflecting uncertainties about the worsening
sovereign debt crisis. However, says the report, while Italy
and the United Kingdom
suffered, FDI in some of the region's other major economies fell only
slightly (e.g. France)
or increased (e.g. Germany).
In contrast, FDI flows to the United
States surged by almost 50 percent
largely thanks to a significant recovery in the reinvested earnings
of foreign affiliates. However, FDI flows were still at about 75 percent
of their peak level of 2008.
At $1,323 billion, global FDI outflows in 2010, while increasing over
the previous year, are still some 11 percent below the pre-crisis average,
and 39 percent below the 2007 peak.
FDI flows from developing and transition economies picked up strongly,
reflecting the strength of their economies, the dynamism of their TNCs
and their growing aspiration to compete in new markets.
The downward trend in FDI from developed countries reversed, with an
10 percent increase over 2009. However, it remained at half the level
of its 2007 peak.
According to the report, outward FDI from developing and transition
economies reached $388 billion in 2010, a 21 percent increase over 2009.
Investors from South, East and South-East Asia and Latin
America were the major drivers for the strong growth in
Developed countries as a group saw only a limited recovery of their
outward FDI. Reflecting their diverging economic situations, trends
in FDI outflows differed markedly between countries and regions: outflows
from Europe and the United States
were up (9.6 and 16 percent respectively) while Japanese outward FDI
flows dropped further in 2010 (down 25 percent).
According to the report, the lingering effects of the crisis and subdued
prospects in developed countries forced many of their TNCs to invest
in emerging markets in an effort to keep their markets and profits:
in 2010, almost half of total investment (cross-border M&A and greenfield
FDI projects) from developed countries took place in developing and
transition economies, compared to only 32 percent in 2007.
In terms of FDI by sector and industry, data on FDI projects (both cross-border
M&As and greenfield investment) indicate
that the value and share of manufacturing rose, accounting for almost
half of the total. The value and share of the primary and services sector
The value of FDI projects in manufacturing rose by 23 percent in 2010
to 2009, reaching $554 billion.
The financial crisis hit a range of manufacturing industries hard, but
the shock could eventually prove to be a boon to the sector, as many
companies were forced to restructure into more productive and profitable
activities - with attendant effects on FDI. In the United States, for example, FDI in
manufacturing rose by 62 percent in 2010, accompanied by a substantial
rise in productivity.
UNCTAD said that within manufacturing, flows fell in business-cycle-sensitive
industries such as metals and electronics. The chemical industry, including
pharmaceuticals, remained resilient through the crisis, while industries
such as food, beverages and tobacco, textile and garments, and automobiles,
recovered in 2010.
The value of FDI projects in the services sector continued to decline
sharply in 2010, with respect to both 2009 and the pre-crisis level
All main service industries (business services, finance, transport and
communications and utilities) fell, although at different speeds. FDI
in the financial industry - the epicentre of the current crisis - experienced
the sharpest decline, and is expected to remain sluggish in the medium
In terms of modes of entry, the report finds that there are diverging
trends between the two main modes of FDI entry: M&As and greenfield
The value of cross-border M&A deals increased by 36 percent in 2010,
to $339 billion, though it was still roughly one-third of the previous
peak in 2007.
On the other hand, greenfield
investment - the other mode of FDI - declined in 2010. Developing and
transition economies tend to host greenfield
investment rather than cross-border M&As. More than two-thirds of
the total value of greenfield
investment is directed to these economies, while only 25 percent of
cross-border M&As are undertaken there.
During the first five months of 2011, both greenfield investments and cross-border M&As
registered a significant rise in value. Cross-border M&As rose by
58 percent, though from a low level, compared with the corresponding
period of 2010.
"Judging from the data on FDI flows, cross-border M&As and
investment for the first few months of 2011, the recovery of FDI is
relatively strong. This trend may well continue into the remaining period
New investment opportunities await for cash-rich companies in developed
and developing countries. Emerging economies, particularly Brazil,
and the Russian Federation,
have gained ground as sources of FDI in recent years. A recovery in
FDI is on the horizon, says the report.
However, the report warns, the business environment remains volatile,
and TNCs are likely to remain relatively cautious regarding their investment
plans. Consequently, medium-term prospects for FDI flows - which have
not really picked up yet after the sharp slump in 2008 and 2009, and
which had only a moderate recovery in 2010 - may vary substantially,
depending on whether or not the potential risks in the global economy
materialize or not.
UNCTAD estimates that FDI flows could range from $1.4-1.6 trillion in
2011 (with a baseline scenario of $1.52 trillion) - the pre-crisis average
of 2005-2007. They are expected to rise further to $1.7 trillion in
2012 and reach $1.9 trillion in 2013, the peak achieved in 2007.
However, there is also a possibility of stagnant FDI flows (pessimistic
scenario) if the above-mentioned risks such as the unpredictability
of global economic governance, worsening sovereign debt crisis, and
fiscal and financial imbalances were to materialize.
The recovery in world output growth rests on a number of factors, including
stabilization of the financial system, the resilient growth of emerging
markets, the stimulus package programmes implemented in various major
economies in the world, and the pickup in final demand in developed
countries, following a return to confidence for both households and
While improving macro- and microeconomic fundamentals, coupled with
rising investor optimism and the strong pull of booming emerging markets,
should signal a strong rebound in global FDI flows, risks and uncertainties
continue to hamper the realization of new investment opportunities,
says the report.
Such factors include the unpredictability of global governance (financial
system, investment regimes, etc.); the worsening sovereign debt crisis
in some developed countries and the resultant fiscal austerity; regional
instability; energy price hikes and risks of inflation; volatility of
exchange rates; and fears of investment protectionism.
Although each can serve as a disincentive to investment in its own right,
the prominence of all of these risks at the same time could seriously
obstruct FDI globally, the report concludes.+
TO MAIN | ONLINE
BOOKSTORE | HOW TO ORDER