TWN Info Service on Finance and Development (Apr12/12)
24 April 2012
Third World Network

Global FDI outflows saw a rise of 16% last year
Published in SUNS #7353 dated 19 April 2012

Geneva, 18 Apr (Kanaga Raja) -- Global foreign direct investment (FDI) outflows rose by 16 per cent to an estimated $1.66 trillion in 2011, but prospects for such flows this year remain guarded on account of the fragility of the global economic recovery, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its latest Global Investment Trends Monitor (No. 9 of April 2012), UNCTAD said that the growth in FDI outflows last year did not translate into an equivalent expansion of productive capacity.

This, it noted, was due "in large part to cross-border acquisitions and increased amounts of cash reserves kept in foreign affiliates rather than the much-needed direct investment in new productive assets through greenfield investment projects or capital expenditures in existing foreign affiliates."

According to the Investment Trends Monitor, in 2011, global FDI outflows rose by 16 per cent to an estimated $1,664 billion, up from $1,429 billion in 2010. Similar to FDI inflows, outflows surpassed their pre-crisis level, but still fell 25 per cent short of their 2007 peak.

"The rise of FDI outflows in 2011 was mainly driven by growth of outward FDI from developed countries. Outward FDI from developing economies fell by 7 per cent in 2011. As a result, the share of developing and transition economies in global FDI outflows declined from 31 per cent in 2010 to 26 per cent in 2011."

Nevertheless, stressed UNCTAD, the outward FDI from developing and transition economies remained important, reaching its second highest level recorded.

Developed-country TNCs largely made strategic acquisitions to seize on increased opportunities in other developed countries resulting in a higher share of the group in total FDI projects. Greenfield projects alone, however, show that developed-country TNCs are continuing to shift capital expenditures to developing and transition economies, for their stronger growth potential.

According to UNCTAD, recovery of outward FDI from developed countries gathered pace in 2011. Outflows exceeded $1.23 trillion, a level comparable to the pre-crisis average of 2005-2007, with the EU, Japan and North America all contributing to the recovery.

Outward FDI from the United States reached $384 billion, which was well above the pre-crisis average and approaching the peak recorded in 2007.

Reinvested earnings of foreign affiliates reached a record $326 billion in 2011, accounting for 85 per cent of FDI outflows. United States TNCs appear to be holding cash abroad in their foreign affiliates, partly in an effort to minimize their tax liabilities at home, but also to fund their foreign operations and finance their foreign investments, said UNCTAD.

An example of the latter is the acquisition of Skype (Luxembourg) by Microsoft (United States) for $8.5 billion in an all-cash deal financed from its foreign cash holdings.

The report finds that rising outward FDI from the EU was driven by FDI from Italy and the United Kingdom, from which outflows doubled and trebled, respectively. Corporate restructuring appears to have been the primary driver of cross-border M&A (mergers and acquisitions) deals by European TNCs.

The growth in FDI outflows from developing economies seen in the past several years appeared to lose some momentum in 2011 due to significant declines in outward FDI from Latin America and the Caribbean and a slowdown in the growth of investments from developing Asia.

"In the former case, a healthy level of equity investments abroad was undercut by a large negative swing in intra-company loans as foreign affiliates of some Latin American TNCs provided or repaid loans to their home country parent firms, possibly driven by opportunities to profit from interest rate differentials. However, some regions such as West Asia bucked the trend by increasing their outward FDI."

FDI from African countries fell in 2011 to an estimated $2.1 billion, compared with $5 billion in 2010. The declines in outflows from Egypt and Libya, traditionally important outward investors of the region, weighed heavily in the fall in total outward FDI.

FDI outflows from developing Asia (excluding West Asia) continued to grow in 2011, but only marginally after a significant increase in the previous year, said UNCTAD.

Outward FDI from East Asia decreased, and that from South Asia remained stagnant while that from South-East Asia rose markedly. FDI from Hong Kong (China), the region's largest source of FDI, declined by 14% to $82 billion, although it boomed in the last quarter of the year. FDI outflows from China reached $68 billion, more or less the same level of 2010.

UNCTAD noted that outflows from India, the dominant source of FDI in South Asia, remained almost the same level of 2010, at $15 billion.

TNCs from developing Asian economies continued to go global, acquiring overseas assets, UNCTAD stressed, noting that their cross-border M&A activities demonstrated diverging trends in the developed and developing worlds in 2011 - total purchases in the former increased by 19 per cent to $51 billion, while those in the latter declined by 55 per cent to $23 billion.

West Asia witnessed a rebound of outward FDI, with flows rising by 41 per cent to $18 billion in 2011, after reaching a five-year low in 2010. This is also reflected by a 19 per cent increase in the region's greenfield FDI projects abroad and the return of cross-border M&A purchases to positive values, after registering negative amounts in 2010.

On the other hand, UNCTAD found that outward FDI flows from Latin America and the Caribbean have become highly volatile in the aftermath of the global financial crisis. They decreased by 29 per cent in 2011, after a strong 82 per cent increase in 2010, which followed a large decline in 2009 (-39 per cent).

"This high volatility is due in part to the importance of the region's offshore financial centres (which accounted for four-fifths of the region's outflows in 2011)."

The report finds that a surge in the repayment of loans by Brazilian affiliates abroad to their parent companies in Brazil pushed intra-company loans to a record negative $21 billion in 2011, largely offsetting equity investment abroad, and driving total Brazilian FDI outflows to -$9 billion.

This could be explained in part by the search of corporate treasurers for ways to park their capital in Brazil's high-interest-rate environment without having to pay the tax on foreign capital (from which repayment of intra-company loans are exempted).

Latin American companies did, however, continue developing their productive activities abroad, as reflected by the 18 per cent increase of their cross-border M&A purchases, and the relative stability (a slight decrease of 5 per cent) in the estimated amount of their greenfield projects abroad.

FDI outflows from the transition economies of South-East Europe and the Commonwealth of Independent States (CIS) grew by 19 per cent, reaching an estimated all-time record of $73 billion.

According to the report, cross-border M&A purchases were sharply up in 2011, rising by 70 per cent to reach $585 billion. Developed-country TNCs generated the majority of this increase, especially those from the EU and Japan, with their purchases rising 79 per cent, to $401 billion.

Purchases by TNCs from developing regions, in contrast, registered only a 6 per cent increase, largely due to a slowdown in cross-border purchases by Indian and Brazilian TNCs.

On the other hand, said UNCTAD, greenfield investment projects abroad by TNCs declined in value terms in 2011, though only marginally (-0.2 per cent). This decline reflects a retreat from projects in various countries and regions.

"However, TNCs from developing economies as a group generated more greenfield projects in 2011 than in 2010 (a 1.4 per cent increase), mostly due to greater activity by West Asian TNCs."

UNCTAD underscored that the prospects for global FDI outflows continue to improve since the depth of the crisis.

"Recent events including the relative easing of the sovereign debt crisis in Europe, due to a massive injection of liquidity into the financial system and Greece's managed debt rescheduling, and a nascent recovery in the United States are suggestive of improvements in FDI flows."

However, the fragility of recovery in Europe and the harsh fiscal austerity adopted by the continent's governments may yet hamper an FDI upturn, it cautioned, noting that recent data give reason for caution when judging FDI prospects for 2012.

"Greenfield projects fell sharply in value terms in the first quarter of 2012, as compared to the previous year. Cross-border M&As were also sluggish in the first quarter of 2012, with announcements remaining at the low levels," it said. +