TWN Info Service on Finance and Development (Jun17/01)
14 June 2017
Third World Network

Modest recovery in FDI flows projected for this year
Published in SUNS #8478 dated 9 June 2017

Geneva, 8 Jun (Kanaga Raja) - Global foreign direct investment (FDI) flows are projected to increase by about 5 per cent to reach almost $1.8 trillion in 2017, with this moderate rise expected to continue in 2018 to reach $1.85 trillion, the UN Conference on Trade and Development (UNCTAD) has said.

In its chapter on prospects and trends in global investment, UNCTAD's World Investment Report 2017 said that the moderate recovery in global FDI flows expected in 2017 reflects accelerating economic growth in all major regions, a strong performance of stock markets and a rebound in world trade volume.

A combined upturn of economic growth in major regions and improved corporate profits will boost business confidence, and consequently TNCs' appetite to invest.

A cyclical up-tick in manufacturing and trade is expected to result in faster growth in developed countries, while a likely strengthening of commodity prices should underpin a recovery in developing economies in 2017.

Nevertheless, said UNCTAD, elevated geopolitical risks and policy uncertainty could have an impact on the scale and contours of the FDI recovery in 2017.

Political developments, such as the United Kingdom's exit from the European Union (EU), moves by the administration in the United States to abandon the Trans-Pacific Partnership and to renegotiate key trade agreements such as the North American Free Trade Agreement (NAFTA), as well as elections in Europe, have all heightened uncertainty.

A potential tax reform in the United States could also significantly affect FDI flows, if United States TNCs reduce retained earnings held in their overseas affiliates, it said.

"The road to a full recovery for FDI remains bumpy, but we are cautiously optimistic. Although this report projects a modest increase for 2017, other factors such as the elevation of geopolitical risks and policy uncertainty may impact the scale of the upturn," said Dr Mukhisa Kituyi, Secretary-General of UNCTAD, in a press release.

Speaking at a media briefing ahead of the report's launch on Wednesday, James Zhan, Director of the UNCTAD Division on Investment and Enterprise, highlighted that one of the key messages in the report is that global investment flows are still at a low level and are facing a "bumpy" recovery.

"The road to global FDI recovery has been bumpy and the level of flows remains lower than the pre-crisis peak," he said, projecting that there will be a modest recovery but with "significant uncertainty."

Looking ahead, he said, economic fundamentals are supportive of a potential rebound in FDI flows in 2017.

Asked what impact the current proposals on investment facilitation made at the World Trade Organisation will have on FDI flows, Zhan explained that investment facilitation is unlike investment liberalisation.

Zhan said that investment facilitation is meant to make investment easier - meaning that you facilitate investment at entry level, operational level and at exit level. It is more in facilitating (investment) to make doing business easier.

"So the impact on net additional investment flows is hard to calculate. It is difficult to quantify," Zhan said, adding that it does however have a role.

"When we look at the report, the investment commitment sometimes is much higher than the actual flows of investment," he noted, adding that this often happens in developing countries, particularly in Africa.

Zhan attributed the huge gap between investment commitment and actual realisation partly to lack of investment facilitation on the ground. Investors are confronted with lots of problems that either delay the investment, scale down the investment or even investors giving it up at the stage of implementation.

In that sense, investment facilitation may save some investment or secure investment that was committed earlier by investors, Zhan maintained.

[The proposals by China, Russia, Brazil and Argentina have however been blocked at the WTO General Council as beyond the WTO remit by India, South Africa and several others, leading to a compromise at the General Council for an informal dialogue. The US has also expressed some scepticism. The first such last week, however, found only proponents explaining their case, with none of those opposed participating, some trade diplomats reported. SUNS]

Asked about the effect of President Trump's policies on investment flows (including his recent announcement of the US withdrawal from the Paris climate deal), Zhan said that US policy matters a lot to global investment flows, flows to the US as well as to the rest of the world.

In reference to Trump's announcement on the Paris climate deal, Zhan was of the view that this may have a significant impact on global FDI flows, not only in terms of the new opportunities for new investment but also the pattern of investment.

Some investment or investable capital will move towards fossil fuel sectors or continue to move towards the renewable energy sector, he said.

"Because we know in the business world there is huge investment into the renewable energy sector and there will be more investment into that sector envisaging there will be significant global policy changes" and policy changes at various national levels in favour of renewable energy vis-a-vis fossil fuels, where there will be a reduction in that.

So that pattern of investment may be affected, said Zhan. "There will be a lot of implications, but first and foremost, we will still need to see what will be the scenario of the policies."

In the first scenario, the US will be out alone, while the rest of the world will move on. The second scenario is that a large number of countries will see that if the US is not in, there is no fair share and they will slow down or move out.

So, there will be two types of implications for global investment and the related investment policies, Zhan said.

He said a lot of countries have already put in place investment policies related to climate change and the Paris deal. "And now what are they going to do? Are they going to adjust to that?"

Zhan noted that investors have already envisaged the investment prospect and the business prospect and the potential benefit from the policies that have already been put in place.

If countries are adjusting that, then it will affect the kind of foreseeable profitability of the investment of all those investors. And that may trigger some kind of investor-State disputes, he cautioned.

"We cannot quantify, but we see that there will be important impact on global FDI and on the FDI into the US as well."

Asked about the implications of China's One Belt-One Road initiative on investment flows, Zhan said that it is not only that China's outward investment will increase but it also has the impact of crowding in investment from other countries, including non-members (of the initiative). It can also crowd in domestic investment.

According to Zhan, the outward investment from China will also help to create export opportunities in terms of construction materials and equipment, so that helps the exporters as well.

It will also have an impact in terms of the logistics services in the regional sense, he said, adding that regional cooperation will be intensified through the One Belt-One Road initiative.


According to the UNCTAD report, developing economies are likely to see a 10 per cent increase in inflows in 2017, not yet fully returning to the 2015 level, while flows to developed economies are expected to hold steady.

FDI inflows to Africa are forecast to increase slightly in 2017, to about $65 billion, in view of modest rises in oil price and a potential increase in non-oil FDI. Announced greenfield FDI projects in 2016 were high in real estate, followed by natural gas, infrastructure, renewable energy, chemicals and automotives.

Advances in regional and inter-regional cooperation, through the signing of economic partnership agreements with the EU by regional economic communities and the negotiations towards the Tripartite Free Trade Agreement should encourage stronger FDI. However, a slump in economic growth could harm investment prospects in 2017.

FDI inflows to developing Asia are expected to increase by 15 per cent in 2017, to $515 billion, as an improved economic outlook in major Asian economies is likely to boost investor confidence. In major recipients such as China, India and Indonesia, renewed policy efforts to attract FDI could contribute to an increase of inflows in 2017.

In South and South-East Asia, several countries are expected to further strengthen their position in regional production networks. In West Asia, FDI is expected to remain flat, with the positive effect of recovering oil prices offset by political and geopolitical uncertainty.

The report said prospects for FDI in Latin America and the Caribbean in 2017 remain muted, as macroeconomic and policy uncertainties persist. Flows are forecast to fall by about 10 per cent, to some $130 billion.

Investment in the region's extractive industries will likely be modest as operators continue to hold back on capital expenditures. Investment in the region, especially in Central America, is also likely to be affected by uncertainties about economic policy in the United States.

FDI flows to transition economies are forecast to rise moderately in 2017, to about $80 billion, supported by the bottoming out of the economic downturn, higher oil prices and privatization plans. However, they may be hindered by geopolitical problems.

FDI flows to developed countries are expected to hold steady, at about $1 trillion. Flows to Europe are projected to recover, as the large volume of negative intra-company loans recorded in 2016 is unlikely to be sustained. However, political events may yet derail the FDI recovery.

In contrast, FDI flows to North America, which reached an all-time high in 2016, appear to be running out of steam, and TNC executives are likely to take a wait-and-see approach in the face of policy uncertainty.

The report highlighted several key factors influencing future FDI flows. It said that global economic growth is projected to accelerate to 2.7 per cent in the coming year, compared with the post-crisis low of 2.2 per cent in 2016.

Growth in developed countries is likely to improve thanks to the expected easing in fiscal policy and a rise in business confidence in the United States, as well as cyclical momentum in Europe and Japan.

Emerging and developing economies are also forecast to rebound significantly in 2017, led by growth in China and by a sharp economic expansion in natural-resources-exporting countries, as commodity prices are expected to increase, especially for crude oil.

Gross fixed capital investment is expected to pick up strongly in emerging and developing economies, but also in advanced economies. Moreover, more buoyant economic activity will help boost world trade, which is forecast to expand by 3.8 per cent in 2017, compared with just 2.3 per cent in 2016.

"The improvement in the global macroeconomic outlook and the modest rise in commodity prices had a direct effect on the profits and profitability of multinational enterprises (MNEs). After the slump in 2015, profits of the largest 5,000 MNEs picked up significantly in 2016. Increased corporate profits, with a consequent increase in stock prices, could boost the value of cross-border M&As [Mergers and Acquisitions]."

An increase of FDI flows in 2017 as a whole can also be projected from the value of cross-border M&As announced in the first four months of 2017, which stood at about $600 billion (including divestments) - or 35 per cent higher than over the same period in 2016.

Rising global interest rates, however, may restrict financing for investment, as interest charges take an increasing bite out of corporate profits. For TNCs from developing and transition regions, this phenomenon could also coincide with a further depreciation of their national currencies, making the servicing of corporate debt denominated in dollars even more expensive.


UNCTAD said in 2016, global FDI flows decreased by 2 per cent to $1,746 billion. While intra-company loans recorded a fall at the global level in 2016, equity investments were boosted by an 18 per cent increase in the value of cross-border M&As. M&As rose to $869 billion, their highest level since 2007, due to buoyant activity in developed economies.

The value of announced greenfield projects also increased - by 7 per cent from 2015 to $828 billion - although this was largely due to a number of very large projects announced in a handful of developing and transition economies.

In 2016, flows to developed economies increased further, after significant growth in the previous year. Inflows rose by 5 per cent to $1 trillion.

Developed economies' share in global FDI inflows grew to 59 per cent - the highest share since 2007. Modest growth of FDI in North America and a sizeable increase in other developed economies more than compensated for a fall in FDI to Europe.

The increase of FDI in developed economies was mainly driven by equity investment flows, which continued to exhibit vigour, albeit with less dynamism than in the previous year. In 2016, the equity component accounted for 74 per cent of FDI flows to developed economies - the largest share since 2008.

Equity flows were driven by cross-border M&As targeting developed countries, which rose to $794 billion - an increase of 24 per cent in value.

Developing economies, in contrast, lost ground in 2016. Weak commodity prices and slowing economic growth weighed on foreign investment inflows, which fell by 14 per cent to $646 billion - a level last observed in 2010.

Cross-border M&A activity suffered a widespread downturn across developing regions during the year, falling by 18 per cent in aggregate value.

In contrast, the value of announced greenfield projects rose by 12 per cent to $516 billion, pulled by the announcement of a few very large investments in a small number of countries, while the majority of countries recorded declines.

In developing Asia, the decline in inflows (-15 per cent to $443 billion) was relatively widespread, with every major sub-region registering reductions, except South Asia.

Economic recession in Latin America and the Caribbean, coupled with weak commodity prices for the region's principal exports, factored heavily in the decline in FDI flows to the region (down 14 per cent to $142 billion).

Flows to Africa also registered a decline (-3 per cent to $59 billion), with the region suffering external vulnerabilities similar to those in Latin America.

Developing and transition economies accounted for 6 of the top 10 host economies. The United States remained the largest recipient of FDI, attracting $391 billion in inflows, followed by the United Kingdom with $254 billion, vaulting from its 14th position in 2015 on the back of large cross-border M&A deals. China was in third position with inflows of $134 billion - a 1 per cent decrease from the previous year.


According to the report, the flow of outward investment from developed economies declined in 2016, falling 11 per cent to $1 trillion. Nevertheless, their share in global outward FDI flows held roughly stable - dipping to 72 per cent from 74 per cent in 2015 - as outflows from developing economies slipped 1 per cent to $383 billion and those from transition economies contracted 22 per cent to $25 billion.

"These overall trends belie significant shifts in outward investment across and within regions in a global economic climate characterized by slow growth, weak trade dynamics and low commodity prices," it said.

Investment by European TNCs, which had surged in 2015, retreated significantly in 2016, falling 23 per cent to $515 billion. This was driven by sharp reductions in outflows in Ireland (down 73 per cent to $45 billion), Switzerland (down 71 per cent to $31 billion) and Germany (down 63 per cent to $35 billion).

Investment by North American TNCs held roughly steady in 2016, despite a significant reduction in the value of their cross-border M&A purchases. The United States remained the world's largest outward-investing country, although flows declined marginally (-1 per cent) to $299 billion.

Net purchases through cross-border M&As by TNCs, in contrast, fell sharply (-39 per cent to $78 billion), reflecting in part a slowdown in tax inversion deals.

The report also said that the year was marked by significant variation in outward investment by TNCs from developing and transition economies.

Chinese outward FDI surged, rising 44 per cent to $183 billion, propelling the country to the position of second largest home country for FDI for the first time. This coincided with the country becoming a net outward direct investor during the year.

Outward investment by African TNCs rose slightly (1 per cent to $18 billion), largely reflecting a rise in outflows in Angola (35 per cent to $11 billion) that more than offset a sharp reduction in flows from South Africa (-41 per cent to $3 billion).

In contrast, outward investment by TNCs from Latin America and the Caribbean collapsed (-98 per cent to $751 million), falling to its lowest point since 1988, as outflows from Brazil and Mexico both swung to net divestment of foreign assets.

FDI outflows from the transition economies registered a 22 per cent decline, falling to $25 billion, as intra-company loans by TNCs from Kazakhstan turned negative.

In 2016, as in the previous year, reinvested earnings accounted for roughly half of FDI outflows from developed- country TNCs. Intra-company loans turned negative, as foreign affiliates reduced their liabilities with their parents.

The structure of outward investment flows of TNCs from developing economies was largely dominated by reinvested earnings - whose share rose from 45 per cent to 66 per cent. The share of new equity investments in outflows attributed to TNCs from developing economies rose (from 43 per cent to 47 per cent) - in line with increasing cross-border acquisitions, principally by Chinese TNCs.

FDI flows to and from large economic groups such as the G20 and Asia Pacific Economic Cooperation (APEC), continued to dominate the global FDI landscape in 2016. These groups accounted for more than 50 per cent of global FDI inflows and outflows, said UNCTAD.

Inflows to most groups (G20, APEC, NAFTA and BRICS) and country associations, such as the Commonwealth of Nations, rose for various economic and corporate reasons.

"Corporate re-configuration, economic growth and improved business sentiments contributed to the rise in these groups. The share of the largest groups in world FDI inflows (G20 and APEC) remained proportionately small relative to their weight in the global economy."


FDI flows to the NAFTA group rose by 7 per cent, from $423 billion in 2015 to $452 billion in 2016, mainly driven by the 12 per cent rise in inflows to the United States. Since 2010, inward FDI stock in the group has risen by 63 per cent, to $7.8 trillion last year.

The group received about the same share of world FDI flows as its global economic size. As with the other economic groups, FDI flows in NAFTA are highly concentrated: about 90 per cent of inflows and more than 80 per cent of inward FDI stock in 2016 was in the United States.

The lion's share of FDI in NAFTA came from the European Union and Japan. However, the United States is the dominant source of FDI to Mexico and Canada.

An eventual renegotiation of the NAFTA treaty is likely to affect the FDI landscape. Changes in the treaty may have implications for the magnitude and composition of flows not only in NAFTA, but also in other groups, such as the G20 and APEC, in which NAFTA members are partner countries, UNCTAD cautioned.

"A renegotiation is likely to affect corporate investment, production decisions and supply chain development in the group, and a possible relocation of industries back to the United States would affect FDI within and outside NAFTA."

To what extent the FDI environment would change, however, will depend on the nature and scope of changes to the treaty - investment provisions, rules of origin and tariff rate arrangements - which remain unclear.

TNCs' investment and production decisions in NAFTA in industries such as automotive and electronics could be affected. In addition, non-United States companies may seek to strengthen their presence in the United States to serve the local market.

Major United States automotive manufacturers in early 2017 have been urged to build plants domestically. Some automotive companies such as Ford, Fiat Chrysler and Volkswagen plan to expand or further invest in their United States operations, said the report.