TWN Info Service on Finance and Development (Oct11/05)
24 October 2011
Third World Network

Modest rise in FDI in first half of this year
Published in SUNS#7242 dated 19 October 2011

Geneva, 18 Oct (Kanaga Raja) - Global foreign direct investment (FDI) inflows rose by only 2 per cent in the first half of 2011 compared with the previous half in 2010, continuing the moderate recovery observed last year, the United Nations Conference on Trade and Development (UNCTAD) announced on Tuesday.

However, said UNCTAD, FDI prospects were dampened in mid-2011, at the global and regional levels, on account of increased turmoil in the world economy, which was marked by fears of a debt crisis in Europe, a slowdown in the United States economy and declining investor confidence.

In its latest edition of the Global Investment Trends Monitor (No. 7 dated 18 October 2011), UNCTAD further said that its full-year forecast for FDI remains "cautiously optimistic".

It projected FDI flows close to the pre-crisis average, saying that this though still remains some 25 per cent below the peak in 2007.

Warning of intensified downside risks, UNCTAD said: "At a time when the global economy urgently needs a boost from private investment to generate growth and jobs, investors are becoming increasingly cautious. Moreover, the attention of policymakers is diverted away from the necessities of long-term productive investment by the urgencies of short-term crisis management."

According to the UNCTAD report, global FDI inflows amounted to an estimated $720.7 billion in the first half of 2011, compared with $706.7 billion in the second half of 2010.

Developing and transition economies continued to account for more than half of global FDI inflows in the first half of 2011 mainly due to their strong economic growth and reinforced by the uncertain economic outlook in the major developed countries.

The report finds that FDI inflows to South, East and South-East Asia continued to grow ($184.2 billion in the first half of 2011), driven by increasing cross-border M&A (mergers and acquisition) deals in major economies in the region.

The two large emerging economies, China and India, saw inflows rising by nearly 20 per cent in the first half of 2011. FDI to China is likely to reach a historically high level in 2011, and that to India is bouncing back after a slide in 2010.

Major recipient economies in ASEAN (Association of South-east Asian Nations), including Indonesia, Malaysia, and Singapore also experienced a rise in inflows, the report adds.

As for Latin America and the Caribbean, the report says that the region also saw its FDI flows rising in the first half of 2011 ($94.2 billion). FDI flows to Brazil soared to $32 billion, accounting for more than one-third of total flows to the region.

"In the region as a whole, there was a significant decline in the value of cross-border M&As deals following a year of exceptional increase, but greenfield investments pushed FDI to a higher level."

FDI flows to Africa in the first six months of 2011 ($30.2 billion) rose moderately largely due to the recovery in South Africa, after a dramatic fall in 2010.

However, the report notes, continuing political uncertainty in Egypt and Libya caused a significant fall in FDI flows to North Africa, which will inevitably cloud the overall performance of the continent.

UNCTAD finds that no sooner had FDI to West Asia recovered in the second half of 2010 from the fallout of the global financial crisis, than it suffered from the impacts of the spreading protests in the Arab world in the first half of 2011, pushing flows down to a level similar to that in the same period of the previous year. This occurred in spite of the rise of FDI to Turkey, which attracted a third of total flows to the region.

Against the background of a fragile world economy, FDI to the transition economies of South-East Europe and the Commonwealth of Independent States (CIS) still managed to recover strongly in the first half of 2011 ($41.1 billion). Investors were motivated by the continued growth of local consumer markets, and by a new round of privatisations.

The report highlights that developed economies as a group experienced a 4 per cent decline in FDI inflows in the first half of 2011 compared with the previous half ($353.1 billion in first half of 2011 compared with $367.3 billion in previous half). The report says that this though was still up by 42 per cent year on year.

Individual country experiences varied, however, as a number of major economies in Europe - including France and Germany - saw declines in the first half of 2011, while countries such as Ireland posted strong gains.

FDI flows to North America fell, particularly to the United States. Among the other developed economies, flows to Australia remained high in the first half of 2011, while Japan slipped into divestment for two consecutive halves.

The UNCTAD report notes some diverging trends with respect to modes of entry of FDI.

The value of cross-border M&As rose to $352 billion during the first three quarters of 2011, up 38 per cent year on year and the strongest increase since 2007. After a sluggish first quarter, global M&A sales rebounded strongly in the second quarter, encouraged by better economic prospects at that time.

However, says the report, the sudden worsening of the debt crisis in Europe and the United States in the second half of 2011 has truncated the growth of cross-border M&A sales in the third quarter and is likely to dampen enthusiasm for major acquisitions in the last quarter of the year.

The strong growth registered in cross-border M&A deals during the first three quarters of 2011 was uneven among economic regions.

Developed countries have increased their lead as target countries and acquirers as well: their cross-border sales grew by 43 per cent to $276 billion. In transition economies, cross-border sales surged from a low of $2.5 to $21 billion.

In developing countries, a 9 per cent decrease in cross-border M&A sales (from $60.9 billion in January-September 2010 to $55.3 billion over the same period in 2011) was weighed down by a 35 per cent decline in Latin America and the Caribbean (from $23.7 billion in January-September 2010 to $15.3 billion over the same period in 2011).

As for greenfield investments, which with M&As make up the two modes of FDI, the report finds that these investments declined slightly in terms of value in the first three quarters of 2011 compared with the same period last year.

"Growth in projects in developing and transition economies was not strong enough to compensate for the decline in developed countries. Nevertheless, developing and transition economies continue to host about two-thirds of the total value of greenfield investment projects," said UNCTAD.

As for prospects for FDI for this year as a whole, UNCTAD said that its full-year forecast remains cautiously optimistic, projecting FDI flows close to the pre-crisis average (which is still some 25 per cent below their 2007 peak).

However, it warns that downside risks have increased, reflecting turmoil in the eurozone sovereign debt markets and related uncertainties in the banking sectors, a slow recovery in the United States, spikes in investor risk aversion, and rising financial market turbulence.

"Due to the significant uncertainties that investors face when confronting the current economic situation, both greenfield investment and cross-border M&As declined in value terms between the second quarter and third quarter of 2011. A sharp slowdown in announced cross-border M&As during the first half of 2011 further suggests that equity investments may continue to decline during the rest of the year," UNCTAD stressed.

"Global investment prospects continue to be clouded by the significant uncertainties that investors face when confronting the current economic situation. Worldwide demand for private productive investment is increasing as many countries are shifting towards fiscal austerities. Governments must facilitate and promote ways for private investment to take up the slack in the global economy and support a sustained recovery," the UNCTAD report concluded.