Global FDI flows rebound to reach $1.7 trillion

Global flows of foreign direct investment rose 36% in 2015 to reach their highest level since 2007, according to an UNCTAD report. The increase did not entail a commensurate expansion of productive capacity, however, as it largely involved mergers and acquisitions instead of new investment projects.

by Kanaga Raja

GENEVA: Global flows of foreign direct investment (FDI) jumped by 36% in 2015, reaching an estimated $1.7 trillion, with the principal factor behind the global rebound being a surge in FDI targeting the developed economies, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its latest Global Investment Trends Monitor (No. 22, dated 20 January 2016), UNCTAD however pointed out that the growth was largely due to cross-border mergers and acquisitions (M&As), with only a limited contribution from greenfield investment projects in productive assets.

Moreover, a part of FDI flows was related to corporate reconfigurations involving large values in the financial account of the balance of payments but little movement in actual resources, it said.

According to the UNCTAD report, barring another wave of M&A deals and corporate reconfigurations, FDI flows are expected to decline in 2016, reflecting the fragility of the global economy, volatility of global financial markets, weak aggregate demand and a significant deceleration in some large emerging market economies.

“Elevated geopolitical risks and regional tensions could further amplify these economic challenges,” it said.

Stagnant greenfield investment globally and outright declines in a number of developing regions suggest that the current upswing in global FDI flows is potentially fragile and is exposed to the vagaries of the cross-border M&A market.

However, said UNCTAD, an improvement in macroeconomic conditions (with global growth projected to reach 2.9% in 2016 compared to 2.4% in 2015) due to modest recovery in developed economies could strengthen the confidence of investors and induce them to make productive investments to cement their business plans.

“In addition, further depreciation of currencies in emerging markets and possible sales of assets to restructure corporate debt may also stimulate additional FDI.”

Global increase

Global FDI flows rose in 2015 to reach an estimated $1.7 trillion, their highest level since 2007, said UNCTAD. A wave of cross-border M&As, which rose significantly in value, was largely responsible for the increase in FDI. Greenfield investment project announcements, in contrast, registered little change in value terms from 2014, with a rise in developed economies roughly compensating a pull-back in multinational enterprises’ capital expenditures in developing economies.

According to UNCTAD, the sharp increase of FDI inflows in developed economies changed the pattern of FDI by economic grouping in their favour. They now account for more than half of global FDI inflows.

However, at the regional level, developing Asia remained the largest host region for FDI inflows, surpassing the European Union and North America.

“Developing economies continue to make up half of the top 10 host economies in the year,” said UNCTAD.

The United States, with an estimated $384 billion in inflows, vaulted back into first position among host economies in 2015, after exceptionally falling to third in 2014.

FDI inflows to Hong Kong-China – the second largest recipient in the world – reached a record of $163 billion for the first time ever.

UNCTAD said: “The rise in both economies, however, was due in part to inversion deals and reconfiguration of corporate structures involving large values in the financial account of the balance of payments but little movement in actual resources.”

According to UNCTAD’s preliminary estimates, FDI flows to developed countries bounced back sharply in 2015, reaching their second highest level ever at $936 billion, and accounting for the majority of the increase in global flows.

“Buoyant cross-border M&A activities, most notably acquisitions of assets in the United States by foreign MNEs [multinational enterprises], boosted FDI flows. MNEs seeking growth, rushed to make acquisitions. The low interest environment and strong balance sheets facilitated such moves.”

Therefore, the growth of FDI inflows did not translate into an equivalent expansion of productive capacity, as it was due in large part to cross-border M&As and with only a limited contribution from greenfield investment projects in productive assets. Furthermore, some deals were structured as inversions which usually involve little movement in resources.

According to UNCTAD, FDI flows to the EU rose to an estimated $426 billion, after three successive years of decline. Inflows to the Netherlands (+146% to $90 billion), Belgium (from -$8.7 billion in 2014 to $32.7 billion) and the United Kingdom (+29% to $68 billion) rose strongly in 2015.

The region’s largest economies, Germany and France, also experienced an uptick in their flows. In Germany, inward FDI returned to positive territory in 2015, after dipping into net divestment in 2014 (-$6.2 billion to $11 billion), thanks to a sharp reduction in net repayment of intra-company loans and a near doubling of reinvested earnings.

“While cross-border M&As to the region jumped (+68%), there was also an important increase in greenfield investment project announcements (+14%) signalling a potential rebound in capital expenditures in productive assets as macroeconomic and financial conditions improve.”

UNCTAD found that the primary sector did not contribute to the rise in FDI or the doubling of M&A sales in developed countries.

In Australia, where FDI fell markedly (-33%), significant divestments of mining assets reduced M&A sales and weighed down inflows. A large swing in intra-company loans (from a net inflow of $13 billion in 2014 to a net repayment of $4 billion in 2015) also caused flows to slump.

The fall of FDI flows to Canada (-16%) was largely attributable to the primary sector as well, with a similar reduction in intra-company loans, especially for energy and mining MNEs.

For the United States, while the comparison with 2014 is skewed due to the exceptionally low level in that year caused by a single large divestment, the estimated $384 billion in FDI inflows in 2015 represent the highest level since 2000.

The rise in flows was due largely to a surge in equity investments and a sharp increase in M&A sales, said UNCTAD.

Acquisitions of assets in manufacturing and services more than compensated for the decline in the primary sector, with total M&A sales rising to $228 billion, the largest volume of cross-border acquisitions since 2000.

Flows to developing countries

According to UNCTAD, in 2015, FDI inflows to developing Asia rose by 15% to an estimated $548 billion, setting a new record. It continued to be the largest FDI recipient region in the world, accounting for one-third of global FDI flows.

With FDI inflows jumping to an estimated $163 billion, Hong Kong-China became the largest recipient economy in the region and the second largest in the world. The corporate reconfiguration of Cheung Kong Holdings and Hutchison Whampoa accounted for part of the increase.

FDI inflows to mainland China rose by 6% to an estimated $136 billion. While inward FDI flows in manufacturing declined, those in services kept momentum and drove total inflows to a new record level.

FDI inflows to Singapore dropped slightly by 4% to an estimated $65 billion, contributing to an overall decline of 7% in ASEAN (Association of South-East Asian Nations) as a whole.

FDI flows to India nearly doubled, reaching an estimated $59 billion. Measures taken by the government to improve the investment climate have had an impact, said UNCTAD.

In 2015, West Asia saw its FDI flows increase by 5% to $45 billion after six consecutive years of decline. However, the increase was driven largely by a rise of FDI flows in Turkey (+30% from $12.4 billion to an estimated $16 billion).

FDI inflows to Africa fell by 31% in 2015 to an estimated $38 billion, due largely to a decline of FDI in Sub-Saharan Africa. Flows to North Africa reversed their downward trend as Egypt saw a rebound of investment from $4.3 billion in 2014 to an estimated $6.7 billion in 2015. Central Africa and Southern Africa saw the largest declines in FDI, said UNCTAD, adding that the end of the commodity “super-cycle” had an impact on resource-seeking FDI.

Flows into Mozambique were down 21% but still notable at an estimated $3.8 billion, while Nigeria saw its FDI decline by 27% to an estimated $3.4 billion as the country was hit hard by the drop in oil prices. FDI flows into South Africa fell dramatically, down 74% to $1.5 billion.

According to UNCTAD, FDI flows to Latin America fell again in 2015 (-11%), reaching $151 billion. “Slowing domestic demand and a strong terms of trade shock caused by plummeting commodity prices hampered investment in South America.”

FDI flows to Brazil, the region’s principal recipient, fell 23% to $56 billion. Inflows were also impacted by the divestment of GVT Participacoes S.A. – a telecommunications provider – by Vivendi S.A. (France) for $9.8 billion to Telefonica Brasil S.A. (Brazil).

Falling profit margins in the extractive sector slowed new investments and crimped reinvestment in South America’s commodities exporters, with flows falling in Chile (-38%) and Colombia (-15%), said UNCTAD.

This dynamic notwithstanding, FDI flows to Peru rose (+11%) with an increase in equity investments, it added.

Economic growth and investment in Central America, in contrast, remained robust in 2015, with Mexico registering a 14% increase in FDI to $29 billion.

UNCTAD said that the ongoing geopolitical situation and reduced market confidence in the transition economies led to a further decline of FDI flows by 54%, reaching an estimated $22 billion. FDI flows in South-East Europe rose 3%.

In the Russian Federation and Kazakhstan, the tumbling of international commodity prices weighed heavily on FDI flows, which declined by 92% and 66%, respectively.

Rise in M&As

UNCTAD also noted a pronounced upturn in cross-border M&As, which reached their highest level since 2007.

“MNEs took advantage of record cash positions, as well as exceptional global liquidity conditions, to make acquisitions with a view to boosting revenue growth and generating cost efficiencies.”

Net sales rose to $644 billion, an increase of 61% over the previous year, spurred on by brisk deal-making in the manufacturing sector (+132%, to $339 billion).

In particular, sales of assets related to the manufacturing of non-metallic mineral products, machinery and equipment, and electrical components rose sharply.

In contrast, sales in the extractive sector slid (-51%) as plummeting oil prices contributed to a significant retreat in the total value of deals in crude oil and natural gas activities (-68%).

Developed economies were largely the target of the upswing in cross-border M&As. Net sales in the EU rose 68% to $269 billion, driven by strong increases in Ireland and the United Kingdom (together representing roughly three-quarters of the increase).

UNCTAD said tax inversion deals, carried out by MNEs from the United States, were evident in both countries.

Deal activity in the United States rose from $11 billion in 2014 to $228 billion in 2015, with the jump in part reflecting the effect of the low 2014 value due to the divestment of Verizon Wireless (United States) by Vodafone (United Kingdom) in that year, but also a growing appetite for assets in the country.

In contrast, said UNCTAD, the value of M&As in developing economies fell sharply (-44%) to $68 billion.

The abovementioned divestment in Brazil pulled Latin America and the Caribbean down (-60%), while sales in developing Asia retreated (-61%) from their exceptional levels, fuelled by large mega-deals, of 2014.

Greenfield project announcements, which are indicative of MNEs’ capital expenditure intentions, remained stagnant, registering little dynamism in 2015 (+0.9%).

Project announcements in developing economies declined sharply, particularly in Africa (-19%) and Latin America and the Caribbean (-23%), said the UNCTAD report. (SUNS8163)              

Third World Economics, Issue No. 607, 16-31 December 2015, pp9-11