Global trends in investment

UNCTAD released its World Investment Report 2012 recently. The report indicated that for the first time since 2007, global FDI inflows increased by 16% despite the continuing effects of the global and financial economic crisis.

However, UNCTAD predicts the FDI growth rates to decline in 2012 due to economic uncertainty and the possibility of lower growth rates in developing countries. Indications are that the rising FDI to developing countries driven by a 10% increase in Asia and 16% increase in Latin America and the Caribbean will continue to keep growing in the medium term.

Among the developing regions, Africa is expected to get increased FDI inflows while FDI growth is expected to temperate in East and South East Asia, South Asia and West Asia and Latin America.FDI flows to transition economies are expected to increase and by 2014 is expected to exceed the 2007 peak. Among the developing and transition economy countries which have shown increased FDI inflows are Mongolia, Ghana, Mozambique, Nigeria, Albania, Madagascar, Argentina, Philippines, Slovenia and South Africa.

FDI inflows

In assessing the FDI inflows in each country, UNCTAD has introduced what is termed as UNCTAD FDI Contribution index which ranks economies on the basis of the significance of the investment to the host country. Index indicators include value addition, employment, wages, tax receipts, exports, research and development, share of employment in total formal employment, etc. According to this index, foreign investors have made relatively higher contributions in local economies of developing countries, especially in Africa.

In South Asia, FDI inflows have reached $ 39 billion mainly due to investments in India which accounted for more than four fifths of the region’s FDI inflows.

New opportunities

Although the countries in the region faced different challenges such as political risks and obstacles to FDI, which have to be handled if FDI is to be attracted, UNCTAD notes that recent developments in the region such as the improving relationship between India and Pakistan has created new opportunities.

Since accession to the WTO, Russia has become an important destination for FDI inflows from across the globe. Although most FDI s came from the developed economies, mainly EU members, investment projects from developing and transition economies also increased.

Although the services sector in Russia has still not gained much importance for FDI, its importance is expected to increase with the accession to the WTO. With accession to the WTO, Russia has committed to reduce restrictions on foreign investments in a number of service industries including banking, insurance, business services, telecommunications and distribution.

Accession to the WTO is expected to increase investor confidence and boost investment environment. As the services sector in Russia is a comparatively underdeveloped and unsaturated market, this might be an area for prospective investors to look for promising opportunities.

Another development noted by UNCTAD is the increase in bilateral and regional agreements with investment provisions, economic partnership agreement. Traditional investment treaty making has continued to lose momentum, perhaps due to many causes, including:

I) gradual shift towards regional treaty making

II) IIAs becoming increasingly controversial and politically sensitive.

Regionalism

Although bilateral agreements still dominate in terms of economic significance, regionalism has become more important as seen by the ongoing investment negotiations in the Trans-Pacific Partnership Agreement (TPP), conclusion of the 2012 trilateral investment agreement between China, Japan and the Republic of Korea, Mexico-Central America FTA which includes an investment chapter and the EU’s negotiations, including investment agreements and developments in ASEAN.

UNCTAD finds that by addressing comprehensively the trade and investment elements of international economic activities, such broader agreements often respond better to today’s economic realities in which international trade and investment are increasingly connected.

But while such treaties have their plus points in that they can bring about consolidation and harmonisation of investment rules which can result in multilateralism, they can also have the opposite results in that instead of simplification, it may lead to a multiplication of rules.

“New generation” of agreements

The report also highlights the rise of a “new generation” of international investment agreements that include the advancement of sustainable development as an objective, while acknowledging the difficulties of implementing sustainable development provisions in international investment agreements, and of managing the “systemic complexity” of the global investment regime.

The report calls on countries to design policies aimed at enhancing the impact of foreign investment on sustainable development and inclusive growth. The UNCTAD report is a valuable document for study by those wanting to promote investment as it deals with present global trends in investment.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)