Global FDI defies crisis to jump 17% to $ 1.5 trillion in 2011

Reuters: Global Foreign Direct Investment flows jumped by 17% to $ 1.5 trillion in 2011 despite worldwide economic turmoil and there is reason to be cautiously optimistic of another rise in 2012, a United Nations report said on Tuesday.

Most of the increase was due to cross-border mergers and acquisitions.

Rising FDI implies increasing globalisation and growing appetite for big projects abroad, which may lead to more trade and create more manufacturing capacity around the world. Set against the gloomy mood of the world’s financial markets, a returning appetite for investment could be a rare positive sign.



Global FDI flows rose for the second year running to an estimated $1.509 trillion in 2011. That is 28 per cent more than two years ago in 2009 but still 23 per cent below the 2007 peak.

Spending on cross-border mergers and acquisitions leapt by 49.7 per cent to $507.3 billion in 2011 while greenfield investments, where an investor starts a foreign operation from scratch, slipped 3.3 per cent to $780.4 billion.

“GDP growth is still positive, and although it’s lower than previously expected, companies still have cash in their pockets, and they have to invest anyway. But at the same time there’s uncertainty because of the fragility of the world economy,” said Astrit Sulstarova, an Economist at the United Nations Conference on Trade and Development, which produced the report.

Developing countries received record inflows of FDI, mainly driven by greenfield investments. China, the second biggest FDI destination, received $124.0 billion of FDI, a record for the second year in a row. FDI to India rebounded 38 per cent after a big fall in 2010, but remained far behind China at $34 billion.

Flows to Latin America rose by 35 per cent to $216.4 billion, with a 31 per cent fall in M&A more than made up for by a surge in investment in new projects in Brazil, Argentina and Chile. Caribbean offshore financial centres also got a boost in FDI spending because of uncertainty in global markets.

Flows to developed countries rose for the first time in three years, up 18 per cent at $753 billion, driven by a 23 per cent rise in investment to Europe. FDI to the United States, the top destination, fell by 7.7 per cent to $210.7 billion.

However, the investment in Europe was not all “healthy” FDI indicating an increased investor appetite. It also reflected sales of non-core assets by European companies, fire sales of distressed assets and opportunistic deals to take advantage of the weak euro and other European currencies.

The boom in M&A, which owed much to megadeals in extractive industries and pharmaceuticals in 2011, may also be built on shaky foundations.

“New deal activity began to falter in the middle part of the year as the number of announcements tumbled dramatically. Completed deals, which follow announcements roughly by half a year, also started to slow down by year’s end,” said the report.

Overall, the figures represent a surprisingly robust second half of 2011 since UNCTAD had previously warned that a bleak second half might push overall FDI flows in 2011 to the bottom end of its full year forecast of $1.4-1.6 trillion.

UNCTAD said it was cautiously optimistic about 2012.

“Based on the current prospects of underlying factors, such as GDP growth and cash holdings by transnational corporations, UNCTAD estimates that FDI flows will rise moderately in 2012, to around $1.6 trillion,” the report said.

But risks remain from a fragile world economy and the thin M&A orderbook, which suggests equity investments will slow in developed countries in 2012.