Global FDI losing momentum in ’12

Global Foreign Direct Investment (FDI) inflows rose 16 per cent in 2011, surpassing the 2005-2007 pre-crisis level for the first time, despite the continuing effects of the global financial and economic crisis and the current debt crisis in Europe, UNCTAD’s annual survey of investment trends reports.

The World Investment Report 20121, subtitled ‘Towards a New Generation of Investment Policies,’ was released recently. A resurgence of economic uncertainty and the possibility of lower growth rates in major emerging markets risk undercutting FDI in 2012, the report contends. UNCTAD predicts the growth rate of FDI will slow in 2012, with flows levelling off at around $ 1.6 trillion.

Leading indicators are suggestive of this trend, with the value of both cross-border mergers and acquisitions and greenfield investments retreating in the first five months of 2012.

UNCTAD projections for the medium term based on macroeconomic fundamentals continue to show FDI flows increasing at a moderate but steady pace, reaching $1.8 trillion in 2013 and $1.9 trillion in 2014, barring any macroeconomic shocks.

Investor uncertainty on the course of economic events for this period is still high, with UNCTAD’s annual survey of executives of Transnational Corporations (TNCs) finding that roughly half of respondents are either neutral or undecided about the state of the global investment climate in 2012.

The World Investment Report 2012 also finds that developing economies continued to account for nearly half of global FDI (45 per cent) in 2011 as their inflows reached a new record high, rising 11 per cent to $684 billion (see table). Inflows to transition economies accounted for another six per cent. They increased during 2011 by 25 per cent.

Rising FDI to these economies was driven by a strong increase in flows to Asia and better-than-average growth in Latin America and the Caribbean and the transition economies. Flows to Africa, in contrast, continued to decline in 2011. The poorest countries remained in FDI recession, with flows to the least developed countries retreating 11 per cent to $15 billion.

FDI is projected to continue to rise in both developing and transition economies overall, reaching, respectively, $720 billion and $100 billion in 2012, and increasing to between $760 billion–$930 billion for developing countries and $110 billion–$150 billion for transition economies by 2014 (see table).

FDI from developed countries rose sharply in 2011 – by 25 per cent – to reach $1.24 trillion. All three major developed-economy investor blocs – the European Union, North America and Japan – contributed to this increase. FDI from the United States was driven by a record level of reinvested earnings, as TNCs built on their foreign cash holdings.

The rise in FDI outflows from the European Union was driven by cross-border mergers and acquisitions. An appreciating yen improved the purchasing power of Japanese TNCs, resulting in a doubling of their FDI outflows, with net purchases of mergers and acquisitions in North America.

Additional major trends in global FDI in 2011:

nGreenfield investment projects, which had declined in value terms for two straight years, held steady in 2011 at $904 billion. Cross-border mergers and acquisitions rose 53 per cent in 2011 to $526 billion, spurred by a rise in the number of megadeals (those with a value over $3 billion) to 62 in 2011, up from 44 in 2010. Although the growth in global FDI flows in 2011 was driven in large part by cross-border mergers and acquisitions, the total project value of greenfield investments remains significantly higher than that of cross-border mergers and acquisitions, as has been the case since the financial crisis.

nPrimary-sector and service-sector FDI picked up after two years of decline. Service-sector FDI, which reached $570 billion in 2011, saw its rebound driven by increased activity in utilities (electricity, gas and water) and transportation and communications. Primary-sector investment, which reached $200 billion, was boosted by strong commodity prices and industry consolidation. The sectoral distribution of projects indicates that the share of both sectors rose slightly at the expense of manufacturing.

nForeign affiliates’ economic activity rose in 2011 across all major indicators of international production. During the year, foreign affiliates employed an estimated 69 million workers globally, who generated $28 trillion in sales and $7 trillion in value added.

Record cash holdings by TNCs, estimated at between $4 trillion and $5 trillion, have so far not translated into sustained growth in investment levels. Data on the largest 100 TNCs shows that during the global financial crisis they cut capital expenditures in productive assets and acquisitions (especially foreign acquisitions) in favour of holding cash. Cash levels for these 100 firms alone stood at $1 trillion in 2011, of which an estimated $105 billion was additional – above the level suggested by average pre-crisis cash holdings.

Although recent figures suggest that the capital expenditures of these firms on productive assets and acquisitions are picking up, the additional cash they hold is still not being fully deployed. This current cash overhang may fuel a future surge in FDI. Projecting the experience of the top 100 TNCs over the estimated $5 trillion in total TNC cash holdings suggests that these firms may be holding back more than $500 billion in investable funds, or around one third of global FDI flows, the Report says.

The UNCTAD FDI attraction index, which measures the success of economies in attracting FDI (in total and in relation to their size), features eight developing and transition economies in the top 10, compared with only four a decade ago (see figure 1). Newcomers in 2011 to the top ranks include Ireland and Mongolia.

Just outside the top 10, a number of countries saw sustained improvements in their rankings, including Peru and Ghana, both of which have improved their rankings in each of the last six years.

The UNCTAD FDI contribution index – introduced for the first time in the World Investment Report 2012 – ranks economies on the basis of the significance of FDI and foreign affiliates for their economies in terms of value added, employment, wages, tax receipts, exports, research and development expenditures and capital formation. According to this year’s index, the host economy with the largest contribution by FDI is Hungary, followed by Belgium and the Czech Republic.