The United States is the world´s leading recipient of foreign direct investment (FDI) and is likely to keep that place for the foreseeable future, says the World Investment Report 2002(1), released today by the United Nations Conference on Trade and Development (UNCTAD). The Report finds that, despite the economic slowdown and the events of September 11 last year, the US managed to retain its position as the #1 FDI recipient and also regained its spot as the world´s largest outward investor (table).
Although the country´s inflows and outflows both dropped last year - inflows by more than half, to $124 billion, and outflows by a third, to $114 billion - this is part of a worldwide decline of more than 50%. An UNCTAD survey of major investors worldwide - supported by other surveys - found that the US is still the world´s most favoured FDI destination. It also indicated that the investment plans of most respondents were unaffected by the events of September 11.
Of the top five companies on UNCTAD´s list of the world´s 100 largest transnational corporations (TNCs), ranked by foreign assets, three are from the United States: General Electric, in second position; ExxonMobil, third; and General Motors, fifth. The UK´s Vodafone Group is first.
ExxonMobil is the largest TNC in terms of value added, comparable in size to the economy of Chile or Pakistan (see press release TAD/INF/PR47). As in previous years, the United States companies that rank among the world´s 100 largest TNCs operate mainly in the automotive and natural-resource-related industries.
US: Unrealized potential
The potential for the United States to attract FDI remains high, according to the Report. UNCTAD´s new Inward FDI Potential Index, based on eight structural economic variables, shows the US topping a list of 140 countries ranked by that potential (figure 1).
At the same time, the United States ranks only 74th on UNCTAD´s new Inward FDI Performance Index of 140 countries, suggesting that, compared to its economic size, the country would be expected to attract more FDI than it actually does (figure 2). Its sound economic fundamentals mean that it has much unrealized potential.
The Report states that the magnitude of FDI inflows to the US is relatively low compared to the size of its GDP, with a ratio of 0.8. Neighbouring Canada has a ratio of 1.6. According to Karl P. Sauvant, lead author of the Report, "This means that the attraction of the United States as an FDI destination is still strong, and the country most likely will remain the leading FDI recipient in the foreseeable future".
In 2001, the services sector in the United States, led by finance and insurance, accounted for more than half of the country´s outward FDI and one third of its inward FDI (figure 3). The main destination of the outward FDI was the EU, followed by the country´s NAFTA partners, Canada and Mexico, which together received more than a quarter of total outflows (largely due to a single transaction, Citicorp´s acquisition of Mexico´s Banamex for a reported value of $ 12.5 billion).
US outflows to Latin America increased, mainly due to the Banamex transaction (23% of total FDI outflows, compared to 14% in 2000). But the share of EU countries in FDI inflows to the United States declined from three quarters in 2000 to less than half in 2001, as Switzerland became the most important individual home country for FDI into the United States, followed by Germany, with the United Kingdom in fifth place (figure 4).
Mergers and acquisitions provide opening to US for foreign investors
UNCTAD reports that the primary mode of entry into the United States was through mergers and acquisitions (M&As), although, as indicated by the fall in FDI inflows, the total value and number of these transactions declined. This drop reflected the economic slowdown and the stock market decline. The euphoria over technology firms and the stock market in general has evaporated, and the problem of auditing irregularities in a number of large TNCs could accentuate this disenchantment in 2002. Already in 2001, cross-border M&A sales and purchases in the US slid by some 40%, to $185 billion and $96 billion, respectively. They are expected to fall further this year.