World FDI flows are likely to decline 40% this year, to $760 billion(1), according to projections released today by the United Nations Conference on Trade and Development (UNCTAD). Should this happen, it would represent the first drop since 1991 and the largest over the past three decades(2). However, the level of flows in 2001 is still expected to be higher than that in 1998 (see table 1) and also higher than the 1996-2000 average.
This year´s projected dip is the result of a recent decline in cross-border mergers and acquisitions (M&As), which account for the bulk of FDI. The significant increases in FDI flows in 1999 and 2000 - by about 50% and 18%, respectively - were in fact caused by megadeals (deals worth over $1 billion) of M&As, as represented, for example, by the $200 billion acquisition of Mannesmann (Germany) by VodafoneAirTouch (United Kingdom) in 2000.
The decline in M&As - both cross-border and domestic - is related to the slowdown in the world economy. The prices of shares, for example, which in 2000 were used to finance some 56% of cross-border M&As, fell significantly, when measured in terms of the exchange of stocks. A lull in the consolidation processes in certain industries through M&As (e.g. telecommunications, automobiles) also plays a role.
More specifically, the value of cross-border M&A deals completed between January and early September this year stood at some $400 billion, about one third of the total value in 2000(3). The number of megadeals during the same period was 75, worth $253 billion. This corresponds to some 40% of the total number and 30% of the total value of megadeals in 2000. As of early September, the largest cross-border M&A this year - the acquisition of VoiceStream (United States) by Deutsche Telekom AG (Germany) (see table 2) - was worth $24.6 billion. The value of worldwide M&As (both domestic and foreign) during the first eight months of 2001 was $1.1 trillion, half the value reported for the same period last year.
The parallel path of FDI flows and cross-border M&As is more pronounced in developed than in developing countries, partly because most FDI in the latter countries is greenfield investment.
FDI flows are expected to decrease significantly in developed countries, from $1.005 trillion in 2000 to an estimated $510 billion in 2001, i.e. by 49%. In the case of developing countries, the decline is estimated to be 6%, from $240 billion to $225 billion. Decreases in FDI inflows are expected in both Latin America and developing Asia. As a result, the share of developing countries in world FDI inflows may rise to 30%, higher than the share attained in 1998. FDI inflows in Central and Eastern Europe are expected to remain stable in 2001, at $27 billion.
1. On the basis of information for 51 host countries as of 3 September 2001. The available data cover the first two quarters or the first several months of this year. Thus, estimates for 2001 in these countries are derived by annualizing these data. These host countries accounted for more than 90% of world FDI inflows in 2000
2. FDI inflows declined in 1976 (by $6 billion or 22%), 1982 (by $12 billion or 17%), 1983 (by $7 billion or 13%), 1985 (by $3 billion or 5%) and 1991 (by $47 billion or 23%).
3. The data cover completed M&As deals involving more than 10% equity acquisition only, provided by Thomson Financial Securities Company.