Cross-border mergers and acquisitions (M&As) were the driving force that led to record volumes of foreign direct investment by the developed countries. Transnational corporations (TNCs)(1) from these countries boosted outflows of foreign direct investment (FDI)(2) by 46 percent to US$595 billion last year, as they received inflows of FDI that rose 68 per cent to US$460 billion, according to the United Nations Conference on Trade and Development (UNCTAD), which today publishes - World Investment Report 1999: Foreign Direct Investment and the Challenge of Development(3).
United States Flows Hit Records
The expanding United States economy and rising asset prices, which enhance a firm’s capacity to raise funds, fueled United States FDI outflows: they reached US$133 billion last year, up from US$109 billion in 1997. Just over one-half of the outflows went into the European Union, while outflows to Brazil and Mexico, two of the largest destinations among developing countries, declined. Non-bank finance and insurance figured prominently in these outflows. United States FDI inflows, meanwhile, rose by US$82 billion to US$193 billion, mainly because of large-scale mergers and acquisitions, such as Daimler-Benz’s acquisition of Chrysler and BP’s acquisition of Arco. European Union flows to the United States almost tripled, to US$155 billion.
The immediate outlook for United States FDI outflows and inflows may be affected by short-term business developments and interest rate trends, notes UNCTAD. A tightening in rates by the Federal Reserve Board could have a negative impact on flows. Moreover, higher interest rates may strengthen the dollar and experience suggests that a dollar appreciation tends to discourage FDI into the United States.
"A still more critical question", UNCTAD says, "is whether rising interest rates would trigger a major correction in asset prices. If stock markets were to decline significantly, United States FDI outflows could be affected negatively as United States investors would be constrained financially. On the other hand, foreign investors might take advantage of reduced asset prices to enter through M&As and expand their activities in the United States."
A host of broad additional factors could impact investment flows to and from the United States. For example, if China were to become a member of the World Trade Organization, this would be an incentive for export-oriented FDI flows from the United States (and other countries) to China.
Quite a different, yet no less important influence, on United States FDI trends, will be the trend of Japan’s economy. A Japanese recovery may result in stronger inflows to the United States. Such flows in the past few years have been characterized by large transactions (almost 90 per cent of total outflows in recent years have been accounted for by investments of over US$100 million).
Big Boost in European FDI
Overall, in 1998, major increases were seen in flows to and from Western Europe with the European Union accounting for almost all of the region’s volume. However, Swiss FDI outflows were also particularly noteworthy, rising by US$700 million to US$17.4 billion.
The EU as a whole continued to be the largest FDI recipient and the most important outward investor worldwide. Total FDI inflows to the European Union rose US$100 billion to US$230 billion; outflows soared by over 75 per cent to US$386 billion, from US$218 billion in 1997.
Given the magnitude of some cross-border M&As nowadays it takes only a few major transactions, in some cases just one, to influence the FDI trends for individual countries from one year to the next. Sweden’s FDI inflows last year, for example, were over US$19 billion, almost double the 1997 total and nearly four times the 1996 volume; inflows last year to the Netherlands more than tripled, to US$32 billion, while those to Spain rose by over 80 per cent, to exceed US$11 billion.
In terms of overall FDI inflows last year, the United Kingdom led the European Union list with US$63 billion (US$37 billion in 1997), followed by France at US$28 billion (US$23 billion), then Belgium and Luxembourg at US$21 billion (US$12 billion), followed by Germany at US$20 billion, double its 1997 volume.
As for FDI outflows, Belgium and Luxembourg tripled their total to over US$23 billion, Finland’s volume almost quadrupled to US$20 billion, Sweden boosted its outflows by US$10 billion to US$22 billion and Spain increased its outflows by over 50 per cent to US$18 billion. The European Union leaders, however, were the United Kingdom at US$114 billion (US$64 billion), Germany at US$87 billion (US$40 billion), France at US$41 billion (US$36 billion) and the Netherlands at US$38 billion (US$21 billion).
The UNCTAD report notes that, unlike the boost to intra-and extra-European Union investment in the late 1980s and early 1990s which resulted from anticipation of the Single Market Programme, steps towards monetary integration manifested by the adoption of a single currency have so far had only little effect on FDI.
Flows to members of the European Monetary Union (EMU) increased only slightly more than those to non-members in 1998, and the share of EMU members in total FDI inflows to the EU was, in fact, lower than in 1996. This could change in 1999 and beyond, as the advantages and disadvantages of monetary union for the location of FDI become clearer to business executives.
Major global trends are likely to have significant bearing on the European Union’s FDI flows in coming years. For example, WIR’99 points out that the trend towards global networking in the motor vehicle industry is likely to result in an increasing share of this industry in manufacturing FDI inflows and outflows. An indication may be that the share of the car industry in German FDI outflows in manufacturing rose from less than 3 per cent in 1991-1992 to almost 16 per cent in 1996-1997 with a further strengthening in 1998.
Japan on the Sidelines
While the United States and European Union have been the dominant players in global FDI, in light of their weak domestic economic conditions, Japanese TNCs have been modest participants. Japan’s FDI outflows fell by seven per cent in 1998 to US$24 billion, while inflows were at the same level as in 1997 at US$3.2 billion.
This year’s WIR states that: "Prospects for significantly higher FDI by Japanese TNCs are not very promising in the near future. In 1998, only slightly more than a quarter of Japanese manufacturing TNCs projected increased investment abroad during the 1999-2001 years, compared to 40 per cent in 1997. If FDI outflows should increase this year, it will be led by M&As, away from the greenfield FDI – the dominant mode preferred by Japanese TNCs so far."
The World Largest TNCs dominated by developed country firms
With two exceptions (Petróleos de Venezuela and Daewoo of Republic of Korea), the largest 100 TNCs in the world are from developed countries. According to the list of the world largest TNCs (based on foreign assets) published by UNCTAD in its 1999 WIR, altogether these firms held an estimated US$1.8 trillion in foreign assets, sold products worth about US$2.1 trillion abroad and employed some six million persons in their foreign affiliates in 1997.
In the new list, General Electric of the United States again ranks as the world’s largest TNC (based on foreign assets), as Ford Motor Company takes the second spot. The Royal Dutch Shell Group, which for many years was number one, slips to third place, according to 1997 data on foreign assets. For those TNCs for which data was fully available, Exxon Corporation topped the latest rankings in terms of its foreign sales with a 1997 volume of US$105 billion, while Nestlé SA was the largest foreign employer, with 219,442 foreign-based employees. No less than 89 per cent of the TNCs on UNCTAD’s Top 100 list are from the European Union, North America and Japan; and, the overwhelming majority of these firms have been in the top 100 ranking since 1990.