Global FDI flows will remain sluggish in the short term but could pick up steam in the medium term, according to an UNCTAD survey of investment promotion agencies (IPAs) from 106 countries. The survey also suggests that greenfield investment may become more important as the preferred mode of entry for FDI.
The survey was conducted during February-March to assess the impact of the current world economic situation on FDI flows, especially in light of their recent global slump -- the largest decline in 30 years. IPAs are an important antenna for FDI prospects and the location strategies of transnational corporations (TNCs): they respond to foreign investors´ inquiries on a daily basis, help investors in their search for locations, assist with feasibility studies and frequently participate in the approval of investment projects.
According to the agencies covered by the survey, while many countries have experienced divestment and retrenchment of investment plans, developing countries weathered the economic slowdown better than developed countries (figure 1): 45% of the latter reported cases of divestment, but in the developing world the figure was only 23%, and in Central and Eastern Europe, 20%. This may reflect both weaker market performance in the developed countries and a search for lower production costs. Three fifths of the respondents, most of which are from the developing world, reported that their countries had received new foreign investment.
Optimism prevails in developing world
A similar regional pattern emerges in agencies´ expectations about the longer-term prospects (figure 2). Optimism is much greater in developing countries (92% of respondents) and Central and Eastern Europe (80%) than among their industrialized counterparts (58%), which were the hardest hit by the current economic downturn. Among the developing regions, however, Latin America is the most pessimistic (42%), expecting gloomy or worsened prospects for the short term.
But no matter what the region, the majority are optimistic about their own national prospects as investment destinations (figure 3), although respondents tended to be more upbeat about longer-term prospects (2004-2005) than short-term (2003-2004). In contrast to the 42% who thought the outlook would remain the same or worsen in 2003-2004, for 2004-2005 that proportion drops to 16%, with 84% betting on an improvement. Many agencies factored into their response the possible consequences of the current economic uncertainty and an eventual war in Iraq, which makes their optimism all the more striking.
The fall in world FDI flows is translating into stronger competition for such investment among countries. To cope with the downturn, 56% of the respondent countries have intensified their efforts to attract FDI. Over half of all respondents them have made their FDI promotion more targeted, but only 21% and 24%, respectively, have resorted to additional incentives and further liberalization in order to compete.
A change is under way in almost every aspect of FDI, the survey finds:
- Investment strategies. Some 62% of respondents predicted that TNCs in their country would prefer greenfield projects to M&As as a mode of entry during 2003-2005; 56% of them said the same preference was already being expressed in 2001-2002. This shift is expected to be more pronounced in developing regions (excluding Asia) and Central and Eastern.
- Industrial composition. Most IPAs considered that tourism and telecommunications would be the most important source of FDI in their countries in 2003-2005 (figure 4). Investment in information technology, financial services, energy services and mechanical equipment could decline, while prospects appear brighter for such industries as agriculture, fishing and forestry, electrical and electronic equipment, metal products, textiles and clothing.
- Sources. Although the US, the UK and Germany are still the main sources of FDI, developing countries like China, India and Saudi Arabia are seen as emerging as major investors, with a strong presence in some developing countries. FDI from Germany and France appears to be spreading more widely, particularly in developing countries and Central and Eastern Europe, but the UK and the Netherlands are expected to retrench in all regions and becoming geographically more concentrated. Similarly, Japanese TNCs are seen as withdrawing from a number of regions and focusing their activities within Asia.
- Corporate functions. Investment agencies in some developing countries expect to attract more FDI in higher value-added corporate functions, such as regional headquarter operations and R&D outsourcing; twice as many countries as before are now banking on R&D as an important future source of FDI.
The survey questionnaire covered 154 countries that have established national investment promotion agencies or a government entity with an investment promotion function. Of the 154, 106 responded, representing a 69% response rate (72% for developed countries, 64% for developing countries and 79% for countries in Central and Eastern Europe).