Foreign direct investment (FDI) inflows to developed countries declined for the second year in a row, falling to $460 billion in 2002 from $590 billion in 2001, according to the World Investment Report 2003(1), released today by UNCTAD. The US and the UK alone accounted for about 54% of the drop in all countries with reduced inflows in 2002. But the decline was broad-based, involving 16 of 26 countries. Large drops in inflows of equity due to reduced cross-border mergers and acquisitions (M&As) and a fall in intra-company loans were behind the reduction in inflows in major host countries. Despite the downturn, however, FDI flows to developed countries in 2002 remained above the average levels of 1996-1999.
UNCTAD expects FDI inflows to increase in some developed countries this year, but flows to the developed countries as a group are not likely to exceed 2002 levels. Future flows will very much depend on economic recovery - globally and especially in the developed countries - and on the success of efforts to strengthen investors´ confidence. Low profits, falling equity prices, concerns about corporate debt and cautious commercial bank lending might all dampen prospects for increased investment.
Prospects bright, say investment agencies
Developed country respondents to UNCTAD´s survey of investment promotion agencies (IPAs) see prospects for FDI in developed countries as rather bright for 2003-2004, although on balance they are much more cautious in their expectations than their counterparts from developing regions (see press release TAD/INF/PR71). Optimism significantly increases for the longer term, with almost three fifths of the respondents (58%) expecting an improvement in the period 2004-2005 (as compared to 93% in developing countries). The survey suggests that the United States is expected to be the most important source of FDI during the period 2003-2005, followed at some distance by Germany, France, Japan and the UK.
As an FDI recipient, the US last year lost its lead position and ranked fourth among the top developed countries. It experienced the largest drop in FDI inflows within that group, followed by the UK. A continuing slowdown in corporate investment caused by weak economic conditions and reduced profit prospects, a pause in consolidation in some industries and declining stock prices were the major factors behind the decline, which occurred in parallel with, and largely in the form of, a drop in cross-border M&As.
In the US, foreign equity inflows decreased as cross-border M&As (especially by EU firms) fell, largely due to slow economic growth in the US and several EU home countries, as well as to uncertain prospects for recovery. Large repayments of intra-company loans partly offset inflows of equity and reinvested earnings. In the EU, FDI inflows were down by 4%, partly as a result of the economic downturn and the decline in cross-border M&As. The top EU recipients were Luxembourg, France and Germany. EU countries whose FDI increased include Finland, Germany, Ireland and Luxembourg. Inflows to other Western European countries as a whole fell last year, with uneven performances by individual countries: inflows to Iceland and Norway declined, while those to Switzerland rose and, as in the past, were directed mainly at service industries. In Japan, FDI inflows gained by 50%, mostly through the acquisition of Japanese financial companies; inflows from the EU almost doubled. FDI flows to Australia almost tripled to a record high, while flows to New Zealand and Canada shrunk.
FDI outflows from developed countries dropped by 9% between 2001 and 2002, from $661 billion to $600 billion. The composition of the top five outward investors from the developed countries changed, as Japan overtook Germany, ranking fifth after Luxembourg, France, the US and the UK (see figure). Outflows from eight of 25 developed economies rose, the largest increases in relative terms being from Norway, Sweden and Austria. About a third of Austria´s outflows last year went to Central and Eastern Europe (CEE). Outflows from the US also climbed, by about 15%. Despite the increase in outflows to almost all developed countries, however, US outflows to developing countries fell by about 20%, particularly to Latin America. In contrast, EU firms were increasingly investing in the CEE region (as well as in China), as were those from other developed countries, such as Switzerland. The main destination for Japanese outflows in 2002 was again the United States, with flows expanding by about 10% over the previous year.
The 100 largest non-financial transnational corporations (TNCs) in the world, almost exclusively from developed countries, were affected by the global economic downturn: the composition of the list changed, with about a quarter of the previously listed companies dropping out. The newcomers to the list are mainly in the tertiary sector. There are no changes to the top positions in the ranking: leading the list again are Vodafone (United Kingdom), followed by General Electric (United States).
During the 2001-2002 downturn, the number of developed countries that introduced changes to their FDI regimes increased, from 12 in 2001 to 19 in 2002. There were 45 regulatory changes in 2002 alone. Over 95% of all new national policy measures adopted by developed countries during 2001-2002 were more favourable to FDI, involving, for example, such measures as tax incentives (as in Belgium, Canada and Ireland), or providing guarantees (as in Belgium, Ireland and New Zealand). Developed countries continued to enter into bilateral and regional agreements at a fast pace, with a cumulative number of 1,169 bilateral investment treaties and 1,663 double taxation treaties concluded by the end of 2002.