4 Feb 09 - Assessing the impact of the current financial and economic crisis on global FDI flows

Global FDI flowsNew study released by UNCTAD shows that gloomy market prospects, reduced financial resources and aversion to risk have already had a negative impact on FDI flows in 2008 and that this effect could deepen in 2009.

The year 2008 marked the end of a growth cycle in international investment that started in 2004 and saw world foreign direct investment (FDI) flows reach a historic record of $1.8 trillion in 2007.

Due to the impact of the on-going worldwide financial and economic crisis, FDI flows could decline by more than 20% in 2008. A further decrease in FDI flows can be expected in 2009.

The fall in global FDI in 2008-2009 is the result of two major factors.

  1. The capability of firms to invest has been reduced by a fall in access to financial resources, both:
  • internally — due to a decline in corporate profits) and

  • externally — due to lower availability and higher cost of finance.
  1. The propensity to invest has been affected negatively by economic prospects, especially in developed countries that are hit by a severe recession.

In addition, a very high level of risk perception is leading companies to extensively curtail their investment plans.

The set-back in FDI is also a fall in cross-border mergers and acquisitions (M&As). It has also taken the form of a rising wave of divestments and restructurings. International greenfield investments have been less impacted to this point, but could be increasingly affected in 2009 as a large number of projects are presently being cancelled or postponed.

Developed countries have so far been the most affected, with a decline in FDI inflows in 2008, due mainly to sluggish market prospects. Flows into developing economies continued to grow in 2008, but at a much lower rate than the year before. An outright decline in FDI inflows to those countries is possible in 2009, due to a pull-back both in efficiency and resource-seeking FDI aimed at exporting to advanced economies, and in market-seeking FDI aimed at servicing local markets with growth prospects that, although still positive, have receded.

Medium-term FDI prospects are made especially difficult to assess, due to the exceptional magnitude of the present crisis and to the fact that it could lead to major structural changes in the world economy.

To illustrate uncertainties and provide a framework for further discussion and analysis, this paper presents a set of three scenarios:

  • Quick recovery of FDI as soon as 2010

  • Slow recovery beginning in 2011

  • No recovery before 2012

Adequate public policies will obviously play a major role in the implementation of favourable conditions for a quick recovery in FDI flows. Structural reforms aimed at ensuring more stability in the world financial system, renewed commitment to an open environment for FDI, the implementation of policies aimed at favouring investment and innovation are key issues in this respect.

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