Developed nations feel the pinch as foreign direct investment (FDI) bottoms out in 2018 to levels last seen during the global financial crisis.
Global foreign direct investment (FDI) fell by nearly a fifth in 2018 to an estimated $1.2 trillion from $1.47 trillion in 2017, according to the latest UNCTAD Global Investment Trends Monitor released on 21 January.
The drop, the third in as many years, brings FDI flows back to the low point reached after the global financial crisis, with the decline concentrated in developed countries where inflows fell by as much as 40% to an estimated $451 billion.
“The underlying FDI trend has shown anemic growth since the global financial crisis and has been on a downward trajectory since 2013,” James Zhan, Director of UNCTAD's Investment Division said.
“The factors behind this negative trend, such as lower profitability of foreign investment and shifts in global value chains, are not changing in the near future. The macro-economic backdrop is also deteriorating," he said.
According to UNCTAD, the 2018 FDI decline stems from corporate income tax reform in the United States. From 2017, United States multinational enterprises have embarked on a large repatriation of accumulated foreign earnings, a move which has hit Europe hard.
In 2018, Europe’s foreign investment inflows amounted to $100 billion – an unprecedented 73% decline – and a value last seen in the 1990s. The United States also saw its inflows dip to $226 billion, a decline of 18%.
In contrast, global cross-border mergers and acquisitions were up 19% and announced greenfield investments were positive, up 29%, indicating that FDI could improve in 2019.
Holding the fort
Meanwhile, developing economies’ FDI flows have been more resilient.
UNCTAD shows that FDI to developing economies increased by 3% to $694 billion in 2018. Developing nations accounted for half of the top 10 host economies for FDI inflows.
Of the developing economies, Asia and Africa benefited the most, with flows increasing to developing countries in Asia by 5%.
East and South-East Asia, where inflows were up 2% and 11% respectively, took the lion’s share of foreign investment, accounting for one-third of global FDI in 2018 and almost all growth in FDI to developed economies.
“South East Asia is the main FDI growth engine,” said Mr. Zhan, with the region rebounding from a dip in 2017, buoyed by growth in Indonesia and Thailand.
Greenfield announcements in developing economies rose by 47% reaching an estimated $539 billion and linked to Asian growth prospects.
African FDI flows were up 6%, though growth was concentrated only in a few countries such as Egypt and South Africa.
“Slow economic recovery in Latin America and the Caribbean saw flows drop by 4%,” Mr. Zhan added.
Challenging world stage
While the outlook is more positive for 2019 with a rebound expected, Mr. Zhan says there are still many uncertainties facing the global economy.
“Beyond the immediate impact of economic headwinds, the underlying trends for global FDI remain weak, driven by one-off factors such as tax reforms, megadeals and volatile financial flows,” says Zhan.
“As the initial flood of earnings repatriations in the United States abate, things will normalize rebounding to ‘average’ levels of inflows. But the outlook for the global economy is darkening, underpinned by structural factors in the economy.”
These include policy factors, trade tensions and a return of protectionist tendencies.
In addition, the strengthening of the digital economy and thus a shift toward intangibles in international production will play a role, alongside significant declines in FDI returns, already evident over the past five years.