Foreign direct investment (FDI) flows to developed countries declined by nearly half in 2001, according to updated regional estimates released today by UNCTAD, with flows also down in all developing regions except Africa. Despite the overall decrease in 2001, however, surveys of transnational corporations (TNCs) for the coming three years suggest a limited impact of 11 September on investment plans. The attractiveness of China, especially after its accession to the WTO, is expected to be sustained.
UNCTAD believes that while the 2001 decline is not likely to be recouped this year, it will ultimately be reversed once consumer confidence returns. This is because the key to restoring FDI flows worldwide is economic growth, while the basic factors determining FDI flows – such as the quality of infrastructure, the availability of skills and technological capacity in host countries – remain the same.
UNCTAD had earlier projected a 40% drop in world FDI inflows for last year, down to $760 billion from over $1.3 trillion in 2000 (see TAD/INF/PR21/Rev.1 of 18 September 2001). It attributed the decline mainly to a slowdown of world economic growth (1.3%, as compared with 4.0% in 2000) and to a decrease in cross-border mergers and acquisitions (M&As). The value of cross-border M&As in 2001 stood at barely $600 billion for less than 6,000 deals, vs. $1.1 trillion for some 7,900 deals in 2000(1).
Despite the estimated downturn in 2001, the cross-border investment plans of TNCs for the coming three years have not substantially changed since 11 September, as previously reported by UNCTAD (see TAD/INF/NC27/Rev.1 of 5 December 2001). Major TNCs plan to continue their international expansion, according to a survey of 129 firms undertaken between May and November 2001 by UNCTAD, the Invest in France Agency (Agence Française pour les Investissements Internationaux, or AFII) and Andersen Consulting. The preferred mode of expansion continues to be cross-border M&As in developed countries and greenfield investment in developing countries. The most favoured locations of TNCs for the next three years are the United States, among all developed countries; Germany, the United Kingdom and France, in Western Europe; China in Asia; Brazil in Latin America; Poland in Eastern Europe; and South Africa in Africa. Similarly, up to 72% of the 501 Japanese manufacturing TNCs surveyed in July/August 2001 by the Japan Bank for International Cooperation said they would strengthen and expand their foreign operations, a 55% jump over the previous year. The impact of 11 September on FDI seems to be limited (box 1).
Developed countries
FDI flows to developed countries are estimated to have declined by nearly half in 2001 from the previous record high – from over $1 trillion to $0.5 trillion. Virtually all of the major developed countries experienced a downturn in 2001. Significant decreases were reported for Austria, Belgium and Luxembourg, Denmark, Germany, the United Kingdom and the United States (table 1). Germany has again become a relatively small recipient of FDI, after being the second largest in Western Europe in 2000 on account of the Vodaphone AirTouch acquisition of Mannesmann (the largest cross-border acquisition to date). The considerable drop in FDI inflows to the US last year was partly due to the general economic slowdown and the drop in foreign acquisitions of US firms. In the third quarter of 2001 reinvested earnings were negative, the first time since the fourth quarter of 1998. The decline for Japan was smaller, because of large flows through M&As in the telecommunications industry, which accounted for the bulk of cross-border M&As in Japan.
FDI outflows from developed countries also declined (table 2) and are expected to remain at a low level this year. But the drop in cross-border M&As from the European Union is less marked. In particular, those from Germany rose, leading to a significant increase in that country’s FDI outflows; as a result, Germany became the second largest Western European outward investor after France in 2001(2).
While domestic investment shrunk last year in Japan(3) Japanese investment abroad grew, including a $2.3 billion investment in Lucent Technologies in the United States by Furukawa Electric Co. Japanese investment flows to Asia remained steady as the production facilities of various Japanese manufacturing firms were relocated from Japan in consequence of a further domestic restructuring induced by the current recession, particularly in the electric and electronics industries.
Developing countries
FDI flows to developing countries are also estimated by UNCTAD to be down, from $240 billion in 2000 to $225 billion in 2001. FDI declined in all developing regions except Africa.
Flows into Latin America and the Caribbean as a whole dwindled slightly, from $86 billion in 2000 to $80 billion in 2001, driven by a drop in M&As, including privatizations. Since Spain had become an important investor in Latin America, a decrease in Spanish FDI – from some $20 billion in 2000 to an estimated $8 billion in 2001 (in Argentina, Brazil, Chile and Mexico) – has meant a substantial reduction of FDI flows to the region, as there were no large investments comparable to such 2000 M&A deals as BSCH-Banespa and BSCH-Serfin. But the regional picture is uneven: while flows to Argentina and Brazil dipped, Mexico attracted substantially more FDI in 2001, despite the economic slowdown at home and in the US, overtaking Brazil as the largest recipient in the region. Half of the flows to Mexico are explained by Citicorp’s $12.7 billion acquisition of Bancomex, one of the largest cross-border M&As last year. Another major investment was the $1.8 billion acquisition of four cellular operations of Motorola in Mexico by Telefónica (Spain) (4). Because of these large deals, FDI flows in 2001 are estimated to be over $25 billion, nearly twice those of the previous year.
Brazil attracted less FDI (an estimated $20 billion) in 2001, mainly as a result of slowing privatizations. This decline is concentrated in the services sector – particularly in the telecommunications industry, which had attracted a considerable amount of FDI through privatization in the previous two years. In addition, privatizations in the electric industry encountered problems (such as the indefinite postponement of the privatization of the Sao Paulo state electricity company, Cesp, early last year). A good part of future FDI in Brazil is likely to come from follow-up investment by privatized firms; EDF (Frava), for example, reportedly announced it will invest $500 million in the electrical distribution system of the state of Rio de Janeiro that it had acquired earlier.
Similarly, flows to Argentina halved for the second year in a row, as no large-scale cross-border M&As were registered. Some investment plans have been cancelled(5) or postponed(6) because of the economic crisis. Divestments have been reported as well, with Valeo, the French motor components group, announcing the closure of its plant in Carmen de Areco.
Developing Asia (comprising West Asia, Central Asia and South, East and South-East Asia) also experienced a decline in FDI inflows in 2001, from $144 billion in 2000 to $125 billion in 2001. However, this drop was largely caused by the near-halving of FDI flows to Hong Kong, China, which had recorded an unusually high $64 billion in 2000 (7). Increased flows to India – where FDI inflows for the first three quarters of 2001 were already higher than those for the whole of 2000, according to the Reserve Bank of India – and China have not compensated for this decline.
FDI flows to China gained new momentum in 2001 – an upward trend that is expected to be sustained in the coming years(8). With inflows last year of $46.8 billion, China will again be the largest recipient among developing countries, a position it had lost to Hong Kong in 2000. Many FDI surveys ranked China at the top of FDI locations(9). The largest host country for Korean FDI in 2001 was no longer the United States, but China. Taiwan Province of China, which was already the fourth largest investor in China measured by stock in 2000, has scrapped its $50 million ceiling on investments in the mainland(10). According to JETRO, one-quarter of Japanese TNCs will increase or have already increased FDI in China (figure 1). One-fifth of Japanese TNCs plan to relocate production to China, and in two-thirds of these cases, the move is from Japan to China (figure 2). Relocations from ASEAN countries to China amount to less than 8%; fewer than 2% of the same Japanese TNCs operating in ASEAN countries will stop production completely there and relocate to China
While FDI flows to the Republic of Korea(11) and the Philippines(12) declined in 2001, those to Taiwan Province of China and Thailand remained almost the same as in 2000(13). Reasons for this include slow economic growth and low demand, in particular in the electric and electronics industries. FDI flows to Indonesia have still not recovered, continuing to be negative (divestments) in every quarter since the third quarter of 1998, according to data on a balance-of-payments basis from Bank Indonesia. Judging also by balance-of-payments data, FDI flows to Malaysia similarly declined in 2001(14).
In West Asia, Saudi Arabia, the subregion’s dominant recipient, attracted more FDI in 2001 than in 2000, in part because of the establishment in the latter year of the Saudi Arabian General Investment Authority (SAGIA) and its introduction of a new law allowing wholly-owned foreign affiliates to be established and tax incentives offered. SAGIA has issued licences to foreign companies whose investments reached almost $10 billion, and an additional $25 billion worth of gas projects are planned over the next 10 years.
In Africa, FDI flows increased – from $9 billion in 2000 to $11 billion in 2001 – with rising investments in Morocco and South Africa, even though those in Egypt declined. South Africa recovered from a temporary dip in 2001. As in past years, FDI inflows into this country in 2001 were fuelled by a relatively limited number of large M&As, including privatizations. The largest deal was Acerinox of Spain’s acquisition of Columbus Stainless Steel for 232 million euros. In Nigeria, a large project of liquefied natural gas with an investment between $1.2 and 1.7 billion over several years (up to 2005) is expected to be concluded in early 2002.
Central and Eastern Europe
FDI inflows into Central and Eastern Europe (including former Yugoslavia) remained steady in 2001 at around $27 billion. For the first time since 1989, flows to Poland decreased as the cycle of mega-privatization deals – such as the $4 billion sale of TPSA in 2000 – slowed. In contrast, FDI flows to the Czech Republic, the Russian Federation and Hungary were up slightly in 2001. Investments in the Czech Republic will expand significantly this year, on account of a large, single greenfield investment ($1.35 billion) by a joint venture of Toyota Motor and PSA Peugeot Citroën.
UNCTAD’s updated estimates on regional FDI flows for 2001 were released at this week’s meetings in Geneva of its Commission on Investment, Technology and Related Financial Flows (21-25 January) and the Seventh Annual Conference of the World Association of Investment Promotion Agencies (22-25 January).
