Global foreign direct investment (FDI) inflows grew in 2006 for the third consecutive year to reach US$1.2 trillion, according to UNCTAD´s first estimate for the year.
The total is a 34% increase from 2005 (table), although still short of the record of US$1.4 trillion set in 2000.
The continued rise in FDI largely reflects high economic growth and strong economic performance in many parts of the world. Such growth has occurred in both developed and developing countries. Increased corporate profits (and resulting higher stock prices) have boosted the value of the cross-border mergers and acquisitions (M&As) that constitute a large share of FDI flows. Continued liberalization of investment policies and trade regimes added further stimulus, although in some countries in Africa and Latin America there were some notable changes in economic policy towards a greater role for the state, as well as changes in policies that directly concern foreign investors or industries, in particular the natural resources industry.
FDI performance has varied greatly among regions and countries.
FDI flows to developed countries in 2006 rose by 48%, well over the levels of the previous two years, and reached US$800 billion (table). The United States recovered its position as the largest single host country for FDI in the world, overtaking the United Kingdom, the top FDI recipient in 2005. The European Union (EU) as a whole continued to be the largest host region, accounting for 45% of total FDI inflows in 2006.
However, several risks for the world economy -- most of them not new -- may have implications for FDI to and from developed countries. Global current-account imbalances have widened dramatically and could cause abrupt exchange-rate shifts. High and volatile oil prices have caused inflationary pressures, and a possible tightening of financial market conditions cannot be excluded. High fiscal deficits in Europe, in combination with rising interest rates, could lead to tax and wage pressures. All these considerations underline the need for caution in assessing future FDI prospects for developed countries.
FDI inflows to developing countries and economies in transition (the latter comprising South-East Europe and the Commonwealth of Independent States (CIS)) rose by 10% and 56% (table), respectively, in 2006, and reached record levels for both groups of economies.
In Africa, FDI inflows in 2006 exceeded their previous record level of 2005. High prices and buoyant global demand for commodities were once again a key factor, particularly in the oil industry, which attracted investment not only from developed countries but also from some developing countries. Cross-border M&As in the extraction and related service industries of Africa tripled in the first half of 2006, as compared to the same period in 2005. However, the regional FDI picture is not uniformly bright across sectors, countries and subregions. Most of the inflows are concentrated in the West, North and Central African subregions. Inflows will continue to be small in low-income economies lacking natural resources.
FDI inflows to Latin America and the Caribbean slowed in 2006. Mexico and Brazil, in that order, remained the largest recipient countries with inflows remaining virtually at the same level in Mexico and increasing by 6% in Brazil, in spite of a fall in cross-border M&As. FDI inflows to Chile increased by 48% due to a continued rise in reinvested earnings resulting from windfall benefits from mining. FDI inflows to Colombia and Argentina decreased by 52% and 30%, respectively, because of a decrease in cross-boarder M&As. In the Andean countries, growing demand for commodities and resulting higher prices propelled changes in policy in the direction of more control by the state. That resulted in less favorable fiscal regimes for investors in such countries as Bolivia, Ecuador, and Venezuela. The possibility of additional regulatory changes and of their extension to more countries may have raised uncertainty among investors in the primary sector, resulting in the decrease in FDI flows to the region. In addition, high commodity prices and resulting improvements in current-account balances have led to an appreciation of the value of many countries´ currencies. That could affect prospects for FDI in export-oriented manufacturing.
FDI inflows to South, East and South-East Asia, and Oceania maintained their upward trend in 2006, reaching a new high of US$187 billion, an increase of 13% over 2005. Investments in high-tech industries by transnational corporations (TNCs) are growing rapidly, particularly in China. Meanwhile, other countries, including India, are attracting increasing FDI for traditional manufacturing. At the subregional level, a shift continues in favour of South and South-East Asia. China, Hong Kong (China) and Singapore retained their positions as the three largest recipients of FDI in the region. India surpassed the Republic of Korea and became the fourth largest recipient. Outward FDI from the region surged with China consolidating its position as an important source of FDI. India is rapidly catching up, with 2006 FDI outflows almost doubling. China and India are challenging the dominance of Asia´s newly industrializing economies as the main sources of FDI in the developing world.
In West Asia, FDI flows, both inward and outward, maintained their upward trend in 2006. Turkey and oil-rich Gulf States continued to attract most FDI inflows, accounting for a record level in 2006 in spite of geopolitical uncertainty in parts of the region. Energy-related manufacturing and services were the most targeted industries. FDI outflows from the region increased, mainly from the Gulf countries led by the United Arab Emirates. Cross-border M&As, particularly by state-owned enterprises, continued to be the main mode of outward FDI,. Such outflows are increasingly taking place in energy-related activities, supported by the region´s tightening ties with China and India and other economies in Asia and Africa.
After a minuscule increase in 2005, FDI inflows to the 19 countries of South-East Europe and the CIS expanded significantly in 2006, the sixth year of uninterrupted growth of FDI in the region. Inflows to the region´s largest host country, the Russian Federation, almost doubled (table). FDI is likely to be particularly buoyant in countries slated to join the EU on 1 January 2007 (Bulgaria and Romania) and in the large economies such as the Russian Federation and Ukraine. FDI prospects for the Russian Federation are, however, affected by the impact of tightening Russian natural resource regulations and by disputes that emerged in 2006 over environmental protection and extraction costs (for example those involving two major oil development projects in Sakhalin). It is uncertain whether large increases in such sectors as chemicals and petrochemicals, services, and real estate (especially in large cities) -- categories where investor confidence is currently high -- could fully compensate for a possible slowdown of oil-related FDI.
One of the most significant developments in FDI over the past two or three years has involved natural resources and related industries. Despite some unfavourable developments for foreign investors in such industries, high demand for natural resources -- and, as a result, the opening up of new potentially profitable opportunities in the primary sector, such as gas and oil development in Algeria -- are likely to attract further FDI to the extractive industries. FDI in this sector will be examined in greater detail in UNCTAD´s World Investment Report 2007.
Economic growth in 2007 is projected to slow moderately. Continuing global external imbalances, sharp exchange rate fluctuations, rising interest rates, and increasing inflationary pressures, as well as high and volatile commodity prices, pose risks that may also hinder global FDI flows and could lead to a slowdown in the fast growth in global FDI registered over the past few years.
ANNEX
Tables and figures
Table. FDI inflows, by host region and major host economy, 2004-2006 (Billions of dollars)
Source: UNCTAD
Note: a - Preliminary estimates
