Mega Mergers & Acquisitions Deals Prop Up Foreign Direct Investment In Developed Countries, Says UN Report

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Mega Mergers & Acquisitions Deals Prop Up Foreign Direct Investment In Developed Countries, Says UN Report

Geneva, Switzerland, 7 June 2017

​Foreign Direct Investment (FDI) flows to developed economies rose by 5 per cent, exceeding the $1 trillion mark for the first time since 2007, according to UNCTAD's World Investment Report 2017.

Although there were increased flows to the United States and the United Kingdom, these were offset by declining flows to most European countries. Flows to the United States, the largest recipient country, reached an all-time high, boosted by sizeable mergers & acquisitions deals (M&As), especially in the pharmaceutical industry.

Despite the BREXIT vote, inflows to the United Kingdom rose to an unprecedented level – up 600 per cent to $254 billion, owing largely to the completion of M&A megadeals initiated before the referendum.  However, FDI flows to other major hosts in Europe contracted sharply. Flows to Ireland – the largest European recipient in 2015 – were down by $166 billion, and those to Switzerland by $97 billion. A major factor in the decline was reduced intracompany loans, which have tended to swing widely in recent years.

FDI outflows from developed countries fell by 11 per cent to $1.04 trillion as investments from major investor economies were reduced to a fraction of the 2015 levels. Outflows from Ireland dropped by $122 billion, from Switzerland by $73 billion and from Germany by $59 billion.

Among the countries that increased their investment abroad, the Netherlands emerged as the largest investor country in Europe with record outflows of $174 billion.  A large part of the United States’ outflows – worth $299 billion – continued to be accounted for by reinvested earnings, which amounted to $280 billion. Japanese multinational enterprises (MNEs) expanded their FDI through cross-border M&As, in particular targeting assets in Europe.

A generally positive economic outlook should help developed countries sustain FDI flows in 2017, but a lot hinges on regulatory approval of M&A megadeals. Cross-border M&A deals announced in 2016 were worth $1.1 trillion, substantially down from $1.4 trillion the previous year. In the first quarter of 2017, both the number and the value of M&A deals in developed countries were significantly down compared to the same period the year before. As of March 2017, about one-quarter of the deals announced in 2016 – half of the total value – were pending approval.  Without the completion of those deals, FDI flows are unlikely to reach the same levels as in 2016.

Tax reform in the United States could potentially have a significant impact on FDI flows. Were the United States to introduce a tax reform that reduces tax liabilities on repatriated foreign profits, United States MNEs would repatriate accumulated overseas earnings, which would show up as negative outflows for the United States and negative inflows in host countries, especially in Europe.

Intracompany loans remain an unpredictable factor. Some intracompany loans are thought to be motivated by corporate strategies to minimize tax liabilities. Therefore, if regulatory measures are enforced that deter tax avoidance and shut down loopholes, the use of intra-company transactions may reduce.

Figure 1 - Developed economies: Top 10 recipients of FDI flows, 2015 and 2016
(Billions of dollars)
Source: UNCTAD, World Investment Report 2017.

Figure 2 - Developed economies: Top 10 investors of FDI flows, 2015 and 2016
(Billions of dollars)

Source: UNCTAD, World Investment Report 2017.