World foreign direct investment (FDI) inflows will decline in 2002 by 27% to about US$ 534 billion, according to preliminary estimates released today by UNCTAD, which is also predicting that China may for the first time overtake the United States to become the largest FDI host country in the world.
As in 2001, the decline - about a third of the peak value recorded in 2000 - is again larger in developed countries (31%) than in developing countries (23%) and Central and Eastern Europe (1%). The uncertain economic situation and weak stock market are undermining business confidence, with a sharp impact on cross-border mergers and acquisitions (M&As) and corporate investment expansion plans. Overall, more than half of the 85 economies for which data are available can be expected to receive lower FDI flows in 2002 than in 2001, UNCTAD says(1).
Completed cross-border M&As between January and early September this year fell by 45% to some US$ 250 billion, as compared to US $460 billion for the same period last year(2). This decline was particularly drastic in the United States - the largest recipient of FDI in 2001 - where these M&As account for the bulk of FDI. Some developing countries and countries in Central and Eastern Europe are less affected by the general fall in worldwide FDI flows. Their situations are influenced by the intensified competitive pressures faced by transnational corporations (TNCs), aggravated by the global economic slowdown, to keep production costs down by operating in less expensive locations. This development, and especially the substantial decrease in FDI flows into the US, may conceivably lead to China´s supplanting the US as the single largest recipient of FDI inflows worldwide this year.
In 25 developed countries, FDI inflows in 2002 could reach US$ 349 billion, as compared to US$ 503 billion last year. However, in 10 of these countries inflows are expected to be higher than in 2001, when they increased in only three countries (France, Italy and Greece). The largest declines in absolute terms are likely to be experienced by the United Kingdom and the United States (by three fourths in the former, from US$ 54 billion to US$ 12 billion, and by two thirds in the latter, from US$ 124 billion to US$ 44 billion). The plunge in inflows to the US is mainly due to intra-company loans shifting from net inflows to net outflows(3).
The outlook for France and Germany, by contrast, is more encouraging. With close to US$ 45 billion, inward flows to both countries could for the first time in three decades reach levels almost comparable to those of the US(4). Cross-border M&As play an important role in supporting these and other increases in developed countries. In France, large acquisitions include the purchase of Aventis CropScience Holding SA by Bayer AG (Germany) for US$ 6.6 billion. In Germany, Reemtsma Cigarettenfabriken GmbH was bought by the UK´s Imperial Tobacco Plc for a reported US$ 5 billion, while Veba Oel was acquired by BP for US$ 1.7 billion.
UNCTAD is projecting a dramatic drop in FDI inflows to Africa, from US$ 17 billion in 2001 to US$ 6 billion this year - representing a two thirds decline. This poor regional performance is explained primarily by three factors:
- the unusual 2001 situation, which saw a significant upturn in flows due to two large but one-off transactions, one in Morocco and the other in South Africa;(5)
- the economic slowdown in major countries (such as the US) that are headquarters for important TNC investors in Africa, and the depressed global investment market; and
- the geopolitical uncertainty in certain African countries, which also affects investors´ attitudes towards other countries on the continent.
European and US TNCs investing less in Asia
FDI flows into developing Asia are expected to decline further this year, by about 12%, following a 24% reduction in 2001. Inflows this year are likely to be US$ 90 billion, vs. US$ 102 billion last year. The slide is largely the result of slowing FDI flows from Europe and the United States, despite the strong economic growth of the region´s leading economies.
Performance within the developing Asian region varies from country to country. FDI growth in China continued its momentum, and at an estimated US$50 billion, inflows will probably set a record. Driven by the liberalization process and industrial restructuring, and further accelerated by the country´s accession to the WTO, China´s FDI is experiencing faster growth in medium- and high-tech manufacturing industries and services. A decline in inflows is expected in such economies as Hong Kong, China; Republic of Korea; Thailand; and Taiwan Province of China, partly due to the repayment of outstanding intra-company debts held by foreign affiliates. Overall, the possibly drastic FDI decline in most of the region´s economies is unlikely to be offset by an increase in such countries as China, India, Malaysia and the Philippines, according to UNCTAD projections.
FDI inflows into Latin America and the Caribbean will fall for the third year in a row, tumbling 27% from US$ 85 billion to US$ 62 billion. The decline is concentrated in Mexico, where inflows last year were inflated by Citicorp´s acquisition of Banamex; excluding that investment, FDI into Mexico this year (US$ 14 billion) would remain at 2001 levels, despite the economic slowdown at home and in the United States, the country´s biggest investor. Inflows into Brazil held steady at about US$ 20 billion; in fact the country is set to regain its position as the region´s top FDI recipient, with rising investments in manufacturing. In Argentina, the impact of last year´s financial crisis reduced inflows to a minimum during the first six months of 2002. Investments are likely to pick up in the second half of the year - due mainly to Petrobras´ US$ 1.1 billion acquisition in July of Pérez Compac - to reach some US$ 3 billion.
Central and Eastern Europe buck downward trend
Central and Eastern Europe are set this year to repeat last year´s US$ 27 billion in FDI inflows, UNCTAD believes, but finds that the picture is mixed. Flows should rise in Albania, Bulgaria, Czech Republic, Latvia, Lithuania and Slovenia; decline in Estonia, Hungary, Moldova, Poland, Slovakia, the Former Yugoslav Republic of Macedonia and Ukraine; and remain unchanged in Bosnia and Herzegovina, Croatia, Romania and the Russian Federation. The star performer is the Czech Republic (up from US$ 5 billion to US$ 9 billion). Poland suffered the largest downturn, from US$ 9 billion to US$ 6 billion, while the Russian Federation is likely to hold steady, at about US$ 3 billion. The divergent trends are associated with different external and internal factors. Among the external factors are the global economic and world FDI situations. Internal factors include the lumpiness of privatization-related FDI, which causes large upswings (in the Czech Republic) or downswings (e.g. in Estonia, Poland and Slovakia); the sluggishness of the national economy (e.g. Poland); and a wait-and-see attitude on the part of investors with respect to such countries as Hungary that are currently adjusting their FDI regimes to meet the requirements for EU membership. On balance, however, the region continues to be resilient to the global downturn.
The fall in world FDI flows - a result both of the global economic slowdown and of uncertainties aggravated by the recent series of corporate financial scandals - is translating into a considerable shrinking of the global FDI pie. For the world economy as a whole, the two consecutive years of decline mean that foreign direct investment is playing a diminished role in helping to overcome the world economic downturn. For developing countries, where FDI is the largest source of resource flows, the decline means less resources for development. As a result, UNCTAD is predicting that competition among countries will intensify further, and that they will accordingly need to focus on the sort of FDI that can contribute the most to specific development objectives. Given that promotional resources are quite limited, investment targeting may therefore become more common in attracting FDI than a strategy of "casting the net wide"(6). In so doing, countries will need to identify their strengths and weaknesses to target the type of FDI that both enhances their development strategies and reflects their comparative advantages. Some of these challenges will be discussed at the annual meeting of the World Association of Investment Promotion Agencies (WAIPA), to be held 22-24 January 2003 at the Palais des Nations, Geneva.
