Global foreign direct investment (FDI) inflows rose 16 per cent in 2011, surpassing the 2005–2007 pre-crisis level for the first time, despite the continuing effects of the global financial and economic crisis of 2008–2009 and the ongoing sovereign debt crises. This increase occurred against a background of higher profits of transnational corporations (TNCs) and relatively high economic growth in developing countries during the year
A resurgence in economic uncertainty and the possibility of lower growth rates in major emerging markets risks undercutting this favourable trend in 2012. UNCTAD predicts the growth rate of FDI will slow in 2012, with flows levelling off at about $1.6 trillion, the midpoint of a range (figure 1). Leading indicators are suggestive of this trend, with the value of both cross-border mergers and acquisitions (M&As) and greenfield investments retreating in the first five months of 2012. Weak levels of M&A announcements also suggest sluggish FDI flows in the later part of the year.
UNCTAD projections for the medium term based on macroeconomic fundamentals continue to show FDI flows increasing at a moderate but steady pace, reaching $1.8 trillion and $1.9 trillion in 2013 and 2014, respectively, barring any macroeconomic shocks. Investor uncertainty about the course of economic events for this period is still high. Results from UNCTAD’s World Investment Prospects Survey (WIPS), which polls TNC executives on their investment plans, reveal that while respondents who are pessimistic about the global investment climate for 2012 outnumber those who are optimistic by 10 percentage points, the largest single group of respondents – roughly half – are either neutral or undecided (figure 2). Responses for the medium term, after 2012, paint a gradually more optimistic picture. When asked about their planned future FDI expenditures, more than half of respondents foresee an increase between 2012 and 2014, compared with 2011 levels.
FDI flows to developed countries grew robustly in 2011, reaching $748 billion, up 21 per cent from 2010. Nevertheless, the level of their inflows was still a quarter below the level of the pre-crisis three-year average. Despite this increase, developing and transition economies together continued to account for more than half of global FDI (45 per cent and 6 per cent, respectively) for the year as their combined inflows reached a new record high, rising 12 per cent to $777 billion (table 1). Reaching high level of global FDI flows during the economic and financial crisis it speaks to the economic dynamism and strong role of these countries in future FDI flows that they maintained this share as developed economies rebounded in 2011.
Rising FDI to developing countries was driven by a 10 per cent increase in Asia and a 16 per cent increase in Latin America and the Caribbean. FDI to the transition economies increased by 25 per cent to $92 billion. Flows to Africa, in contrast, continued their downward trend for a third consecutive year, but the decline was marginal. The poorest countries remained in FDI recession, with flows to the least developed countries (LDCs) retreating 11 per cent to $15 billion.
Indications suggest that developing and transition economies will continue to keep up with the pace of growth in global FDI in the medium term. TNC executives responding to this year’s WIPS ranked 6 developing and transition economies among their top 10 prospective destinations for the period ending in 2014, with Indonesia rising two places to enter the top five destinations for the first time (figure 3).
The growth of FDI inflows in 2012 will be moderate in all three groups – developed, developing and transition economies (table 2). In developing regions, Africa is noteworthy as inflows are expected to recover. Growth in FDI is expected to be temperate in Asia (including East and South-East Asia, South Asia and West Asia) and Latin America. FDI flows to transition economies are expected to grow further in 2012 and exceed the 2007 peak in 2014.
FDI from developed countries rose sharply in 2011, by 25 per cent, to reach $1.24 trillion. While all three major developed-economy investor blocs – the European Union (EU), North America and Japan – contributed to this increase, the driving factors differed for each. FDI from the United States was driven by a record level of reinvested earnings (82 per cent of total FDI outflows), in part driven by TNCs building on their foreign cash holdings. The rise of FDI outflows from the EU was driven by cross-border M&As. An appreciating yen improved the purchasing power of Japanese TNCs, resulting in a doubling of their FDI outflows, with net M&A purchases in North America and Europe rising 132 per cent.
Outward FDI from developing economies declined by 4 per cent to $384 billion in 2011, although their share in global outflows remained high at 23 per cent. Flows from Latin America and the Caribbean fell 17 per cent, largely owing to the repatriation of capital to the region (counted as negative outflows) motivated in part by financial considerations (exchange rates, interest rate differentials). Flows from East and South-East Asia were largely stagnant (with an 9 per cent decline in those from East Asia), while outward FDI from West Asia increased significantly, to $25 billion.
Cross-border M&As rose 53 per cent in 2011 to $526 billion, spurred by a rise in the number of megadeals (those with a value over $3 billion), to 62 in 2011, up from 44 in 2010. This reflects both the growing value of assets on stock markets and the increased financial capacity of buyers to carry out such operations. Greenfield investment projects, which had declined in value terms for two straight years, held steady in 2011 at $904 billion. Developing and transition economies continued to host more than two thirds of the total value of greenfield investments in 2011.
Although the growth in global FDI flows in 2011 was driven in large part by cross-border M&As, the total project value of greenfield investments remains significantly higher than that of cross-border M&As, as has been the case since the financial crisis.
FDI flows rose in all three sectors of production (primary, manufacturing and services), according to FDI projects data (comprising cross-border M&As and greenfield investments) (table 3). Services-sector FDI rebounded in 2011 after falling sharply in 2009 and 2010, to reach some $570 billion. Primary sector investment also reversed the negative trend of the previous two years, at $200 billion. The share of both sectors rose slightly at the expense of manufacturing. Overall, the top five industries contributing to the rise in FDI projects were extractive industries (mining, quarrying and petroleum), chemicals, utilities (electricity, gas and water), transportation and communications, and other services (largely driven by oil and gas field services).
Compared with assets of nearly $5 trillion under management, FDI by sovereign wealth funds (SWFs) is still relatively small. By 2011, their cumulative FDI reached an estimated $125 billion, with more than a quarter of that in developing countries. However, with their long-term and strategically oriented investment outlook, SWFs appear well placed to invest in productive sectors in developing countries, particularly the LDCs. They offer the scale to be able to invest in infrastructure development and the upgrading of agricultural productivity – key to economic development in many LDCs – as well as in industrial development, including the build-up of green growth industries. To increase their investment in these areas, SWFs can work in partnership with host-country governments, development finance institutions or other private sector investors that can bring technical and managerial competencies to projects.
Foreign affiliates’ economic activity rose in 2011 across all major indicators of international production (table 4). During the year, foreign affiliates employed an estimated 69 million workers, who generated $28 trillion in sales and $7 trillion in value added. Data from UNCTAD’s annual survey of the largest 100 TNCs reflects the overall upward trend in international production, with the foreign sales and employment of these firms growing significantly faster than those in their home economy.
Despite the gradual advance of international production by TNCs, their record levels of cash have so far not translated into sustained growth in investment levels. UNCTAD estimates that these cash levels have reached more than $5 trillion, including earnings retained overseas. Data on the largest 100 TNCs show that during the global financial crisis they cut capital expenditures in productive assets and acquisitions (especially foreign acquisitions) in favour of holding cash. Cash levels for these 100 firms alone peaked in 2010 at $1.03 trillion, of which an estimated $166 billion was additional – above the levels suggested by average pre-crisis cash holdings. Although recent figures suggest that TNCs’ capital expenditures in productive assets and acquisitions are picking up, rising 12 per cent in 2011, the additional cash they are holding – an estimated $105 billion in 2011 – is still not being fully deployed. Renewed instability in international financial markets will continue to encourage cash holding and other uses of cash such as paying dividends or reducing debt levels. Nevertheless, as conditions improve, the current cash “overhang” may fuel a future surge in FDI. Projecting the data for the top 100 TNCs over the estimated $5 trillion in total TNC cash holdings results in more than $500 billion in investable funds, or about one third of global FDI flows.
The UNCTAD FDI Attraction Index, which measures the success of economies in attracting FDI (combining total FDI inflows and inflows relative to GDP), features 8 developing and transition economies in the top 10, compared with only 4 a decade ago. A 2011 newcomer in the top ranks is Mongolia. Just outside the top 10, a number of other countries saw significant improvements in their ranking, including Ghana (16), Mozambique (21) and Nigeria (23). Comparing the FDI Attraction Index with another UNCTAD index, the FDI Potential Index, shows that a number of developing and transition economies have managed to attract more FDI than expected, including Albania, Cambodia, Madagascar and Mongolia. Others have received less FDI than could be expected based on economic determinants, including Argentina, the Philippines, Slovenia and South Africa.
The UNCTAD FDI Contribution Index – introduced in WIR12 – ranks economies on the basis of the significance of FDI and foreign affiliates in their economy, in terms of value added, employment, wages, tax receipts, exports, research and development (R&D) expenditures, and capital formation (e.g. the share of employment in foreign affiliates in total formal employment in each country, and so forth). These variables are among the most important indicators of the economic impact of FDI. According to the index, in 2011 the host economy with the largest contribution by FDI was Hungary followed by Belgium and the Czech Republic. The UNCTAD FDI Contribution Index shows relatively higher contributions of foreign affiliates to local economies in developing countries, especially Africa, in value added, employment, export generation and R&D expenditures.
Comparing the FDI Contribution Index with the weight of FDI stock in a country’s GDP (figure 4) shows that a number of developing and transition economies get a higher economic development impact “per unit of FDI” than others, including Argentina, the Plurinational State of Bolivia and Colombia and, to a lesser degree, Brazil, China and Romania. In other cases, FDI appears to contribute less than could be expected by the volume of stock present in the country, as in Bulgaria, Chile and Jamaica. The latter group also includes a number of economies that attract significant investment largely because of their fiscal regime, but without the equivalent impact on the domestic economy
The FDI Contribution Index is the first attempt at a systematic comparative analysis of the contribution of FDI to economic development, a field in which data is extremely sparse. UNCTAD will continue to conduct research on the impact of investment and seek to improve on data and methodology for the index. UNCTAD is ready to engage with policymakers in the interpretation of the results, and to help countries improve national data collection.