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World Investment Report 2012

Overview

Chapter 2 – RECENT TRENDS BY REGION

FDI to Africa continues to decline, but prospects are brightening

FDI inflows to Africa as a whole declined for the third successive year, to $42.7 billion. However, the decline in FDI inflows to the continent in 2011 was caused largely by the fall in North Africa; in particular, inflows to Egypt and Libya, which had been major recipients of FDI, came to a halt owing to their protracted political instability. In contrast, inflows to sub-Saharan Africa recovered from $29 billion in 2010 to $37 billion in 2011, a level comparable with the peak in 2008. A rebound of FDI to South Africa accentuated the recovery. The continuing rise in commodity prices and a relatively positive economic outlook for sub-Saharan Africa are among the factors contributing to the turnaround. In addition to traditional patterns of FDI to the extractive industries, the emergence of a middle class is fostering the growth of FDI in services such as banking, retail and telecommunications, as witnessed by an increase in the share of services FDI in 2011.

The overall fall in FDI to Africa was due principally to a reduction in flows from developed countries, leaving developing countries to increase their share in inward FDI to the continent (from 45 per cent in 2010 to 53 per cent in 2011 in greenfield investment projects).

South-East Asia is catching up with East Asia

In the developing regions of East Asia and South-East Asia, FDI inflows reached new records, with total inflows amounting to $336 billion, accounting for 22 per cent of global inflows. South-East Asia, with inflows of $117 billion, up 26 per cent, continued to experience faster FDI growth than East Asia, although the latter was still dominant at $219 billion, up 9 per cent. Four economies of the Association of Southeast Asian Nations (ASEAN) – Brunei Darussalam, Indonesia, Malaysia and Singapore – saw a considerable rise.

FDI flows to China also reached a record level of $124 billion, and flows to the services sector surpassed those to manufacturing for the first time. China continued to be in the top spot as investors’ preferred destination for FDI, according to UNCTAD’s WIPS, but the rankings of South-East Asian economies such as Indonesia and Thailand have risen markedly. Overall, as China continues to experience rising wages and production costs, the relative competitiveness of ASEAN countries in manufacturing is increasing.

FDI outflows from East Asia dropped by 9 per cent to $180 billion, while those from South-East Asia rose 36 per cent to $60 billion. Outflows from China dropped by 5 per cent, while those from Hong Kong, China, declined by 15 per cent. By contrast, outflows from Singapore registered a 19 per cent increase and outflows from Indonesia and Thailand surged.

Rising extractive industry M&As boost FDI in South Asia

In South Asia, FDI inflows have turned around after a slide in 2009–2010, reaching $39 billion, mainly as a result of rising inflows in India, which accounted for more than four fifths of the region’s FDI. Cross-border M&A sales in extractive industries surged to $9 billion, while M&A sales in manufacturing declined by about two thirds, and those in services remained much below the annual amounts witnessed during 2006–2009.

Countries in the region face different challenges, such as political risks and obstacles to FDI, that need to be tackled in order to build an attractive investment climate. Nevertheless, recent developments such as the improving relationship between India and Pakistan have highlighted new opportunities.

FDI outflows from India rose by 12 per cent to $15 billion. A drop in crossborder M&As across all three sectors was compensated by a rise in overseas greenfield projects, particularly in extractive industries, metal and metal products, and business services.

Regional and global crises still weigh on FDI in West Asia

FDI inflows to West Asia declined for the third consecutive year, to $49 billion in 2011. Inflows to the Gulf Cooperation Council (GCC) countries continued to suffer from the effects of the cancellation of large-scale investment projects, especially in construction, when project finance dried up in the wake of the global financial crisis, and were further affected by the unrest across the region during 2011. Among non-GCC countries the growth of FDI flows was uneven. In Turkey they were driven by a more than three-fold increase in cross-border M&A sales. Spreading political and social unrest has directly and indirectly affected FDI inflows to the other countries in the region.

FDI outflows recovered in 2011 after reaching a five-year low in 2010, indicating a return to overseas acquisitions by investors based in the region (after a period of divestments). It was driven largely by an increase in overseas greenfield projects in the manufacturing sector.

Latin America and the Caribbean: shift towards industrial policy

FDI inflows to Latin America and the Caribbean increased by 16 per cent to $217 billion, driven mainly by higher flows to South America (up 34 per cent). Inflows to Central America and the Caribbean, excluding offshore financial centres, increased by 4 per cent, while those to the offshore financial centres registered a 4 per cent decrease. High FDI growth in South America was mainly due to its expanding consumer markets, high growth rates and natural-resource endowments.

Outflows from the region have become volatile since the beginning of the global financial crisis. They decreased by 17 per cent in 2011, after a 121 per cent increase in 2010, which followed a 44 per cent decline in 2009. This volatility is due to the growing importance of flows that are not necessarily related to investment in productive activity abroad, as reflected by the high share of offshore financial centres in total FDI from the region, and the increasing repatriation of intracompany loans by Brazilian outward investors ($21 billion in 2011).

A shift towards a greater use of industrial policy is occurring in some countries in the region, with a series of measures designed to build productive capacities and boost the manufacturing sector. These measures include higher tariff barriers, more stringent criteria for licenses and increased preference for domestic production in public procurement. These policies may induce “barrier hopping” FDI into the region and appear to have had an effect on firms’ investment plans. TNCs in the automobile, computer and agriculture-machinery industries have announced investment plans in the region. These investments are by traditional European and North American investors in the region, as well as TNCs from developing countries and Japan.

FDI prospects for transition economies helped by the Russian Federation’s WTO accession

In economies in transition in South-East Europe, the Commonwealth of Independent States (CIS) and Georgia, FDI recovered some lost ground after two years of stagnant flows, reaching $92 billion, driven in large part by cross-border M&A deals. In South-East Europe, manufacturing FDI increased, buoyed by competitive production costs and open access to EU markets. In the CIS, resource-based economies benefited from continued naturalresource-seeking FDI. The Russian Federation continued to account for the lion’s share of inward FDI to the region and saw FDI flows grow to the third highest level ever. Developed countries, mainly EU members, remained the most important source of FDI, with the highest share of projects (comprising cross-border M&As and greenfield investments), although projects by investors from developing and transition economies gained importance.

The services sector still plays only a small part in inward FDI in the region, but its importance may increase with the accession to the World Trade Organization (WTO) of the Russian Federation. Through WTO accession the country has committed to reduce restrictions on foreign investment in a number of services industries (including banking, insurance, business services, telecommunications and distribution). The accession may also boost foreign investors’ confidence and improve the overall investment environment.

UNCTAD projects continued growth of FDI flows to transition economies, reflecting a more investor-friendly environment, WTO accession by the Russian Federation and new privatization programmes in extractive industries, utilities, banking and telecommunications.

Developed countries: signs of slowdown in 2012

Inflows to developed countries, which bottomed out in 2009, accelerated their recovery in 2011 to reach $748 billion, up 21 per cent from the previous year. The recovery since 2010 has nonetheless made up only one fifth of the ground lost during the financial crisis in 2008–2009. Inflows remained at 77 per cent of the pre-crisis three-year average (2005–2007). Inflows to Europe, which had declined until 2010, showed a turnaround while robust recovery of flows to the United States continued. Australia and New Zealand attracted significant volumes. Japan saw a net divestment for the second successive year.

Developed countries rich in natural resources, notably Australia, Canada and the United States, attracted FDI in oil and gas, particularly for unconventional fossil fuels, and in minerals such as coal, copper and iron ore. Financial institutions continued offloading overseas assets to repay the State aid they received during the financial crisis and to strengthen their capital base so as to meet the requirements of Basel III.

The recovery of FDI in developed regions will be tested severely in 2012 by the eurozone crisis and the apparent fragility of the recovery in most major economies. M&A data indicate that cross-border acquisitions of firms in developed countries in the first three months of 2012 were down 45 per cent compared with the same period in 2011. Announcement-based greenfield data show the same tendency (down 24 per cent). While UNCTAD’s 2012 projections suggest inflows holding steady in North America and managing a modest increase in Europe, there are significant downside risks to these forecasts.

LDCs in FDI recession for the third consecutive year

In the LDCs, large divestments and repayments of intracompany loans by investors in a single country, Angola, reduced total group inflows to the lowest level in five years, to $15 billion. More significantly, greenfield investments in the group as a whole declined, and large-scale FDI projects remain concentrated in a few resource-rich LDCs.

Investments in mining, quarrying and petroleum remained the dominant form of FDI in LDCs, although investments in the services sector are increasing, especially in utilities, transport and storage, and telecommunication. About half of greenfield investments came from other developing economies, although neither the share nor the value of investments from these and transition economies recovered to the levels of 2008–2009. India remained the largest investor in LDCs from developing and transition economies, followed by China and South Africa.

In landlocked developing countries (LLDCs), FDI grew to a record high of $34.8 billion. Kazakhstan continued to be the driving force of FDI inflows. In Mongolia, inflows more than doubled because of large-scale projects in extractive industries. The vast majority of inward flows continued to be greenfield investments in mining, quarrying and petroleum. The share of investments from transition economies soared owing to a single largescale investment from the Russian Federation to Uzbekistan. Together with developing economies, their share in greenfield projects reached 60 per cent in 2011.

In small island developing States (SIDS), FDI inflows fell for the third year in a row and dipped to their lowest level in six years at $4.1 billion. The distribution of flows to the group remained highly skewed towards taxfriendly jurisdictions, with three economies (the Bahamas, Trinidad and Tobago, and Barbados) receiving the bulk. In the absence of megadeals in mining, quarrying and petroleum, the total value of cross-border M&A sales in SIDS dropped significantly in 2011. In contrast, total greenfield investments reached a record high, with South Africa becoming the largest source. Three quarters of greenfield projects originated in developing and transition economies.