World Investment Report 2014

Key Messages

Global Investment Trends
Cautious optimism returns to global foreign direct investment (FDI)

After the 2012 slump, global FDI returned to growth, with inflows rising 9 per cent in 2013, to $1.45 trillion. UNCTAD projects that FDI flows could rise to $1.6 trillion in 2014, $1.7 trillion in 2015 and $1.8 trillion in 2016, with relatively larger increases in developed countries. Fragility in some emerging markets and risks related to policy uncertainty and regional instability may negatively affect the expected upturn in FDI.

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Developing economies maintain their lead in 2013

FDI flows to developed countries increased by 9 per cent to $566 billion, leaving them at 39 per cent of global flows, while those to developing economies reached a new high of $778 billion, or 54 per cent of the total. The balance of $108 billion went to transition economies. Developing and transition economies now constitute half of the top 20 ranked by FDI inflows.

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FDI outflows from developing countries also reached a record level

Transnational corporations (TNCs) from developing economies are increasingly acquiring foreign affiliates from developed countries located in their regions. Developing and transition economies together invested $553 billion, or 39 per cent of global FDI outflows, compared with only 12 per cent at the beginning of the 2000s.

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Megaregional groupings shape global FDI

The three main regional groups currently under negotiation (TPP, TTIP, RCEP) each account for a quarter or more of global FDI flows, with TTIP flows in decline, and the others in ascendance. Asia-Pacific Economic Cooperation (APEC) remains the largest regional economic cooperation grouping, with 54 per cent of global inflows.

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The poorest countries are less and less dependent on extractive industry investment.

Over the past decade, the share of the extractive industry in the value of greenfield projects was 26 per cent in Africa and 36 per cent in LDCs. These shares are rapidly decreasing; manufacturing and services now make up about 90 per cent of the value of announced projects both in Africa and in LDCs.

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Private equity FDI is keeping its powder dry

Outstanding funds of private equity firms increased to a record level of more than $1 trillion. Their cross-border investment was $171 billion, a decline of 11 per cent, and they accounted for 21 per cent of the value of cross-border mergers and acquisitions (M&As), 10 percentage points below their peak. With funds available for investment (“dry powder”), and relatively subdued activity in recent years, the potential for increased private equity FDI is significant.

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State-owned TNCs are FDI heavyweights

UNCTAD estimates there are at least 550 State-owned TNCs – from both developed and developing countries – with more than 15,000 foreign affiliates and foreign assets of over $2 trillion. FDI by these TNCs was more than $160 billion in 2013. At that level, although their number constitutes less than 1 per cent of the universe of TNCs, they account for over 11 per cent of global FDI flows.

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Regional Investment Trends
FDI flows to all major developing regions increased

Africa saw increased inflows (+4 per cent), sustained by growing intra-African flows. Such flows are in line with leaders’ efforts towards deeper regional integration, although the effect of most regional economic cooperation initiatives in Africa on intraregional FDI has been limited. Developing Asia (+3 per cent) remains the number one global investment destination. Regional headquarter locations for TNCs, and proactive regional investment cooperation, are factors driving increasing intraregional flows. Latin America and the Caribbean (+6 per cent) saw mixed FDI growth, with an overall positive due to an increase in Central America, but with an 6 per cent decline in South America. Prospects are brighter, with new opportunities arising in oil and gas, and TNC investment plans in manufacturing.

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Structurally weak economies saw mixed results

Investment in the least developed countries (LDCs) increased, with announced greenfield investments signalling significant growth in basic infrastructure and energy projects. Landlocked developing countries (LLDCs) saw an overall decline in FDI. Relative to the size of their economies, and relative to capital formation, FDI remains an important source of finance there. Inflows to small island developing States (SIDS) declined. Tourism and extractive industries are attracting increasing interest from foreign investors, while manufacturing industries have been negatively affected by erosion of trade preferences.

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Inflows to developed countries resume growth but have a long way to go

The recovery of FDI inflows in developed countries to $566 billion, and the unchanged outflows, at $857 billion, leave both at half their peak levels in 2007. Europe, traditionally the largest FDI recipient region, is at less than one third of its 2007 inflows and one fourth of its outflows. The United States and the European Union (EU) saw their combined share of global FDI inflows decline from well over 50 per cent pre-crisis to 30 per cent in 2013.

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FDI to transition economies reached record levels, but prospects are uncertain

FDI inflows to transition economies increased by 28 per cent to reach $108 billion in 2013. Outward FDI from the region jumped by 84 per cent, reaching a record $99 billion. Prospects for FDI to transition economies are likely to be affected by uncertainties related to regional instability.

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Investment Policy Trends And Key Issues
Most investment policy measures remain geared towards investment promotion and liberalization

At the same time, the share of regulatory or restrictive investment policies increased, reaching 27 per cent in 2013. Some host countries have sought to prevent divestments by established foreign investors. Some home countries promote reshoring of their TNCs’ overseas investments.

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Investment incentives mostly focus on economic performance objectives, less on sustainable development

Incentives are widely used by governments as a policy instrument for attracting investment, despite persistent criticism that they are economically inefficient and lead to misallocations of public funds. To address these concerns, investment incentives schemes could be more closely aligned with the SDGs.

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International investment rule making is characterized by diverging trends

International investment rule making is characterized by diverging trends: on the one hand, disengagement from the system, partly because of developments in investment arbitration; on the other, intensifying and up-scaling negotiations. Negotiations of “megaregional agreements” are a case in point. Once concluded, these may have systemic implications for the regime of international investment agreements (IIAs).

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Widespread concerns about the functioning and the impact of the IIA regime are resulting in calls for reform

Four paths are becoming apparent: (i) maintaining the status quo, (ii) disengaging from the system, (iii) introducing selective adjustments, and (iv) undertaking systematic reform. A multilateral approach could effectively contribute to this endeavour.

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Investing In The SDGs: An Action Plan For Promoting Private Sector Contributions
Faced with common global economic, social and environmental challenges, the international community is defining a set of Sustainable Development Goals (SDGs)

The SDGs, which are being formulated by the United Nations together with the widest possible range of stakeholders, are intended to galvanize action worldwide through concrete targets for the 2015–2030 period for poverty reduction, food security, human health and education, climate change mitigation, and a range of other objectives across the economic, social and environmental pillars.

The role of the public sector is fundamental and pivotal, while the private sector contribution is indispensable. The latter can take two main forms, good governance in business practices and investment in sustainable development. Policy coherence is essential in promoting the private sector’s contribution to the SDGs.

The SDGs will have very significant resource implications across the developed and developing world. Global investment needs are in the order of $5 trillion to $7 trillion per year. Estimates for investment needs in developing countries alone range from $3.3 trillion to $4.5 trillion per year, mainly for basic infrastructure (roads, rail and ports; power stations; water and sanitation), food security (agriculture and rural development), climate change mitigation and adaptation, health, and education.

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The SDGs will require a step-change in the levels of both public and private investment in all countries.

At current levels of investment in SDG-relevant sectors, developing countries alone face an annual gap of $2.5 trillion. In developing countries, especially in LDCs and other vulnerable economies, public finances are central to investment in SDGs. However, they cannot meet all SDG-implied resource demands. The role of private sector investment will be indispensable.

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Today, the participation of the private sector in investment in SDG-related sectors is relatively low

Only a fraction of the worldwide invested assets of banks, pension funds, insurers, foundations and endowments, as well as transnational corporations, is in SDG sectors. Their participation is even lower in developing countries, particularly the poorest ones.

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In LDCs, a doubling of the growth rate of private investment would be a desirable target

Developing countries as a group could see the private sector cover approximately the part of SDG investment needs corresponding to its current share in investment in SDG sectors, based on current growth rates. In that scenario, however, they would still face an annual gap of about $1.6 trillion. In LDCs, where investment needs are most acute and where financing capacity is lowest, about twice the current growth rate of private investment is needed to give it a meaningful complementary financing role next to public investment and overseas development assistance (ODA).

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Increasing the involvement of private investors in SDG-related sectors, many of which are sensitive or of a public service nature, leads to policy dilemmas

Policymakers need to find the right balance between creating a climate conducive to investment and removing barriers to investment on the one hand, and protecting public interests through regulation on the other. They need to find mechanisms to provide sufficiently attractive returns to private investors while guaranteeing accessibility and affordability of services for all. And the push for more private investment must be complementary to the parallel push for more public investment.

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UNCTAD’s proposed Strategic Framework for Private Investment in the SDGs

UNCTAD’s proposed Strategic Framework for Private Investment in the SDGs addresses key policy challenges and options related to (i) guiding principles and global leadership to galvanize action for private investment, (ii) the mobilization of funds for investment in sustainable development, (iii) the channelling of funds into investments in SDG sectors, and (iv) maximizing the sustainable development impact of private investment while minimizing risks or drawbacks involved.

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Increasing private investment in SDGs will require leadership at the global level, as well as from national policymakers

Increasing private investment in SDGs will require leadership at the global level, as well as from national policymakers, to provide guiding principles to deal with policy dilemmas; to set targets, recognizing the need to make a special effort for LDCs; to ensure policy coherence at national and global levels; to galvanize dialogue and action, including through appropriate multi-stakeholder platforms; and to guarantee inclusiveness, providing support to countries that otherwise might continue to be largely ignored by private investors.

Challenges to mobilizing funds in financial markets include start-up and scaling problems for innovative financing solutions, market failures, a lack of transparency on environmental, social and corporate governance performance, and misaligned rewards for market participants. Key constraints to channelling funds into SDG sectors include entry barriers, inadequate risk-return ratios for SDG investments, a lack of information and effective packaging and promotion of projects, and a lack of investor expertise. Key challenges in managing the impact of private investment in SDG sectors include the weak absorptive capacity in some developing countries, social and environmental impact risks, and the need for stakeholder engagement and effective impact monitoring.

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UNCTAD’s Action Plan for Private Investment in the SDGs presents a range of policy options

UNCTAD’s Action Plan for Private Investment in the SDGs presents a range of policy options to respond to the mobilization, channelling and impact challenges. A focused set of action packages can help shape a Big Push for private investment in sustainable development:

  • A new generation of investment promotion and facilitation. Establishing SDG investment development agencies to develop and market pipelines of bankable projects in SDG sectors and to actively facilitate such projects. This requires specialist expertise and should be supported by technical assistance. “Brokers” of SDG investment projects could also be set up at the regional level to share costs and achieve economies of scale. The international investment policy regime should also be reoriented towards proactive promotion of investment in SDGs.
  • SDG-oriented investment incentives. Restructuring of investment incentive schemes specifically to facilitate sustainable development projects. This calls for a transformation from purely “location-based” incentives, aiming to increase the competitiveness of a location and provided at the time of establishment, towards “SDG-based” incentives, aiming to promote investment in SDG sectors and conditional upon their sustainable development contribution.
  • Regional SDG Investment Compacts. Launching regional and South-South initiatives towards the promotion of SDG investment, especially for cross-border infrastructure development and regional clusters of firms operating in SDG sectors (e.g. green zones). This could include joint investment promotion mechanisms, joint programmes to build absorptive capacity and joint public-private partnership models.
  • New forms of partnership for SDG investments. Establish partnerships between outward investment agencies in home countries and investment promotion agencies (IPAs) in host countries for the purpose of marketing SDG investment opportunities in home countries, provision of investment incentives and facilitation services for SDG projects, and joint monitoring and impact assessment. Concrete tools that might support joint SDG investment business development services could include online tools with pipelines of bankable projects, and opportunities for linkages programmes in developing countries. A multi-agency technical assistance consortium could help to support LDCs.
  • Enabling innovative financing mechanisms and a reorientation of financial markets. Innovative financial instruments to raise funds for investment in SDGs deserve support to achieve scale. Options include innovative tradable financial instruments and dedicated SDG funds, seed funding mechanisms, and new “go-to-market” channels for SDG projects. Reorientation of financial markets also requires integrated reporting. This is a fundamental tool for investors to make informed decisions on responsible allocation of capital, and it is at the heart of Sustainable Stock Exchanges.
  • Changing the business mindset and developing SDG investment expertise. Developing a curriculum for business schools that generates awareness of investment opportunities in poor countries and that teaches students the skills needed to successfully operate in developing-country environments. This can be extended to inclusion of relevant modules in existing training and certification programmes for financial market actors.
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The Action Plan for Private Investment in the SDGs

The Action Plan for Private Investment in the SDGs is meant to serve as a point of reference for policymakers at national and international levels in their discussions on ways and means to implement the SDGs. It has been designed as a “living document” and incorporates an online version that aims to establish an interactive, open dialogue, inviting the international community to exchange views, suggestions and experiences. It thus constitutes a basis for further stakeholder engagement. UNCTAD aims to provide the platform for such engagement through its biennial World Investment Forum, and online through the Investment Policy Hub.

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