World Investment Report 2015


Chapter 2 – Regional Trends In FDI

FDI remained stable in Africa

FDI flows to Africa overall remained flat at $54 billion (table 2). North Africa saw its FDI flows decline by 15 per cent to $11.5 billion. FDI fell overall in the region because of tension and conflict in some countries, despite significant inflows in others. FDI into Egypt grew by 14 per cent to $4.8 billion, and flows into Morocco by 9 per cent to $3.6 billion.

FDI flows to West Africa declined by 10 per cent to $12.8 billion, as Ebola, security issues and falling commodity prices negatively affected several countries. East Africa saw its FDI flows increasing by 11 per cent, to $6.8 billion. FDI rose in the gas sector in the United Republic of Tanzania, and Ethiopia is becoming a hub for MNEs in garments and textiles. Central Africa received $12.1 billion of FDI in 2014, up 33 per cent from 2013. FDI flows in Congo almost doubled, reaching $5.5 billion as foreign investors were undeterred, despite falling commodity prices. The Democratic Republic of the Congo continued to attract notable flows. Southern Africa received $10.8 billion of FDI in 2014, down 2.4 per cent from 2013. While South Africa remained the largest host country in the region ($5.7 billion, down 31 per cent from 2013), Mozambique played a significant role in attracting FDI ($4.9 billion).

FDI inflows into Africa are increasingly due to the rise of developing-country MNEs. A number of developed countries (in particular France, the United States and the United Kingdom) were large net divestors from Africa during 2014. Demand from developing-economy investors for these divested assets was significant. As a result, African M&As increased by 32 per cent from $3.8 billion in 2013 to $5.1 billion in 2014, especially in oil and gas and in finance.

Services account for the largest portion of Africa’s stock of inward FDI, although the share is lower than in other regions, and concentrated in a relatively small number of countries, including Morocco, Nigeria and South Africa. Finance accounts for the largest portion of Africa’s stock of services FDI; by 2012 more than half of Africa’s services FDI stock was held in finance (56 per cent), followed by transport, storage and communications (21 per cent) and business activities (9 per cent).

Developing Asia now the largest recipient region of FDI

Following a 9 per cent rise in FDI inflows, developing Asia reached a historically high level of $465 billion in 2014, consolidating the region’s position as the largest recipient region in the world.

Inflows to East Asia rose by 12 per cent to $248 billion. China, now the largest FDI host economy in the world, accounted for more than half of this figure. Hong Kong (China) witnessed a 39 per cent increase in inflows to $103 billion. In South-East Asia, FDI inflows rose by 5 per cent to $133 billion. This increase was driven mainly by Singapore, now the world’s fifth largest recipient economy, where inflows reached $68 billion. Other SouthEast Asian economies also saw strong FDI growth: inflows to Indonesia went up by 20 per cent to $23 billion.

Policy efforts to deepen regional integration are driving greater connectivity between economies in East and South-East Asia. This is especially so in infrastructure, where MNEs are major investors across the region. Hong Kong (China), China, Japan and Singapore are among the most important regional sources of equity investment in the sector. They are also active through non-equity modalities. Regional infrastructure investment is set to grow further, supported by policies to boost connectivity, such as China’s “One Belt, One Road” strategy and the opening up of transport industries to foreign participation by ASEAN member countries. FDI inflows to South Asia rose to $41 billion in 2014. India, accounting for more than three quarters of this figure, saw inflows increase by 22 per cent to $34 billion. The country also dominated FDI outflows, with a five-fold increase to $10 billion, recovering from a sharp decline the year before. A number of other South Asian countries, such as Pakistan and Sri Lanka, saw rising FDI from China. In attracting manufacturing FDI, especially in capital-intensive industries, South Asia lags behind East and South-East Asian economies. However, some success stories have emerged, such as the automotive industry, with Automakers now expanding beyond India to locate production activities in other countries in the region, including Bangladesh and Nepal.

The security situation in West Asia has led to a six-year continuous decline of FDI flows (down 4 per cent to $43 billion in 2014); weakening private investment in parts of the region is compensated by increased public investment. In GCC economies, State-led investment in construction focused on infrastructure and oil and gas development has opened up opportunities for foreign contractors to engage in new projects in the region through non-equity modes. FDI outflows from the region decreased by 6 per cent to $38 billion, due to the fall of flows from Kuwait and Qatar − the two largest investors in the region. FDI flows from Turkey almost doubled to $6.7 billion.

FDI flows declined after four years of increases in Latin America and the Caribbean

FDI flows to Latin America and the Caribbean, excluding the Caribbean offshore financial centres, decreased by 14 per cent to $159 billion in 2014. This was mainly the consequence of a 78 per cent decline in cross-border M&As in Central America and of lower commodity prices, which reduced investment in the extractive industries in South America. Flows to South America declined for the second consecutive year, down 4 per cent to $121 billion, with all the main recipient countries, except Chile, registering negative FDI growth. In Central America and the Caribbean, FDI declined 36 per cent to $39 billion, partly because of unusually high levels in 2013 due to a crossborder megadeal in Mexico.

There were two main waves of FDI in the past few decades. The first wave began in the mid-1990s as a result of liberalization and privatization policies that encouraged FDI into sectors such as services and extractive industries, which had previously been closed to private and/or foreign capital. The second wave began in the mid-2000s in response to a surge in commodity prices, leading to increased FDI in extractive industries in the region (especially South America). After more than a decade of strong growth driven by South America, the FDI outlook in Latin America and the Caribbean is now less optimistic. For the region, this is an occasion for a reflection on the experience of the two FDI waves across the region. In the context of the post-2015 development agenda, policymakers may consider potential policy options on the role of FDI for the region’s development path.

FDI flows in transition economies more than halved in 2014

FDI inflows to the transition economies fell by 52 per cent to reach $48 billion in 2014 − a value last seen in 2005. In the Commonwealth of Independent States (CIS), regional conflict coupled with falling oil prices and international sanctions reduced foreign investors’ confidence in the strength of local economies. The Russian Federation − the largest host country in the region − saw its FDI flows fall by 70 per cent due to the country’s negative growth prospects, and as an adjustment after the level reached in 2013 due to the exceptional Rosneft−BP transaction. In South-East Europe, FDI flows remained stable at $4.7 billion. Foreign investors mostly targeted manufacturing because of competitive production costs and access to EU  markets.

FDI outflows from the transition economies fell by 31 per cent to $63 billion as natural-resource-based MNEs, mainly from the Russian Federation, reduced their investment abroad, particularly due to constraints in international financial markets and low commodity prices.

In the Russian Federation, sanctions, coupled with a weak economy and other factors, began affecting inward FDI in the second half of 2014, and this is expected to continue in 2015 and beyond. Market-seeking foreign investors – for example, in the automotive and consumer industries – are gradually cutting production in the country. Volkswagen (Germany) will reduce its production in Kaluga, and PepsiCo (United States) has announced it will halt production at some plants. The geographical profile of investors in the country is changing. As new investment from developed-country MNEs is slowing down, some of the losses are being offset by other countries. In 2014, China became the fifth largest investor in the Russian Federation.

Inflows to developed economies down for the third successive year

FDI inflows to developed countries lost ground for the third successive year, falling by 28 per cent to $499 billion, the lowest level since 2004. Inflows to Europe continued the downward trend since 2012 to $289 billion. Inflows to North America halved to $146 billon, mainly due to Vodafone’s $130 billion divestment of Verizon, without which they would have remained stable.

European countries that made the largest gains in 2014 were those that had received a negative level of inflows in 2013, such as Finland and Switzerland. FDI to the United Kingdom jumped to $72 billion, leaving it in its position as the largest recipient country in Europe. In contrast, large recipients of FDI in 2013 saw their inflows fall sharply, such as Belgium, France and Ireland. Inward FDI to Australia and to Japan both contracted.

FDI outflows from developed countries held steady at $823 billion. Outflows from Europe were virtually unchanged at $316 billion. Outflows from Germany almost trebled, making it the largest European direct investor. France also saw its outflows increase sharply. In contrast, FDI from other major investor countries plummeted. In North America, both Canada and the United States saw a modest increase of outflows. Outflows from Japan declined by 16 per cent, ending a three-year run of expansion.

The impact of MNE operations on the balance of payments has increased, not only through FDI, but also through intra-firm trade and FDI income. The recent experience of the United States and Japan shows that growing investment income from outward FDI provides a counterbalance to the trade deficit. Furthermore, outward FDI has helped create avenues for exports of knowledge-intensive goods and services.

FDI to structurally weak, vulnerable and small economies witnessed divergent trends

FDI flows to the least developed countries (LDCs) increased by 4 per cent to $23 billion, mainly due to increases in Ethiopia, Zambia, Myanmar and the Lao People’s Democratic Republic. Announced greenfield investments into the group reached a six-year high, led by a $16 billion oil and gas project in Angola. In contrast, a large reduction of FDI flows took place in Mozambique, and other recipients, including Bangladesh, Cambodia, the Democratic Republic of Congo and the United Republic of Tanzania, also saw weak or negative FDI growth.

FDI flows to the landlocked developing countries (LLDCs) fell by 3 per cent to $29 billion. The Asian countries in the group experienced the largest fall, mainly due to a drop in investment in Mongolia which saw its inflows decline for a third successive year. In Central Asian LLDCs, investors from developing and transition economies are increasingly important in terms of the value of FDI stock, led by China, Russia, Turkey, the United Arab Emirates, the Republic of Korea and the Islamic Republic of Iran. FDI remains the largest source of external finance for LLDCs, having overtaken official development assistance after the global financial crisis.

FDI inflows to small island developing States (SIDS) increased by 22 per cent to $7 billion in 2014, mostly due to a rise in cross-border M&A sales. Trinidad and Tobago, the Bahamas, Jamaica and Mauritius were the largest destinations of FDI flows to SIDS, accounting for more than 72 per cent of the total. Flows to Trinidad and Tobago were lifted by a $1.2 billion acquisition in the petrochemical industry; cross-border acquisitions also drove the increased FDI flows in Mauritius. A number of cross-border megadeals took place in Papua New Guinea’s oil and gas industry. In contrast, flows to Jamaica – the group’s second largest recipient − decreased by 7 per cent to $551 million.

A stock-taking of external finance flows to structurally weak, small and vulnerable economies since the First Conference on Financing for Development in Monterrey in 2002 demonstrates the potential of FDI in pursuit of sustainable development and in the context of the post-2015 development agenda. Because of the size, stability and diverse development impact of FDI compared with other sources of finance, it remains an important component in external development finance. In particular, given its contribution to productive and export capacities, FDI plays a catalytic role for development in these economies, including in partnership with other sources of finance. A holistic approach – encompassing all sources, public and private, domestic and foreign – is essential for mobilizing development finance effectively into all three economic groups; a perspective to be discussed at the Third Financing for Development Conference in Addis Ababa in July 2015, and subsequently.

Over the past decade (2004–2014), FDI stock tripled in LDCs and SIDS, and quadrupled in LLDCs. With a concerted effort by the international investment-development community, it would be possible to have FDI stock in these structurally weak economies quadruple by 2030. More important, further efforts are needed to harness financing for economic diversification to foster greater resilience and sustainability in these countries.