Global foreign direct investment (FDI) flows fell by 23 per cent in 2017, to $1.43 trillion from $1.87 trillion in 2016 (figure 1). The decline is in stark contrast to other macroeconomic variables, such as GDP and trade, which saw substantial improvement in 2017. The fall was caused in part by a 22 per cent decrease in the value of net cross-border mergers and acquisitions (M&As). But even discounting the large one-off deals and corporate reconfigurations that inflated FDI in 2016, the 2017 decline remained significant. The value of announced greenfield investment – an indicator of future trends – also fell by 14 per cent, to $720 billion.
FDI flows fell in developed economies and economies in transition while those to developing economies remained stable. As a result, developing economies accounted for a growing share of global FDI inflows in 2017, absorbing 47 per cent of the total, compared with 36 per cent in 2016.
Flows to developed economies dropped by more than one-third, to $712 billion (figure 2). The fall can be explained in large part by a decline from high inflows in the preceding year caused by cross-border M&As and corporate reconfigurations. A significant reduction in the value of such transactions resulted in a decline of 40 per cent in flows in the United States to $275 billion, and 92 per cent in the United Kingdom to $15 billion. Reinvested earnings rose by 26 per cent, buoyed by United States MNEs in anticipation of tax relief on the repatriation of funds.
FDI inflows to developing economies remained close to their 2016 level, at $671 billion, showing no signs of recovery after the 10 per cent decline in 2016. FDI flows to Africa continued to slide, flows to developing Asia remained stable, and flows to Latin America and the Caribbean increased moderately.
FDI flows to transition economies in South-East Europe and the Commonwealth of Independent States (CIS) declined by 27 per cent in 2017, to $47 billion, the second lowest level since 2005.
Half of the top 10 host economies are developing economies (figure 3). The United States remained the largest recipient of FDI, attracting $275 billion in inflows, followed by China, with record inflows of $136 billion, despite an initial slowdown in the first half of 2017. France, Germany and Indonesia made significant upward jumps in the list.
The top outward investors are still mostly developed economies (figure 4). MNEs from those countries reduced their overseas investment activity only marginally. The flow of outward investment from developed economies declined by 3 per cent to $1 trillion in 2017. Their share of global outward FDI flows was unchanged at 71 per cent. Flows from developing economies fell 6 per cent to $381 billion, mainly because outflows from China declined for the first time in 15 years (down 36 per cent to $125 billion) as a result of restrictive policies in reaction to significant capital outflows during 2015–2016. Outflows from transition economies rose 59 per cent to $40 billion.
The negative FDI trend was caused by several factors. Asset-light forms of overseas operations are causing a structural shift in FDI patterns (see WIR17). Another major factor is a significant decline in rates of return on FDI over the past five years. In 2017, the global rate of return on inward FDI was down to 6.7 per cent (table 1). Although rates of return remain higher on average in developing and transition economies, most regions have not escaped the erosion. In Africa, for instance, return on investment dropped from 12.3 per cent in 2012 to 6.3 per cent in 2017. Because the decline is especially strong in regions that depend on commodity-related FDI, it can be partly explained by the fall in commodity prices during the period. But the widespread nature of the decline suggests that structural factors, mainly reduced fiscal and labour-cost arbitrage opportunities in international operations, are also at work.
FDI activity was lower across all sectors. M&A values were down in the primary, manufacturing and services sectors. Greenfield project announcements also fell, by 14 per cent, to $720 billion. Although the 2017 decline was concentrated in services and investment project activity picked up in some manufacturing industries, such as chemical products and electronics, overall greenfield announcements in the manufacturing sector remained relatively depressed from a longer-term perspective. Investment project activity in manufacturing has been consistently lower during 2013–2017 than during the previous five-year period across Africa, Latin America and the Caribbean, and developing Asia. This could have important implications for FDI-supported industrial development.
The sharp fall in global FDI contrasted with the trend in other cross-border capital flows. Total capital flows increased from 5.6 to 6.9 per cent of global GDP, as bank lending and portfolio investment (mostly debt) flows compensated for the FDI slump. Capital flows to developing economies increased more modestly, from 4.0 to 4.8 per cent of GDP, because they rely relatively more on FDI.
Developing countries can draw on a range of external sources of finance, including FDI, portfolio equity, long-term and short-term loans (private and public), official development assistance, remittances and other official flows. FDI has been the largest source of external finance for developing economies over the past decade, and the most resilient to economic and financial shocks. It makes up 39 per cent of total incoming finance in developing economies as a group, but less than a quarter in the least developed countries (LDCs). Moreover, FDI in LDCs is showing a downward trend, with a 17 per cent fall in 2017, the second consecutive year of decline.
International production is still expanding, but the rate of expansion is slowing and the modalities of cross-border transactions and exchanges of goods, services and factors of production are shifting (table 2). The average annual growth rates over the past five years of foreign affiliates’ sales (1.5 per cent), value added (1.5 per cent) and employment (2.5 per cent) were all lower than during the equivalent period before 2010 (at 9.7, 10.7 and 7.6 per cent, respectively). This is in line with the loss of growth momentum in the longer-term FDI trend.
Sales of foreign affiliates are growing at twice the rate of assets and employees, in a continuation of the asset-light international production trend described in WIR17. The average annual growth rates over the past five years of royalties and licensing fee receipts (almost 5 per cent) compared to trade in goods and FDI (less than 1 per cent) show how international production is shifting from tangible cross-border production networks to intangible value chains. This could negatively affect the prospects for developing countries to attract investment in productive capacity.
Growth in global value chains (GVCs) has also stagnated. Foreign value added (FVA) in trade – the imported goods and services incorporated in a country’s exports, and a key measure of the importance of GVCs – appears to have peaked in 2010–2012 after two decades of continuous increase. UNCTAD’s GVC data shows it down 1 percentage point to 30 per cent of trade in 2017. The rate of growth in GVC participation decreased significantly this decade compared with the last, across all regions, developed and developing (figure 5). The slowdown shows clear correlation with the FDI trend and confirms the impact of FDI on global trade patterns.
MNEs in the global top 100 and the developing-economy top 100 are leading the way towards more gender-balanced boardrooms, although they have a distance to go. At the end of 2017, women held an average of 22 per cent of board seats in the top 100 MNEs, and five corporations had a female CEO. Board representation is slightly better than the S&P 500 average and compares favourably with national averages in almost all countries in the world.
The MNEs with the most diverse boards are from Europe, where some countries have introduced quotas and targets, followed by North America, where the appointment of women is not regulated. Among developing economies, South African corporations have a comparable share of women on their boards of directors. Companies in other developing economies, along with Japanese corporations, lag significantly behind their Western and South African counterparts.
Prospects remain muted; projections for global FDI in 2018 show fragile growth. Global flows are forecast to grow marginally, by up to 10 per cent, but remain below the average over the past 10 years. Higher economic growth projections, trade volumes and commodity prices would normally point to a larger potential increase in global FDI in 2018. However, risks are significant and policy uncertainty abounds. Escalation and heightening of trade tensions could negatively affect investment in GVCs. In addition, tax reforms in the United States and increased tax competition are likely to significantly affect global investment patterns. Moreover, longer-term forecasts for macroeconomic variables contain important downsides, including the prospect of interest rate rises in developed economies, with potentially serious implications for emerging-market currencies and economic stability.