Info Service on Finance and Development (Jun18/02)
14 June 2018
Third World Network
Global FDI flows fell by 23% last year, says UNCTAD
Published in SUNS #8697 dated 8 June 2018
Geneva, 7 Jun (Kanaga Raja) - Global foreign direct investment (FDI)
flows fell sharply by 23 per cent to $1.43 trillion in 2017, from
a revised $1.87 trillion in 2016, according to the United Nations
Conference on Trade and Development (UNCTAD).
UNCTAD has projected global FDI flows to increase marginally, by about
5 per cent in 2018, to $1.5 trillion.
In its World Investment Report 2018 (WIR-2018) released Thursday,
UNCTAD said that the decline last year 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 cross -border mergers and acquisitions (M&As), it said.
In other findings in the thematic part of its report, UNCTAD said
that over the past 10 years, at least 101 economies across the developed
and developing world - accounting for more than 90% of global GDP
- have adopted formal industrial development strategies.
Over the past five years alone, at least 84 countries have issued
industrial policy statements or explicit policy frameworks for industrial
According to the WIR, growth in global value chains (GVCs) has stagnated.
Foreign value added (FVA) in trade - 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
According to UNCTAD data, foreign value added in trade (the key GVC
indicator) was down 1 percentage point to 30% of trade in 2017.
UNCTAD also said that as a result of the investment downturn, the
rate of expansion of international production is slowing down.
The modalities of international production and of cross-border exchanges
of factors of production are shifting from tangible to intangible
forms. Sales of foreign affiliates continue to grow - up 6 per cent
in 2017 - but productive assets and employees are increasing at a
This could negatively affect the prospects for developing countries
to attract investment in productive capacity, it said.
Speaking on the thematic part of the report on investment and new
industrial policies at a media briefing on 4 June, Dr Mukhisa Kituyi,
the Secretary-General of UNCTAD, said that one of the key messages
in the report is the resurgence of industrial policy, not just in
developing countries but also in developed countries.
More than 100 countries have new industrial policies as a focal centre
of public policy. Over the past five years alone, about 80 countries
have embraced new industrial policy, he added.
On the monitoring of FDI flows, in particular to developing countries,
Dr K ituyi said the report paints a rather depressing picture in that
there has been a continued decline of FDI flows, particularly greenfield
FDI, in the developing countries.
Some regions like Africa which had a significant decline in FDI of
10% last year have now witnessed a decline of 20% in FDI.
James Zhan, Director of the UNCTAD Division on Investment and Enterprise,
said 80% of industrial policies were formulated over the last five
This is kind of a new wave of industrial policy formulation and "we
see the emergence of a new generation of industrial policies,"
According to Zhan, if one looks at the design criteria, these new
industrial policies have the nature of openness, sustainability, inclusiveness,
and also getting ready for the new industrial revolution.
Furthermore, these policies try to address the issues of coherence,
flexibility, and effectiveness. There is a strong component of investment
policies, and investment policy instruments are built into these industrial
He said ninety percent of the new industrial policies have investment
policy components or investment policy instruments, mainly in four
areas: incentives and the related performance requirements; special
economic zones; investment promotion and facilitation; and the screening
and monitoring of investment projects at entry levels.
On global trends in FDI, Zhan highlighted the implications of the
low level of global FDI flows for global value chains, for the international
production network and also for trade.
As for the prospects for FDI, he said that UNCTAD has forecast that
global FDI may increase by roughly 5%, at most by 10%, but the growth
is very fragile and full of policy uncertainties and geopolitical
risks. The policy uncertainties and geopolitical risks are very high,
and that may reverse the trends of FDI growth, he pointed out.
Asked to elaborate on the current "trade tensions", Zhan
said that when we talk about trade tensions, the issue is complex
in the sense that it has several dimensions.
Trade tensions can lead to tariff escalation, an increase in non-tariff
barriers, increase in investment protectionist measures, firm-level
sanctions, and to pressure for liberalisation of trade investment.
All these parameters may have impacts or effects on several dimensions
of global international production and FDI, said Zhan.
In essence, in the short-term, it generates uncertainty and that will
affect investment plans of multinational companies. In light of that,
some companies will adopt a wait-and-see attitude instead of going
forward on investment.
It may risk the reduction of FDI because of that and it may also lead
to diversification of companies from the "conflict zones"
to non-conflict zones. It could also lead to re-shoring because some
multinationals may feel more safe to be back home, he added.
DECLINE IN FDI FLOWS
According to the WIR 2018, global foreign direct investment (FDI)
flows fell by 23 per cent in 2017, to $1.43 trillion, from a revised
$1.87 trillion in 2016. The decline is in stark contrast to other
macroeconomic variables, such as GDP and trade, which saw substantial
improvement in 2017.
A decrease in the value of net cross-border mergers and acquisitions
(M&As) to $694 billion, from $887 billion in 2016, contributed
to the decline. The value of announced greenfield investment - an
indicator of future trends - also fell by 14 per cent, to $720 billion.
FDI flows fell sharply 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 F DI inflows in 2017, absorbing 47 per cent of the total, compared
with 36 per cent in 2016.
Even discounting the volatile financial flows, large one-off transactions
and corporate restructurings that inflated FDI numbers in 2015 and
2016, the 20 17 decline was still sizeable and part of a longer-term
negative cycle, said UNCTAD.
This negative cycle is caused by several factors. One factor is asset-light
forms of overseas operations, which are causing a structural shift
in FDI patterns. 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, extending the steady decline recorded over the preceding five
years. Rates of return in developed economies have trended downwards
over this period but stabilized.
Although rates of return remain higher on average in developing and
transit ion economies, most regions have not escaped this erosion.
In Africa, for instance, return on investment dropped from 12.3 per
cent in 2012 to 6.3 per cent in 2017. This can be partly explained
by the fall in commodity prices during the period.
Yet the decline persisted in 2016 when prices stabilized, and rates
of return on FDI to oil-rich West Asia did not weaken as much as in
This suggests that structural factors, mainly reduced fiscal and labour
cos t arbitrage opportunities in international operations, may also
be at work.
REGIONAL TRENDS IN FDI FLOWS
According to the report, FDI flows to developed economies fell by
one-third to $712 billion, explained in part by a decline from relatively
high inflows in the preceding year.
Inflows to developed economies in 2015-2016 exceeded $1 trillion,
mainly due to a surge in cross-border M&As and corporate re-configurations
(i.e. changes in legal or ownership structures of multinational enterprises
(MNEs), including tax inversions).
A significant reduction in the value of such transactions resulted
in a decline of 40 per cent in flows in the United States (from $466
billion in 2015 and $457 billion in 2016 to $275 billion in 2017).
Similarly, the absence of the large mega-deals that caused the anomalous
peak in 2016 in FDI inflows in the United Kingdom caused a sharp fall
to only $15 billion in 2017.
In developed economies, while equity investment flows and intra-company
loans recorded a fall, reinvested earnings rose by 26 per cent, accounting
for half of FDI inflows.
Reinvested earnings were buoyed by United States MNEs, in anticipation
of a tax relief on repatriation of funds.
FDI flows increased in other developed economies (7 per cent). FDI
inflows to developing economies remained close to their 2016 level,
at $671 billion.
FDI flows to developing Asia were stable at $476 billion. The modest
increase in Latin America and the Caribbean (+8 per cent to $151 billion)
compensated for the decline in Africa (-21 per cent to $42 billion).
The slump in FDI flows to Africa was due largely to weak oil prices
and lingering effects from the commodity bust, as flows contracted
in commodity-exporting economies such as Egypt, Mozambique, the Congo,
Nigeria and Angola.
Foreign investment to South Africa also contracted, by 41 per cent.
FDI inflows to diversified exporters, led by Ethiopia and Morocco,
were relatively more resilient.
Developing Asia regained its position as the largest FDI recipient
region. Against the backdrop of a decline in worldwide FDI, its share
in global inflows rose from 25 per cent in 2016 to 33 per cent in
The largest three recipients were China, Hong Kong (China) and Singapore.
With reported inflows reaching an all-time high, China continued to
be the largest FDI recipient among developing countries and the second
largest in the world, behind the United States.
The increase in FDI flows to Latin America and the Caribbean (excluding
financial centres) constituted the first rise in six years. Inflows
are still well below the peak reached in 2011 during the commodity
Although commodities continued to underpin investment in the region,
there is now a shift towards infrastructure (utilities and energy,
in particular), finance, business services, ICT and some manufacturing.
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, following the global trend.
This constituted the second lowest level since 2005. Most of the decline
was due to sluggish FDI flows to four major CIS economies: the Russian
Federation, Kazakhstan, Azerbaijan and Ukraine.
As a result of these regional variations, the share of developed economies
in world FDI flows as a whole decreased to 50 per cent of the total.
Half of the top 10 host economies continue to be developing economies.
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 apparent slowdown in the first half of 2017.
According to the report, MNEs from developed economies 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, while
those from transition economies rose 59 per cent to $40 billion.
Outward investment by European MNEs fell by 21 per cent to $418 billion
in 2017. This was driven by sharp reductions in outflows from the
Netherlands and Switzerland.
Outflows from the Netherlands - the largest source country in Europe
in 201 6 - dropped by $149 billion to just $23 billion, owing to the
absence of the large mega-deals that characterized Dutch outward investment
in 2016. As a result, the country's equity outflows fell from $132
billion to a net divestment of -$5.2 billion.
In Switzerland, outflows declined by $87 billon to -$15 billion. Equity
flows fell by $47 billion and intra-company loans by $42 billion.
In contrast, outflows from the United Kingdom rose from -$23 billion
in 2016 to $100 billion in 2017, as a result of large purchases by
MNEs based in the United Kingdom.
Investment by MNEs in North America rose by 18 per cent to $419 billion
in 2017. Most outward FDI from the United States - the largest investing
country - is in the form of retained earnings.
Reinvested earnings in the fourth quarter of 2017 were 78 per cent
higher than during the same period in 2016, in anticipation of tax
Investment activity abroad by MNEs from developing economies declined
by 6 per cent, reaching $381 billion.
Outflows from developing Asia were down 9 per cent to $350 billion
as outflows from China reversed for the first time since 2003 (down
36 per cent to $125 billion).
The decline of investment from Chinese MNEs was the result of policies
clamping down on outward FDI, in reaction to significant capital outflows
during 2015-2016, mainly in industries such as real estate, hotels,
cinemas, entertainment and sport clubs.
The decline in China and Taiwan Province of China (down 36 per cent
to $11 billion) offset gains in India (up 123 per cent to $11 billion)
and Hong Kong-China (up 39 per cent to $83 billion).
Outward FDI from Latin America and the Caribbean (excluding financial
centres) rose by 86 per cent to $17.3 billion, as Latin American MNEs
resumed their international investment activity. Yet outflows remained
significantly lower than before the commodity price slump.
Outflows from Chile and Colombia - the region's largest outward investors
i n 2016 - declined by 18 per cent in 2017, at $5.1 billion and $3.7
billion respectively, as equity outflows dried up. Investment from
Brazil remained negative at about -$1.4 billion.
FDI outflows from Africa increased by 8 per cent to $12.1 billion.
This largely reflected increased outward FDI by South African firms
(up 64 per cent to $ 7.4 billion) and Moroccan firms (up 66 per cent
to $960 million).
South African retailers continued to expand into Namibia, and Standard
Bank opened several new branches there.
In 2017, FDI outflows from economies in transition recovered by 59
per cent, to $40 billion, after being dragged down by the recession
This level, however, remains 47 per cent below the high recorded in
2013 ($ 76 billion). As in previous years, the bulk of investment
from transition economies is by Russian MNEs.
SECTORAL TRENDS IN FDI
According to the report, in 2017, both the value of announced FDI
greenfield projects and the value of net cross-border M&As declined
significantly. The former dropped by 14 per cent to $720 billion.
The latter decreased by 22 per cent to $694 billion.
The value of announced FDI greenfield projects, an indicator of future
FDI flows, declined by 25 per cent in services and 61 per cent in
the primary sector.
In contrast, manufacturing announcements increased by 14 per cent.
As a result, the values of greenfield projects in manufacturing and
services were nearly the same, at about $350 billion in 2017.
Greenfield project values decreased in several key services industries
- construction, utilities (electricity, gas and water), business services,
and transport, storage and communications.
PROSPECTS FOR FDI IN 2018
UNCTAD has projected global FDI flows to increase marginally, by about
5 per cent in 2018, to $1.5 trillion.
It said that the fragile growth of FDI flows expected for 2018 reflects
an upswing in the global economy, strong aggregate demand, an acceleration
in world trade and strong MNE profits (total profits, which may not
reflect the profitability of overseas operations).
The improving macroeconomic outlook has a direct positive effect on
the capacity of MNEs to invest; business survey data indicates optimism
about short-term FDI prospects. Also, the expected increase in FDI
inflows in 2018 is consistent with project data (M&As and announced
greenfield projects) for the first quarter.
However, UNCTAD cautioned, the expectation of an increase in global
FDI is tempered by a series of risk factors.
"Geopolitical risks, growing trade tensions and concerns about
a shift toward protectionist policies could have a negative impact
on FDI in 2018," it said.
In addition, tax reforms in the United States are likely to significantly
affect investment decisions by United States MNEs in 2018, with consequences
for 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.
Projections indicate that FDI flows could increase in developed and
transit ion economies, while remaining flat in developing economies
as a group.
FDI inflows to Africa are forecast to increase by about 20 per cent
in 2018, to $50 billion. The projection is underpinned by the expectation
of a continued modest recovery in commodity prices, and by macroeconomic
In addition, advances in inter-regional cooperation, through the signing
of the African Continental Free Trade Area (AfCFTA) could encourage
stronger FDI flows in 2018. Yet Africa's commodity dependence will
cause FDI to remain cyclical.
FDI inflows to developing Asia are expected to remain stagnant, at
about $4 70 billion. Inflows to China could see continued growth as
a result of recently announced liberalization plans.
Other sources of growth could be increased intra-regional FDI in ASEAN,
including to relatively low-income economies in the grouping, notably
the CLMV countries (Cambodia, Laos, Myanmar and Vietnam).
Investments from East Asia will also continue to be strong in these
countries. In West Asia, the evolution of oil prices, the efforts
of oil-rich countries to promote economic diversification, and political
and geopolitical uncertainties will shape FDI inflows.
If trade tensions should escalate and result in disruptions in GVCs,
the subsequent effect on FDI would be more strongly felt in Asia,
Prospects for FDI in Latin America and the Caribbean in 2018 remain
muted, as macroeconomic and policy uncertainties persist. Flows are
forecast to decline marginally, to some $140 billion.
Economic prospects remain challenging. Uncertainty associated with
upcoming elections in some of the largest economies in the region,
and possible negative spillovers from interest rate rises in developed
countries and international financial market disruptions might have
an impact on FDI flows in 2018.
FDI flows to transition economies are forecast to rise by about 20
per cent in 2018, to $55 billion, supported by firming oil prices
and the growing macro-stability of the Russian economy. However, they
may be hindered by geopolitical risks.
FDI flows to developed countries are projected to increase to about
Based on macroeconomic fundamentals, flows to Europe should increase
by 15 per cent and to North America by 5 per cent. However, the repatriation
of retained profits by United States MNEs as a result of tax reforms
will have a dampening effect on FDI inflows in Europe, as will uncertainties
arising from tensions in trade relations.
UNCTAD said a positive short-term global macroeconomic outlook underpins
an expected recovery of FDI in 2018, although growth will be fragile.
GDP is expected to grow in all developed economies and in leading
However, prospects are softer in the mid-term, influenced by elevated
geopolitical risks and policy uncertainty. Financial conditions are
expected to tighten as central banks in major developed economies
normalize monetary policy.
In recent months, significant tensions have emerged in global trade,
encompassing a number of major economies.
The resultant atmosphere of uncertainty could cause MNEs to cancel
or delay investment decisions until the trade and investment climate
is more stable. If tariffs come into force, trade and global value
chains in the targeted sectors will be affected and so, consequently,
would be efficiency-seeking FDI.
MNE profitability would be affected in some sectors, further weakening
the propensity to invest. MNEs could also be incentivized to relocate
production activities to avoid tariffs.
According to the report, tensions and scrutiny extend beyond trade.
The Committee on Foreign Investment in the United States (CFIUS),
has become more proactive in blocking and discouraging acquisition
of United States firms.
More restrictive investment screening procedures are also being considered
elsewhere. The European Commission, Germany, Italy and the United
Kingdom have announced reforms to their investment control regime
in the past year.
The tax reform bill adopted in the United States in December 2017
will also have a significant impact on global FDI stocks and flows.
The immediate impact of the one-off deemed repatriation measure will
be the freeing up of more than $3.2 trillion in accumulated overseas
retained earnings of United States MNEs, a significant portion of
which could be repatriated.
Such repatriations would result in a drop in outward FDI stock and
negative outflows from the United States, with a mirror effect on
inward stocks and flows of other countries, said the report.