TWN Info Service on Finance and Development (May10/01)
3 May 2010
Third World Network

FDI flows stay stable in fourth quarter of last year
Published in SUNS #6913 dated 28 April 2010

Geneva, 27 Apr (Kanaga Raja) -- Foreign direct investment (FDI) flows remained relatively stable during the fourth quarter of last year, albeit at a much lower level than that of 2007 and 2008, the United Nations Conference on Trade and Development (UNCTAD) said on Monday.

In its latest Global Investment Trends Monitor (No. 3 dated 23 April 2010), UNCTAD said that during the last quarter of 2009, only a handful of economies, including China, Hong Kong China and Ireland, received more FDI inflows than those in the quarterly average of 2007.

Among the three components of FDI flows, equity flows (the most closely linked to real investment operations abroad) compared to reinvested earnings and other capital (intra-company loans), remained at a very low level.

According to UNCTAD, transnational corporations (TNCs) thus apparently remained cautious regarding their international investment expenditures during the last quarter of 2009, as also illustrated by the low value of cross-border mergers and acquisitions (M&As) and the number of greenfield projects.

Prospects for the first quarter of 2010 are better as indicated by improvements in the global business environment and a growing optimism of TNC executives regarding their own company's prospects and a pick-up in the value of cross-border M&As.

Noting that growth of FDI inflows in general trails economic growth, UNCTAD said that the current trend of gross domestic product (GDP) turned positive in mid-2009.

It however cautioned that government policies regarding the current crisis have double-edged effects. While the majority of these policies may promote and facilitate FDI, some policies such as increased screening requirements and new limitations of foreign equity may work against renewed flows.

With the slight drop in the number of greenfield projects in the first quarter of 2010, it is premature to say that FDI is now on a strong rebound, said UNCTAD, adding that TNCs still remain very cautious in their international investment programmes.

According to the investment trends report, after a continuous drop from the fourth quarter of 2007 to the first quarter of 2009, followed by a slight pick-up in the second quarter of 2009, FDI inflows have remained practically unchanged, at a low level, for the last three quarters.

The value of UNCTAD's FDI Global Quarterly Index remained at 117 in the fourth quarter, a level similar to that of the third quarter of 2009 and comparable to the 2006 average, but markedly lower than that in 2007 and 2008.

(The Global Quarterly Index is based on national data on FDI inflows for over 60 major FDI recipients worldwide, representing more than 90% of total FDI inflows in 2008.)

Inflows to most of the major recipient countries remained much lower than those in the quarterly average of 2007. This is the case for Canada, Japan, the Netherlands, the Russian Federation, Spain, Switzerland and the United States, among others, where FDI inflows dropped significantly during the fourth quarter of 2009.

In some other countries, says the report, FDI inflows rose as compared to the third quarter, but remained markedly lower than those in the quarterly average of 2007. This is the case, in particular, of Belgium, France and the United Kingdom.

Only in a handful of economies such as China, Hong Kong China, Ireland, and, to a smaller extent, Norway, were inflows larger in the last quarter of 2009 than those in the quarterly average of 2007.

During the last four quarters, notes UNCTAD, while FDI inflows were very low (2009: Q1) or stable at a low level (2009: Q2-Q4), there was an increase in reinvested earnings in the last two quarters of 2009, compared to those in the previous quarters, reflecting an overall improvement in profitability.

However, equity inflows, which is the most directly related to real investment operations, have remained at a low level since the beginning of 2009.

The value of cross-border M&As dropped during the fourth quarter to the lowest level: US$41 billion (or one tenth the historical peak in the fourth quarter of 2007), but picked up during the first quarter of 2010.

Greenfield projects, despite a slight increase, remained at a level lower than that in the quarterly average of 2008.

UNCTAD noted, however, that their decline during the past two years was by far smaller than for M&As, either in terms of number or value.

Despite sharp cuts in investment for increasing production capacity, internal growth (new investments or expansion through greenfield projects) has thus showed more resilience to the crisis than external growth (acquisition through M&As) in TNCs' FDI strategy.

As the world economy is slowly recovering from the crisis, an improvement in TNCs' business environment is on the way, said UNCTAD, adding that this can be illustrated, among others, by the fact that, after a sharp drop at the beginning of 2009, profits are progressively coming back to near pre-crisis levels.

The continued growth of GDP - which turned positive in mid-2009 - will provide additional impetus for FDI flows in the coming quarters. As a consequence, TNCs may be returning to more ambitious international investment programmes. This is evidenced, in particular, by the marked pick-up in the value of cross-border M&As during the first quarter of 2010, which practically doubled, although from a low level, as compared to the previous period.

According to UNCTAD, available data, however, suggest that there is no clear dynamic for FDI flows in the coming quarter. M&As, which were a primary driver of FDI flows in the past years, posted a solid gain in the first quarter of 2010 pointing to a potential rise in FDI flows for the quarter.

However, the slight drop in the number of greenfield projects shows that TNCs still remain very cautious in their international investment programmes, the report concluded. +