TWN Info Service on Finance and Development (May11/01)
3 May 2011
Third World Network

Outward FDI rose to more than $1.3 trillion last year
Published in SUNS #7139 dated 29 April 2011

Geneva, 28 Apr (Kanaga Raja) -- Global outflows of Foreign Direct Investment (FDI) increased to an estimated $1,346 billion, or by 13%, in 2010, compared with $1,189 billion in the previous year, albeit that this level is still 40% below the peak of 2007, just before the onset of the global financial crisis.

This has been highlighted by the United Nations Conference on Trade and Development (UNCTAD) in its latest Global Investment Trends Monitor (No. 6 of 27 April 2011) on global and regional trends of FDI outflows in 2010.

Earlier this January, UNCTAD had brought out its previous Monitor No. 5 that had examined global and regional FDI trends for last year. It found that global inflows of FDI saw a marginal rise of 1%, from $1,114 billion in 2009 to almost $1,122 billion in 2010.

It had further found that for the first time, developing and transition economies received more than half of global FDI flows. FDI inflows to developing and transition economies in 2010 is estimated to total $596 billion, as compared to $527 billion to the developed economies. (See SUNS #7069 dated 19 January 2011.)

In its latest Monitor, UNCTAD has found that developing and transition economies are also increasingly important investors with their share in global outflows increasing to 28% in 2010, up from 15% in 2007, the year prior to the financial crisis.

According to the latest Monitor, the rise of FDI outflows in 2010 reflected an improvement of corporate profits and the increasing internationalization of TNCs (transnational corporations).

The financial crisis caused firms to rationalize their corporate structure and increase efficiencies wherever possible, often by relocating business functions to cost-advantageous locations, UNCTAD added.

In a media briefing on 27 April, Mr James Zhan, Director of the UNCTAD Division on Investment and Enterprise, pointed to both positive developments as well as increasing risks vis-a-vis prospects for FDI in the short term.

Among the positive developments that he highlighted are that the global economy is gaining strength, stock market valuations are rising and corporate profits of TNCs are rebounding. On top of that, there is ongoing corporate and industrial restructuring which he said will generate opportunities, as well as a new wave of privatisation in some countries.

"With this optimism, we would add caution," he however said, pointing to some risk factors that include the unpredictability of global economic governance - namely, the financial system is under reform and the trading system is in difficulties on account of the Doha Round. The investment regime is also evolving and the climate change framework is not in place yet.

He also pointed to other risks such as the sovereign debt crisis in the developed countries, with fiscal austerity being put in place in these countries; regional instability; the hike in energy prices and risks of inflation; the volatility of exchange rates; and risks associated with the rise in trade and investment protectionism.

"So, all these factors may derail the current fragile FDI recovery," the UNCTAD official stressed.

According to UNCTAD's Global Investment Trends Monitor, as developed countries are still confronting the effects of the crisis, many TNCs in developing and transition economies are investing in other emerging markets, where recovery is strong and the economic outlook better. "Indeed, in 2010, 70 per cent of investment by developing and transition economies are directed towards other developing and transition economies compared with developed countries where the share of these economies is about 50 per cent," said UNCTAD.

FDI outflows from developed countries for 2010 rose to $970 billion, an increase of 10% over the previous year, but this is only half of the peak level recorded in 2007. Limited recovery was made possible by an unprecedented amount of cash on TNCs' balance sheets and historically low rates of debt financing.

Reflecting the divergences of economic situations in the major economies of the developed world, trends in FDI outflows differed markedly across countries and sub-regions, and also in their three components - equity investment, reinvested earnings and other capital flows (mainly, intra-company loans), says the Monitor.

Outflows from Europe were slightly up despite a 67% fall in cross-border M&A (mergers and acquisitions) deals carried out by European TNCs. In some countries, outflows were mostly driven by a revival of intra-company financing to affiliates located abroad (for example, for Germany and Switzerland, there was a dramatic swing of intra-company loans, from -$24 billion and -$7 billion, respectively, in 2009, to nearly $19 billion and $12 billion in 2010).

In contrast, said UNCTAD, outflows from the United Kingdom, traditionally one of the largest investor countries, continued to suffer in 2010, reaching a level last seen in 1993, as parent firms withdrew or were paid back loans from their affiliates in order to strengthen their balance sheets at home.

Outflows from the United States rose significantly (by 31%) in 2010, mainly due to higher equity investments abroad (cross-border M&A deals by United States firms more than doubled in 2010) and reinvested earnings. Japanese outward FDI dropped by 24% as declining intra-company loans and reinvested earnings overwhelmed a near doubling of cross-border M&As.

As for developing countries, the Monitor notes that after a temporary setback in 2009, FDI flows from developing countries returned to their previous upward trend. They reached an estimated $316 billion in 2010, 23 per cent more than in 2009. However, said UNCTAD, they showed an uneven pattern among regions. A strong rebound of outward FDI flows from Latin America and the Caribbean and developing Asia more than offset the decline of outflows from Africa and West Asia.

FDI flows from Africa declined further in 2010. UNCTAD estimated its value at $4 billion, barely one per cent of the developing economies' total, down from $4.5 billion in 2009. Outflows from the two major outward investors, the Libyan Arab Jamahiriya and South Africa, which together accounted for more than half of the regional total in 2009, fell significantly. On the positive side, outflows from Egypt more than doubled, to $1.2 billion.

Outward FDI from South, East and South-East Asia rose by more than 20% in 2010, particularly from Hong Kong (China), China, the Republic of Korea, Taiwan Province of China and Malaysia. Outflows from the region's two largest FDI sources - Hong Kong (China) and China - rose by more than $10 billion each, reaching historical highs of $76 billion and $68 billion (estimated), respectively.

"Chinese companies continued to be on a buying spree, actively acquiring overseas assets in a wide range of industries and countries," said UNCTAD.

Cross-border M&A purchases by companies from the region as a whole surged to nearly $94 billion in 2010. The value of deals increased in all three - primary, manufacturing and services - sectors, particularly in oil and gas in the primary sector, finance and telecommunications among services, as well as food and beverage, motor vehicles and chemical products in manufacturing.

FDI outflows from West Asia dropped to near zero in 2010. This is due on one hand to large-scale divestments by West Asian firms from their enterprises abroad. The largest divestment deals included the $10.7 billion sale by Zain Group (Kuwait) of its African operations to Bharti Airtel (India), and the $2.2 billion sale by International Petroleum Investment Company (Abu Dhabi's sovereign wealth fund) of a 70% stake in Hyundai Oilbank in the Republic of Korea, said UNCTAD.

The Monitor notes that West Asian greenfield projects abroad - mainly targeting developing countries - dropped by 52% in value. Government-controlled entities - West Asia's main outward investors - have been redirecting part of their oil surplus to support their home country weakened by the global financial crisis.

"This is expected to continue as Governments vowed to finance higher social spending to pre-empt or respond to popular discontent," it underscores.

According to UNCTAD, Latin American and the Caribbean was the sub-region with the strongest increase of outward FDI flows in 2010 mainly due to the surge in cross-border M&As purchases. The region's TNCs, bolstered by strong economic growth at home, have increased their acquisitions abroad, particularly in developed countries where investment opportunities have arisen in the aftermath of the crisis.

All the big investor countries - Brazil, Chile, Colombia and Mexico - registered increases in both their outward FDI flows and cross-border M&As purchases. The most noticeable case was Brazil where FDI outflows jumped from high negative value in 2009 (-$10 billion) to $11.5 billion in 2010, largely due to the nearly five-fold increase of the equity capital component of its outward investments, said UNCTAD.

With respect to the transition economies of South-East Europe and the Commonwealth of Independent States (CIS), the Monitor finds that after a short-lived setback in 2009, FDI flows from these economies grew by 24%, reaching an estimated all-time record of $61 billion. Most of the outward FDI projects, as in the past years, were carried out by Russian TNCs, followed by those from Kazakhstan.

"The quick recovery of natural-resource-based companies in transition economies was helped by strong support by the State, and got a boost from recovering commodity prices and higher stock market valuations, easing the cash flow problems these firms were facing in 2009."

The Monitor points to some diverging trends in outward FDI components and modes of entry. It says that data on FDI outflows of 44 countries (mainly developed countries) show that both reinvested earnings and other capital flows (mainly intra-company loans) increased by 45% in 2010, while equity investments dropped by 11%. The level of reinvested earnings was still below the peak of 2007, but their share in total FDI nevertheless exceeded 50%.

According to UNCTAD, the continuing depressed level of equity investments was still the key factor that kept FDI flows relatively low.

"It is a source of concern as among the components of FDI, equity investment compared with reinvested earnings and intra-company loans, is the most directly related to TNCs' long-term international investment strategies. This type of investment directly involves acquisition or establishment of foreign affiliates. Therefore, its low level demonstrates that the FDI recovery starting in 2010 remains fragile," stressed UNCTAD.

Cross-border M&As continued to react more quickly to changing economic conditions. They jumped by 36% in 2010, reflecting both the growing value of assets on the stock market and the increased financial capability of potential buyers to carry out such operations.

Nevertheless, said UNCTAD, they declined again in the first quarter of 2011 as confidence was undermined by factors such as the impending tightening of fiscal policy, regional conflicts and the sovereign debt crises of some European countries. Greenfield investments registered a rise in both value and number during the first quarter of 2011, and continue to account for the bulk of FDI projects.

As to the prospects for outward FDI this year, UNCTAD said that with the global economic recovery gaining strength, rising stock market valuations and rebounding corporate profits of TNCs, it expects FDI outflows to continue rising in 2011.

"Ongoing corporate and industrial restructuring and a new wave of privatization in some countries with empty state coffers in the wake of the financial crisis are creating new investment opportunities for cash-rich companies in developed and developing countries."

Emerging economies, particularly Brazil, China, India and the Russian Federation have gained ground as sources of FDI in recent years. Outflows from these economies are expected to continue to grow in 2011, as the result of rapid economic growth, abundant financial resources and strong motives of firms to acquire mineral resources and strategic assets abroad, UNCTAD added. +