Global FDI flows fell by 8% last year

2014 witnessed a fall in global foreign direct investment inflows, says the United Nations Conference on Trade and Development in its latest report on global investment trends. Reflecting the growing economic uncertainty and the fragility of the global economy, this trend may well continue this year, says the UN agency.

Kanaga Raja

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GLOBAL foreign direct investment (FDI) inflows declined by 8% to an estimated $1.26 trillion in 2014, compared with $1.36 trillion recorded the previous year, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its latest Global Investment Trends Monitor (No. 18, dated 29 January 2015), UNCTAD attributed this decline to the fragility of the global economy, policy uncertainty and geopolitical risks.

UNCTAD said that flows were heavily influenced by economic uncertainty and geopolitical risks including regional conflicts, and by the $130 billion mega-buyback of shares by Verizon (United States) from Vodafone (United Kingdom) which significantly reduced the equity component of FDI inflows to the United States.

China became the largest FDI recipient in the world in 2014, with inflows to the country - including both financial and non-financial sectors - estimated at $128 billion, while the United States fell to being the third largest host country.

FDI flows to developed economies

According to UNCTAD, preliminary estimates show that FDI flows to developed countries as a whole dropped by 14% to an estimated $511 billion.

FDI flows to the United States fell to an estimated $86 billion - almost a third of their 2013 level. Cross-border merger and acquisition (M&A) sales in the United States declined from $60 billion in 2013 to just $10 billion in 2014, primarily due to the Verizon-Vodafone deal.

On the other hand, FDI inflows to the European Union (EU) rose by 13% to an estimated $267 billion.

Among the largest economies, the United Kingdom saw its inflows rise to an estimated $61 billion, helped by rising reinvested earnings and cross-border M&As.

UNCTAD further estimated a significant rise in FDI flows to Sweden and Portugal, though this was from very low levels in 2013. Inflows to the Netherlands and Luxembourg increased to $42 billion and $36 billion, respectively.

In contrast, inflows to Germany and France were in negative territory, at -$2.1 billion and -$6.9 billion, respectively.

In Germany, FDI flows declined due to changes in the flows of intra-company loans. In France, in addition to the repayment of loans to parent companies, a single large divestment took place (Nestle Switzerland sold its 8% share in L'Oreal for $9 billion).

Lower intra-company loans by EU investors diminished FDI flows to Ireland to just $10 billion, said the report.

According to UNCTAD, Japan, while still a small host country, continued to perform well, with FDI inflows rising to $10 billion in 2014. Inflows to Canada declined by 26% to $53 billion as a result of a sharp fall in intra-company loans.

FDI flows to developing economies

FDI flows in developing economies reached more than $700 billion, the highest level ever recorded, and accounting for 56% of global FDI flows, said UNCTAD. It attributed the increase mainly to developing Asia - the world's largest recipient region - while Latin America saw its flows decline.

Although economic growth in developing Asia slowed down, FDI inflows remained resilient, with preliminary estimates demonstrating that combined inflows to 40 economies in the region grew by an estimated 15% to a historic level of around $492 billion in 2014.

Among the sub-regions, East Asia, South-East Asia and South Asia experienced rapid increases in inflows, while those to West Asia dropped.

Inflows to China amounted to an estimated $128 billion, rising by about 3% from 2013. This was mainly driven by an increase in FDI in the service sector, while FDI to the manufacturing sector fell, particularly from Japan, and especially in industries that are sensitive to rising labour costs.

By contrast, FDI inflows to India surged by about 26% to an estimated $35 billion, despite macroeconomic uncertainties and financial risks.

According to UNCTAD, inflows to Hong Kong-China - a leading regional business hub and location of regional headquarters of transnational corporations (TNCs) in Asia - rose by an estimated 46% to an annual total of about $111 billion.

Similarly, FDI inflows to Singapore, another international business hub in the region, rose by 27% to an estimated $81 billion.

According to the UNCTAD report, FDI was also on the rise in other South-East Asian economies, including Indonesia and Thailand. 'However, as locations for foreign companies' production in labour-intensive industries, a number of low-income economies in the subregion exhibited a mixed picture: flows to Myanmar doubled, while those to Cambodia and Viet Nam fell.'

FDI flows to West Asia are estimated to have maintained their downward trend in 2014 for the sixth consecutive year, decreasing by around 4% to $44 billion. According to UNCTAD, this is due to a further deterioration of the security situation in the region that deterred FDI not only to countries directly affected - like Iraq, Syria and Yemen - but also in neighbouring countries and regionally. FDI remained sluggish also in the oil-rich Gulf Cooperation Council (GCC) countries, even though they have avoided large-scale political unrest and enjoyed strong economic growth.

FDI inflows to Africa fell by 3% to an estimated $55 billion, largely accounted for by a decrease of FDI into North Africa.

Other sub-regions experienced similar FDI inflows compared to 2013, UNCTAD said, underlining that FDI into Africa was buoyed by increased inflows to Mozambique driven by its potential as one of the world's largest liquefied natural gas exporters.

FDI into North Africa declined by 17% to $12.5 billion, with continued civil unrest in Libya dragging down the region's potential as an FDI host. Notwithstanding strong inflows to Mozambique, FDI into sub-Saharan Africa remained flat.

Africa saw cross-border M&A sales increase by 41% to $5.4 billion, as investors looked to tap into Africa's growing consumer markets. Private equity firms and Middle East investors also played a role, said the report.

In Nigeria, significant cross-border M&A growth to $1.3 billion, especially into consumer-orientated sectors, helped counterbalance the decline in FDI to other sectors, stemming the level at $4.9 billion.

As for Latin America, UNCTAD said that FDI flows to the region are estimated to have decreased by 19% to $153 billion in 2014, after four years of consecutive increases.

'This was mainly the consequence of a 26% decline in cross-border M&As and of reduced investment in the extractive industries due to lower commodity prices.'

The report noted that most of the decline took place in Mexico where inflows are estimated to have fallen 52% - or by $22 billion - due to both the exceptional levels reached in 2013 (after the $13 billion purchase of the Modelo brewery by the Belgian multinational Anheuser-Busch InBev) and the $5 billion divestment by AT&T (United States) of its stake in America Movil.

Flows to Argentina are estimated to be down by 60% to $4.5 billion due to the $5.3 billion compensation received by Repsol for the 2012 nationalisation of 51% of YPF.

In Brazil, despite a significant increase of cross-border M&As (by 45% to $14 billion), FDI flows are estimated to be down around 4% to $62 billion, affected by a strong fall in flows to the primary sector, while those to manufacturing and services increased.

In Chile, FDI flows were boosted by exceptionally high levels of cross-border M&A sales that increased almost fourfold to $9 billion in 2014, without which FDI would have registered a significant decline due to waning FDI in the mining sector.

According to UNCTAD, the latter also affected FDI to Colombia and Peru where inflows are estimated to have fallen to $15.8 billion and $7.4 billion, respectively.

Transition economies experienced a 51% decline in their FDI inflows, reaching an estimated $45 billion, as regional conflict and sanctions on the Russian Federation - the largest host country in the region - have deterred foreign investors (especially from developed countries).

FDI flows to the Russian Federation are estimated to have fallen by 70% to $19 billion, due to both the country's negative growth prospects and the exceptional level reached in 2013 (because of the $55 billion Rosneft-BP transaction).

'Major oil and gas companies based in developed countries have cancelled or withheld equity investments in the Russian Federation. In Ukraine, FDI flows turned negative to -$0.2 billion. In contrast, FDI flows to Kazakhstan and Azerbaijan rose.'

Cross-border M&As

UNCTAD also reported that cross-border M&As rebounded strongly in 2014, reaching their highest level since 2011. TNCs have gradually gained the confidence to go back on the acquisition trail and make strategic deals, it said.

'Tax inversion deals also contributed to the increase in 2014. Cross-border M&As increased by 19% to $384 billion with strong performance in finance, as well as pharmaceuticals, metals, and communications and media industries.'

The financial industry played its most prominent role since 2008 in cross-border M&A sales at $135 billion, accounting for 35% of global sales. 'This industry intensified its ongoing restructuring to cope with new monetary policies and meet more stringent capital adequacy requirements.'

The value of announced greenfield investment increased by 3% in 2014. Among major groupings, developing economies saw their greenfield investment up by 7%, developed economies remained flat with a decline of 1%, and transition economies declined by 10%.

'This reinforced developing economies as the main hosts of greenfield investment with their share accounting for three quarters of total announced deals,' said UNCTAD.

Trends for 2015

UNCTAD said that trends in global FDI flows are uncertain for 2015. The fragility of the world economy, with growth tempered by hesitant consumer demand, volatility in currency markets and geopolitical instability will act as a deterrent for investors. The decline in commodity prices will also lower investments in the oil and gas and other commodity industries.

Among developed countries, said UNCTAD, the increasing divergence in economic growth between the United States and the euro area and Japan will lead to different patterns of FDI.

In developing and transition economies, slower growth prospects in some emerging markets and regional conflicts are likely to affect investment negatively.

Despite those risks, said UNCTAD, TNCs are expected gradually to increase strategic investments and to deploy part of their record levels of cash holdings.

'Various corporate surveys point to the fact that TNCs are gaining more confidence in their business growth prospects. Stronger economic growth in the United States, the demand-boosting effect of lower oil prices and proactive monetary policy in the eurozone could support increased FDI flows. Increased investment liberalisation and promotion measures will also favourably affect FDI flows,' it added.                                 

Kanaga Raja is Editor of the South-North Development Monitor (SUNS) published by the Third World Network. This article is reproduced from SUNS (No. 7953, 3 February 2015).

*Third World Resurgence No. 293/294, January/February 2015, pp 33-35