Global Investment Trends and New Industrial Policies

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Friday June 08, 2018/01:02PM / UNCTAD 

Global foreign direct investment (FDI) flows fell by 23 per cent to $1.43 trillion. This is in stark contrast to the accelerated growth in GDP and trade. The fall was caused in part by a 22 per cent decrease in the value of cross-border mergers and acquisitions (M&As). But even discounting the large one-off deals and corporate restructurings that inflated FDI numbers in 2016, the 2017 decline remained significant. The value of announced greenfield investment – an indicator of future trends – also decreased by 14 per cent.
 

·    FDI flows to developing economies remained stable at $671 billion, seeing no recovery following the 10 per cent drop in 2016.

·   FDI flows to Africa continued to slide, reaching $42 billion, down 21 per cent from 2016. The decline was concentrated in the larger commodity exporters.

·    Flows to developing Asia remained stable, at $476 billion. The region regained its position as the largest FDI recipient in the world.

·    FDI to Latin America and the Caribbean rose 8 per cent to reach $151 billion, lifted by that region’s economic recovery. This was the first rise in six years, but inflows remain well below the 2011 peak during the commodities boom.

·     FDI in structurally weak and vulnerable economies remained fragile. Flows to the least developed countries fell by 17 per cent, to $26 billion. Those to landlocked developing countries increased moderately, by 3 per cent, to $23 billion. Small Island developing States saw their inflows increase by 4 per cent, to $4.1 billion.


Inward FDI flows to developed economies fell sharply, by 37 per cent, to $712 billion. Cross-border M&As registered a 29 per cent decrease, with fewer of the megadeals and corporate restructurings that shaped global investment patterns in 2016. The strong decrease in inflows was in large part the effect of a return to prior levels in the United Kingdom and the United States, after spikes in 2016. 

FDI flows to transition economies declined by 27 per cent, to $47 billion, the second lowest level since 2005. The decline reflects geopolitical uncertainties and sluggish investment in natural resources.

Projections for global FDI in 2018 show fragile growth. Global flows are forecast to increase marginally, by up to 10 per cent, but remain well 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 broadening of trade tensions could negatively affect investment in global value chains (GVCs). In addition, tax reforms in the United States and greater tax competition are likely to significantly affect global investment patterns. 

A decrease in rates of return is a key contributor to the investment downturn. The global average return on foreign investment is now at 6.7 per cent, down from 8.1 per cent in 2012. Return on investment is in decline across all regions, with the sharpest drops in Africa and in Latin America and the Caribbean. The lower returns on foreign assets may affect longer-term FDI prospects. 

FDI activity was lower across all sectors. M&A values were down in the primary, manufacturing and services sectors. The fall in greenfield announcements in 2017 was concentrated in services. However, over the past five years, the level of greenfield projects in manufacturing has been consistently lower than in the preceding five-year period across all developing regions. This has important implications for 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 GDP, as bank lending and portfolio investment (mostly debt) compensated for the FDI slump. Capital flows to developing countries increased more modestly, from 4.0 to 4.8 per cent of GDP. 

FDI remains the largest external source of finance for developing economies. It makes up 39 per cent of total incoming finance in developing economies as a group, but less than a quarter in the LDCs, with a declining trend since 2012.

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 gradually shifting from tangible to intangible forms. Sales of foreign affiliates continue to grow (+6 per cent in 2017) but assets and employees are increasing at a slower rate. 

This could negatively affect the prospects for developing countries to attract investment in productive capacity. Growth in GVCs has stagnated. Foreign value added in global trade (i.e., the imported goods and services incorporated in countries’ exports) peaked in 2010–2012 after two decades of continuous increases. UNCTAD’s GVC data shows foreign value added down 1 percentage point to 30 per cent of trade in 2017. Growth in GVC participation decreased significantly this decade compared with the last, across all regions, developed and developing. The GVC slowdown shows a clear correlation with the FDI trend and confirms the impact of the FDI trend 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. On average 22 per cent of board members of the Top 100s are women, better than both the S&P average and national averages. 

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