The Hindu Business Line : Slowdown will cause decline in FDI flows this year: Unctad

New Delhi, Sept. 25 The UN Conference on Trade and Development (UNCTAD) foresees a perceptible decline in foreign direct investment (FDI) flows in the world economy in 2008, though developing countries would likely to be less affected.

In its World Investment Report, released today, the Geneva-based UN body ascribes the likely fall in global FDI flows this year attributing to the slowdown in the world economy and the financial turmoil, which together have led to a liquidity crisis in the money and debt markets in many developed countries. Corporate profits and syndicated loans are also declining, the report said adding that the value of mergers and acquisitions (M&A), which fired global FDI flows last year, was 29 per cent lower in the first half of 2008 than in the second half of 2007.

Based on available data, it said, estimated annualised FDI flows for the whole of 2008 are expected to be about $1,600 billion, representing a 10 per cent decline from 2007, when global FDI inflows rose by 30 per cent to reach $1833 billion, well above the peak scaled in 2000. Last year, reinvested earnings accounted for about 30 per cent of total FDI inflows as a result of increased profits of foreign affiliates, particularly in developing countries.

FDI inflows into developed countries reached $1248 billion, led by the United States, which maintained its position as the largest recipient country, followed by the United Kingdom, France, Canada and the Netherlands. The European Union (EU) was the largest host region attracting two-thirds of total FDI inflows.

In developing countries, FDI inflows reached their zenith at $500 billion last year, a 21 per cent spurt over 2006, while they continue to gain importance as sources of FDI, with outflows rising to a new record of $253 billion, mainly following the outward expansion by Asian transnational corporations (TNCs).

The UNCTAD said that continued consolidation through cross border M&As led to the global surge in FDI last year with the value of such transactions at $1637 billion is 21 per cent higher than the previous record in 2000. TNCs from developed countries, actuated by large corporate profits, accounted for about 90 per cent of the growing number and the value of cross-border mega M&As deals was over $1 billion, even as developing-countries’ TNCs were also increasingly active in tapping developed-country markets for corporate assets.

The value of cross-border M&As in advanced countries rose in the manufacturing and services sector, but lagged in the primary sector. The US $98 billion acquisition of ABN-AMRO Holding NV by the consortium Royal Bank of Scotland, Fortis and Santander was the largest deal in banking history. However, UNCTAD voiced concern over the growing number of cross-border investments by Sovereign Wealth Funds (SWFs) and by private equity and hedge funds as the number of cross-border M&As involving SWFs rose from one in 1987 to 30 in 2007.

While SWFs invest very little in the form of FDIs (0.2 per cent of their total assets in 2007), their investment has been growing abroad as out of the $39 billion they invested over the past two decades, as much as $31 billion was committed in the past three years. UNCTAD said that even as investments by SWFs in the banking industry in 2006-07 were hailed due to their stabilising effect on financial markets, they also generated some “negative” public perceptions with calls for regulatory restrictions on investments by these funds, notably on national security grounds.

Referring to the FDI policy the world over, UNCTAD said the overall policy remains “one of greater openness” and this is borne out by the fact that of the almost 100 policy changes identified by UNCTAD in 2007 as having a potential bearing on FDI, 74 aimed at making the host country environment more friendly to FDIs.

But the proportion of changes that were less propitious to FDI has been increasing over the past few years, it said adding that most of the new restrictions related to the extractive industries in Latin America but were apparent in other countries too. It said several Governments, including the US and the Russian Federation, adopted stricter regulations with regard to investments in projects that have potential implications for national security.

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