Global foreign direct investment (FDI) flows last year remained flat, at $653 billion, according to UNCTAD estimates released today. The figure for 2002 was $651 billion (see table). This follows two previous consecutive declines - from $824 billion in 2001 and $1.4 trillion in 2000. The continuing low value and number of cross-border mergers and acquisitions (M&As) (1) - the key driver of global FDI flows since the late 1980s - contributed heavily to the downturn (2).
But UNCTAD is predicting that FDI flows will rebound this year, boosted by the improving global economy, higher corporate profitability, recovering M&A transactions and growing investor confidence.
Developed countries. FDI inflows to developed countries increased marginally, from $460 billion in 2002 to $467 billion in 2003 - just two fifths of their peak level of $1.1 trillion in 2000. FDI flows to the United States rose threefold. The largest decline occurred in the European Union (EU), notably in France and Germany. Flows to Japan were down as well.
With global economic recovery gaining strength, the outlook for FDI inflows to developed countries in 2004 is promising, UNCTAD says. Led by the US, developed countries expect stronger economic growth in 2003 and 2004, with a positive impact on corporate investment. Further industry consolidation and an increase in M&A transactions will also boost FDI. The strong euro, while hurting export-oriented companies, favours investment in the US by EU firms.
Africa. FDI inflows to Africa last year rose by 30% to $14 billion, up from $11 billion in 2002. The rebound was due to a number of large investment projects in natural resources and an improving policy environment with the unfolding of the New Partnership for Africa´s Development (NEPAD). The oil industry continues to account for the bulk of the increase in FDI flows to African countries. Africa´s prospects for FDI inflows in 2004 are also positive, based on expected investment in the oil sector. Privatization is likely to remain weak in the region, but some large deals may come off, particularly in electricity and telecommunications.
Asia and the Pacific. FDI flows to the Asia-Pacific region increased marginally, from $95 billion in 2002 to $99 billion in 2003. China (whose $57 billion marked another record for that country), the Republic of Korea, Thailand, Viet Nam and oil-rich Azerbaijan all saw higher FDI flows. Strong domestic growth, the relocation of efficiency-seeking FDI to competitive locations in the region, higher global corporate spending and oil investment were the key factors behind the performance. Flows to the Pacific Islands, however, remained modest. In the aftermath of the Iraq war, flows to West Asia again slumped.
Overall, UNCTAD is expecting good prospects for Asia and the Pacific next year, with accelerating global and regional economic growth and improved investor confidence and corporate profitability. The region proved resilient to the predicted negative impact of the severe acute respiratory syndrome (SARS) on FDI inflows. Flows into the automotive, electronics and services industries, including corporate services and back-office operations, are likely to benefit from the coming upswing. The recent surge in the number of regional and bilateral agreements and free trade areas affecting Asian and Pacific economies, which typically include investment issues, may further strengthen FDI flows to and within the region.
Latin America and the Caribbean. The Latin American-Caribbean region was again the most negatively affected in the developing world, with FDI flows falling for the fourth consecutive year, from $56 billion in 2002 to $42 billion last year. Argentina, Brazil and Mexico all saw significant declines. Concern over the economic and political situation in some Latin American countries, a slowdown in privatization and weak global economic factors were the key reasons behind the downturn. The relocation of efficiency-seeking FDI to lower-cost areas, such as China, also contributed to the downturn, as did the continuing consolidation and downsizing programmes of transnational corporations (TNCs).
With the improving regional and global economic situation, however, the outlook for FDI flows to the region in 2004 is favourable, although much will depend on the performance of Argentina and Brazil, UNCTAD believes.
Central and Eastern Europe. After a record 2002, when inflows reached $29 billion, FDI inflows to Central and Eastern Europe last year were just over $30 billion. Inflows into the "Accession-8" declined from $22 billion in 2002 to $15 billion in 2003. As a result, their share of total flows into Central and Eastern Europe dropped from almost two thirds in 2002 to just more than one half in 2003. This may confirm expectations concerning a post-EU-enlargement shift in the regional geography of FDI inflows from relatively more advanced countries towards less developed ones. In the former group, the fall in FDI inflows was particularly pronounced in those countries that had wrapped up major privatization programmes involving foreign capital in 2002.
However, this downturn was more than offset by higher flows to other countries in the region. In the Russian Federation in particular, FDI jumped from $2.4 billion in 2002 to $5.2 billion in 2003. Flows to south-eastern Europe (including Bulgaria and Romania, the two countries expected to join the EU in 2007) and to the European members of the Commonwealth of Independent States also mounted last year.
Based on the variety of advantages the region has to offer (geographical proximity to the EU and access to EU markets, improving communications and transportation infrastructure, stability, labour skills and natural resources), FDI inflows into Central and Eastern Europe are expected to remain strong in 2004. They will, however be unevenly distributed, the bulk of them concentrated in a relatively small number of countries. The performance of the Russian Federation and the speed with which labour costs are rising in the eight countries joining the EU this May will most likely determine the overall performance of the region.
Further information on global FDI trends is included in the World Economic Situation and Prospects 2004, to be issued by the United Nations on 14 January.
