According to preliminary data released today by UNCTAD, world foreign direct investment (FDI) inflows in 1998 increased by 39 per cent over 1997, to US$644 billion.
The increase was due largely to a substantial increase in cross-border mergers and acquisitions (M&As) among developed country firms. FDI flows to developing countries as a whole declined by 4 per cent, from US$172 in 1997 to US$165 billion in 1998 (figure 1). This decline – the first since 1985 - was largely caused by lower flows to South, East and South-East Asia (see TAD/INF/PR/9803 dated 27 April).
The FDI increase occurred against the background of a slow-down in world economic growth to 2 per cent in 1998 (from 3.4 per cent in 1997) and the financial crisis that hit many developing countries and the Russian Federation in 1997 - 1998. Global FDI rose despite instability in the Russian Federation and Latin America, the decline in the value of world trade, decreases in commodity prices, a slowdown in privatization programmes, and excess-capacity in industries such as automobiles, steel and petroleum-related products.
Cross-border mega-deals, with transaction values of over US$3 billion, were the defining characteristic of the past year. The number of such deals reached 32, compared to 15 in 1997 and 8 in 1996 (figure 2). UNCTAD notes that large cross-border M&As do not necessarily require cash or new funds, as they can be based on a mutual exchange of stock. Nearly 90 per cent of majority-owned cross-border M&A sales1 (in terms of value) last year were concluded in developed countries, where this mode of entry by firms is far more important than in developing countries.
The overall value of majority-owned, international M&As amounted to US$411 billion in 1998, nearly double the 1997 and triple the 1995 figure.
The surge in M&As is partly the result of increased competition brought about by liberalization, and the need to consolidate business internationally. UNCTAD cautions, however, that the value of cross-border M&As can not be calculated as a percentage of FDI as they are not financed by FDI only. They can also be financed by borrowing from capital markets. (Such borrowing is not reported as FDI.) Moreover, the financial transaction related to M&As can be phased over several years.
The European Union strengthened its position as the largest investor as well as the largest recipient of FDI flows. The United States remained the single largest host and home country for FDI. In Japan, M&As boosted inflows while outflows declined significantly, mainly due to corporate restructuring.
Final data and detailed analysis of FDI flows in 1998 will be contained in the UNCTAD World Investment Report 1999 to be released at the end of September.
