Smaller decline in FDI, but more serious implications for development of small and vulnerable economies

Geneva, 22 July 2010 - The decline in foreign direct investment (FDI) to weak, vulnerable and small country groupings - least developed countries (LDCs), landlocked developing countries (LLDCs) and small island developing States (SIDS) - is of particular concern, given the role of FDI in these countries´ economies, says the World Investment Report 2010(1) , published by UNCTAD today.

The ratio of FDI to their gross fixed capital formation ranged between 22% and 30% in 2009, which was much higher than in other parts of the world. Thus, the impact of lower inward investment is serious for these groups of countries. Total FDI inflows to these countries are still below 5% of global FDI flows (table 1). FDI is concentrated in natural resources in the value term in these groups, even though FDI is spread in manufacturing and services sectors as well.

• FDI flows to the 49 LDCs declined by 14% to $28 billion in 2009. FDI from developing countries is increasing. In terms of the number of greenfield projects, over 60% of such projects originated from developing and transition economies in 2009. The limitations of these countries could be partly mitigated if official development assistance (ODA) were used more effectively, particularly in infrastructure, with a view to boosting the productive capacity of the host country in order to leverage FDI for development.
• Inherent geographical disadvantages of the 31 LLDCs, compounded by structural weaknesses, have hampered their economic performance. And yet economic reforms, investment liberalization and favourable global economic conditions had translated into a steady increase in FDI inflows during 2000-2008. The 17% decline in FDI to $22 billion in 2009 was less pronounced than in the rest of the world (table 1). A few resource-rich countries absorbed the bulk of the FDI to this group, with Kazakhstan alone receiving 58% of the total in 2009. Regional integration involving non-landlocked countries would make these economies more attractive investment destinations, by expanding the size of local markets.
• The 29 SIDS have also struggled to attract FDI. The small size of their domestic markets, limited natural and human resources, and high transaction costs, such as those for transport, have discouraged FDI flows, which declined by 35% to $5 billion in 2009 (table 1). Half of the grouping´s total FDI inflows last year were concentrated in the top three SIDS investment destinations (Jamaica, Trinidad and Tobago, and the Bahamas, in that order). Tax-haven SIDS accounted for one quarter of both FDI inflows and stocks in 2009, but stricter international regulations are gradually eroding inward FDI to those economies.

The 2009 FDI decline, and an uneven recovery in 2010 and beyond, will require these groups of economies to refocus their efforts on FDI promotion and to develop over the long run a comparative advantage in niche industries (finance and tourism as well as maritime-related businesses for SIDS, and knowledge-based manufacturing activities for LDCs and LLDCs).

ANNEX

Tables and figures

Table 1. FDI flows, by region, 2007-2009 (Billions of dollars and per cent)


Source: UNCTAD, World Investment Report 2010.

Note:a Without double counting, as a number of countries belong to two of these three groups.