WIDESPREAD GROWTH OF FOREIGN DIRECT INVESTMENT
REPORTED FOR 2006

Global foreign direct investment (FDI) inflows amounted to $1,306 billion in 2006, rising more than 38% over the previous year and finishing close to the record level of 2000 (figure 1), UNCTAD´s yearly review of investment trends reports.

The World Investment Report 2007 (1)finds that the growth of FDI in 2006 was the largest since 2000 and occurred in all three groups of economies: developed countries, developing countries, and the transition economies of South-East Europe and the Commonwealth of Independent States (CIS). (For regional trends in FDI, see UNCTAD/PRESS/PR/2007/031 to 036)

This year´s report is subtitled Transnational Corporations, Extractive Industries and Development.

The stock of FDI worldwide reached US$12 trillion, according to the report. Such investment was used for the activities of some 78,000 transnational corporations (TNCs) worldwide which own some 780,000 foreign affiliates (companies established abroad by TNCs). The sales, value added and exports of these affiliates are estimated to have increased by 18%, 16% and 12% in 2006, respectively (table 1).

The rise in global FDI flows and in international production reflected strong economic performance in many parts of the world and was partly driven by increasing corporate profits worldwide and resulting higher stock prices that raised the value of cross-border mergers and acquisitions (M&As). M&As continued to account for a high share of FDI flows, but greenfield investments (the new establishment of affiliates in a foreign country) also increased, especially in developing and transition economies.

While FDI inflows in developed countries rose by 45% to reach $857 billion, flows to developing countries and the transition economies attained their highest levels ever: $379 billion (a 21% increase over 2005) and $69 billion (a 68% increase), respectively (figure 1). The United States regained its position as the leading host country for FDI, followed by the United Kingdom and France (figure 2).

Among developing and transition economies, almost all regions and subregions enjoyed healthy growth in FDI flows in 2006. (The exceptions were Oceania, South America, and southern Africa, where flows declined.) The largest inflows to developing countries were to China, Hong Kong (China) and Singapore. Among transition economies, the largest inflows were to the Russian Federation (figure 2).

As many as 172 mega deals (deals worth over $1 billion), close to the record number of 2000, were undertaken in 2006, accounting for about two-thirds of the total value of cross-border M&As, the report says. Another notable trend in global M&A activity has been the growing importance of private equity funds and other collective investment funds. In 2006, such funds were involved in cross-border M&As valued at $158 billion, an 18% increase over 2005. A growing appetite for higher yields and ample liquidity in world financial markets helped fuel these acquisitions. Private equity firms are increasingly acquiring large and publicly listed companies, in contrast to their former strategy of investing in high-yield, high-risk assets or private firms. They are likely to continue to play a prominent role in M&A transactions, though this scale of activity may not be sustainable in the future, the report says. In contrast with the M&A boom of the late 1990s, this time transactions have been predominantly financed by cash and debt rather than through exchanges of shares.

Developed-country TNCs remained the leading sources of FDI, accounting for 84% of 2006 global outflows. While there was a rebound of FDI from the United States, almost half the world´s outflows originated in European Union (EU) countries, notably France, Spain and the United Kingdom in that order (figure 3). TNCs from developing and transition economies continued their international expansions in 2006, led by Hong Kong (China) among developing economies and the Russian Federation among transition economies. Total FDI outflows from these two groups reached $193 billion, or 16% of world FDI outflows (see UNCTAD/PRESS/PR/2007/037 for the largest TNCs based in these economies).

While governments continued to adopt measures to facilitate FDI in 2006, in some industries -- in particular industries considered to be of "strategic" importance -- new restrictions on foreign ownership or measures to secure a greater government share in revenues were applied. Such steps were most common in the extractive industries (see UNCTAD/PRESS/PR/2007/030 for FDI in these industries). In 2006, while 147 policy changes making host-country environments more favourable to FDI were observed, there were 37 changes that moved in the opposite direction.

At a somewhat slower rate than in 2006, FDI is expected to grow in 2007 and beyond. This forecast was confirmed by a rise in global cross-border M&As to $581 billion in the first half of 2007 - a 58% increase over the corresponding period of 2006 - and by the results of various surveys, including UNCTAD´s new World Investment Prospects Survey (see UNCTAD/PRESS/PR/2007/039 issued on 4 October 2007). Nevertheless, FDI prospects may be affected by current uncertainties in the financial markets and unfavourable measures and movements for FDI in some areas.

ANNEX

Tables and figures

Figure 1. FDI inflows, global and by group of economies, 1980-2006(billions of dollars)



Source: Source: UNCTAD, World Investment Report 2007

Figure 2. Global FDI inflows, top 20 host economies, 2005-2006a(billions of dollars)


Source: UNCTAD, World Investment Report 2007

Note: a Ranked by the magnitude of 2006 FDI inflows

Figure 3. Global FDI outflows, top 20 investors, 2005-2006a(billions of dollars)


Source: UNCTAD, World Investment Report 2007

Note: a Ranked by the magnitude of 2006 FDI outflows

Table 1. Selected indicators of FDI and international production, 1990, 2005, 2006(billions of dollars)


Source: UNCTAD, World Investment Report 2007