Global foreign direct investment (FDI) grew by one quarter in 1999, according to preliminary estimates released today. Developing countries rebounded from their 1998 stagnation in terms of inward flows, while the United States and the United Kingdom continued to lead in terms of outward flows. The United Kingdom even replaced the United States as the largest outward investor for the first time since 1988.
This assessment was made by the United Nations Conference on Trade and Development (UNCTAD), in preparation for its meeting in Bangkok, Thailand, from 12 to 19 February 2000, at which Heads of State and Government, national ministers, chiefs of key international financial institutions and representatives from civil society and business will discuss the ramifications of globalization. The release of these latest figures on FDI flows also precedes the Fifth Annual Conference of the World Association of Investment Promotion Agencies (WAIPA) in Bangkok, the largest international gathering of investment promotion experts, where strategies and techniques to attract foreign investment for development will be discussed. UNCTAD assists developing countries in taking advantage of investment flows; it also publishes the annual World Investment Report, the foremost source of information on FDI.
UNCTAD estimates that FDI continued its nearly decade-long march upwards in 1999 to set a significant new record of global flows: US$827 billion in inward investment (table 1)(1). This is a 25 per cent rise over the 1998 figure of US$660 billion, itself representing a 41 per cent increase over the preceding year. The driving force behind these recent increases is cross-border mergers and acquisitions (M&As). In the developed world, M&As have become the primary mode of entry into foreign markets, while in developing countries their importance is growing. The reasons for the enhanced role of M&As are in part specifically commercial (e.g., overcapacity and low demand in certain industries), in part strategic (e.g., sharing high investment costs in information technology and high research and development expenditures) and in part related to the policy environment (e.g., the widespread adoption of deregulation and liberalization measures).
Investment that arrives through a merger or an acquisition can differ from Agreenfield investment in some of its consequences for the host country. With cross-border M&As having topped US$1.1 trillion in 1999(2), the short-term and long-term consequences of M&A-driven FDI therefore require careful analysis in terms of their impact on development.
Among the highlights of the preliminary data are the following:
- FDI flows to developing countries increased by 15 per cent in 1999, after stagnating in 1998. Of the total flows of an estimated US$198 billion:
- In Latin America, privatization was a major magnet, pulling in 32 per cent more inflows than in 1998. Of this total B an estimated US$97 billion B some US$31 billion went to Brazil, which was the regional champion for the second year in a row(3). Argentina also was a large recipient, experiencing significant increases in FDI flows in 1999. Latin America and the Caribbean replaced developing Asia as the largest host developing region for the first time since 1986.
- US$91 billion went to developing Asia (including West Asia), US$40 billion of it to China alone. The Republic of Korea saw a 55 per cent jump to US$8.5 billion, driven once again by M&As. (4)
- In Africa, large increases in FDI inflows were recorded in Morocco and South Africa: for the former, an estimated US$ 2 billion, and for the latter, US$1.3 billion. Africa (including South Africa) is estimated to have attracted US$11 billion in inward investment. In Africa, large increases in FDI inflows were recorded in Morocco and South Africa: for the former, an estimated US$ 2 billion, and for the latter, US$1.3 billion. Africa (including South Africa) is estimated to have attracted US$11 billion in inward investment.
- Developed countries attracted an estimated US$609 billion in FDI inflows in 1999, accounting for nearly three quarters of the world´s total. The United States and the United Kingdom continue to lead the world in FDI flows. The United Kingdom became the largest investor in 1999, replacing the United States for the first time since 1988. These two countries also represent, for each other, the principal home country as well as host country. Other developed countries recording high levels of FDI flows were France and Germany (both inflows and outflows), Netherlands (inflows), Spain (outflows) and Sweden (inflows). Sweden became the second largest host country in the world for the first time ever. Total flows between the European Union and the United States increased significantly in 1999, after doubling in 1998. FDI inflows to the European Union as a region were an estimated US$269 billion, a 14 per cent rise over the previous year.
- Japan offers a dramatic example of the impact of M&As: its worst post-war recession has led to a sweeping economic restructuring and a more liberal M&A regime that has strongly encouraged M&As and led to an almost quintupling of FDI inflows: from US$3 billion in 1998 to an estimated US$14 billion in 1999. Japanese outflows, also driven by M&As, showed a slight decline, from US$24 billion to an estimated US$23 billion, a decline that might easily have been larger but for a single acquisition, that of the international tobacco business of RJR Nabisco by Japan Tobacco for US$7.8 billion.
- The countries of Central and Eastern Europe, in transition to the market economy, managed to retain a stable flow at about US$20 billion in 1999.
