The FINANCIAL — Global foreign direct investment (FDI) inflows are estimated to have fallen by 21% in 2008 to an estimated $1.4 trillion, and will likely fall farther in 2009, according to new estimates released on January 19 by UNCTAD.
In the face of a global economic recession, tighter credit conditions, falling corporate profits, and gloomy prospects and uncertainties for global economic growth, many companies have announced plans to curtail production, lay off workers, and cut capital expenditures, all of which tend to reduce FDI. The impact of the crisis varies widely depending on region and country, with consequently varying impacts on the geographic patterns of FDI flows.
The current situation is very different from that of the last financial crisis, which originated in developing Asian countries in 1997 and had a significant negative influence on FDI flows to some of them, such as Indonesia. By contrast, the current crisis began in the developed world, although it is rapidly spreading to developing and transition economies. Developed countries have already been directly hit, while the effects of the crisis on developing economies have so far been indirect in most cases, with varying degrees of severity. This has affected the patterns of FDI location and FDI flows.
Preliminary data for 2008 indicates that for many developed countries, FDI flows have fallen, mainly as a result of the protracted and deepening problems affecting financial institutions and as a result of the liquidity crisis in the money and debt markets. Preliminary estimates show a decline of about 33% from flows in 2007 for this group. Inward FDI may have declined in Finland, Germany, Hungary, Italy, and the United Kingdom (table 1), even when compared with 2006 levels. Decreased earnings of developed-country transnational corporations (TNCs) and a decline in syndicated bank loans have particularly limited financing for investment. A drop in leveraged buyout transactions also dampened cross-border mergers and acquisitions (M&As), further depressing FDI flows. Cross-border M&A sales in developed countries fell by a similar magnitude (33%) as estimated FDI flows in 2008 (table 1).
In developing and transition economies, preliminary estimates suggest that FDI inflows have been more resilient, though the worst impacts of the global economic crisis had still, at year's end, to be fully transmitted to these countries. The growth rate of FDI inflows to developing countries, while lower than in 2007 (when it exceeded 20%), should still have remained positive for 2008 at an estimated 4%. Flows to Africa were expected to have grown further, to more than US$60 billion, despite the slowdown in global economic growth and its negative consequences for the region. Flows to East, South, and South-East Asia (the largest recipient of FDI, accounting for almost half of all flows to developing countries) may have risen as well during 2008, but by a slower rate than in 2007. Flows to West Asia are expected to have declined significantly (more than 20%), following the record levels registered last year. The cause was slower growth in oil demand, rising costs, and lower funds from export proceeds (due to lower prices of oil). By contrast, FDI flows to Latin America and the Caribbean are expected to have shown significant resilience to the world economic slowdown. They are estimated to have increased by 13% in 2008, partly as a result of a strong rise in FDI flows to South America. However, Central America and the Caribbean — which are traditionally highly dependent on the United States economy — most likely registered a decline. FDI flows to the transition economies of South-East Europe and the Commonwealth of Independent States (CIS) are estimated to have maintained their upward trend despite the financial crisis, global economic slowdown, and regional conflicts. A 2008 increase of about 6% is expected to have occurred there. Of the developing countries and transition economies, the largest (Brazil, Russian Federation, India, and China) are all estimated to have experienced a rise in FDI in 2008. Similarly, cross-border M&As in developing countries also rose during the year by some 16%, with much of that increase registered by Africa and Asia (table 1), although from a generally low level in Africa. (In Asia, M&A values are already significant).
In the short-term, the negative impacts of the financial and economic crises on FDI are expected to remain dominant and to contribute to a continued fall in overall FDI through 2009. Developing countries will not be excepted — that is, FDI falls in 2009 will be more widespread. However, various positive factors are at work and will trigger, sooner or later, a resurgence of international investment flows. These factors include investment opportunities based on cheap asset prices and industry restructuring, relatively large amounts of financial resources available in emerging countries and cash-rich oil-exporting countries, quick expansion of new activities such as new energy- and environment-related industries, and the relative resilience of international companies. Hence medium-term FDI prospects are more difficult to assess.
Public policies obviously will play a major role in the establishment of favourable conditions for a quick recovery of FDI flows. Structural reforms aimed at ensuring more stability in the world financial system, prompt and effective economic stimuli by national governments, renewed commitment to an open attitude towards FDI, the implementation of policies aimed at favouring investment and innovation — especially in the fields of environment, new energy sources, and small and medium-sized enterprises — are key issues in this respect. The current crisis thus could turn into a major opportunity for creating new impetus for global FDI. However, this can only occur if policymakers resist calls for more protectionism and other policies that restrict FDI.