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08 Oct, 2017

World Foreign Direct Investment Trends UNCTAD 2017 (Part 1)

World Foreign Direct Investment Trends UNCTAD 2017 (Part 1)

Investment prospects

Global investment is seeing a modest recovery, with projections for 2017 cautiously optimistic. Higher economic growth expectations across major regions, a resumption of growth in trade and a recovery in corporate profits could support a small increase in foreign direct investment (FDI). Global flows are forecast to increase to almost $1.8 trillion — still below the 2007 peak. Policy uncertainty and geopolitical risks could hamper the recovery, and tax policy changes could significantly affect cross-border investment. FDI prospects are moderately positive in most regions, except Latin America and the Caribbean. Developing economies as a group is expected to gain about 10 per cent. This includes a sizeable increase in developing Asia, where an improved outlook in major economies is likely to boost investor confidence.

FDI to Africa is also expected to increase, with a modest projected rise in oil prices and advances in regional integration. In contrast, prospects for FDI Latin America and the Caribbean are muted, with an uncertain macroeconomic and policy outlook. Flows to transition economies are likely to recover further after their economies bottomed out in 2016. Flows to developed economies are expected to hold steady in 2017.

Investment trends

After a strong rise in 2015, global FDI flows lost growth momentum in 2016, showing that the road to recovery remains bumpy. FDI inflows decreased by 2 per cent to $1.75 trillion, amid weak economic growth and significant policy risks, as perceived by multinational enterprises (MNEs). Flows to developing economies were especially hard hit, with a decline of 14 per cent to $646 billion. FDI remains the largest and most constant external source of finance for developing economies — compared with portfolio investments, remittances and official development assistance. But inflows were down across all developing regions:

  • FDI flows to developing Asia contracted by 15 per cent to $443 billion in 2016. This first decline in five years was relatively widespread, with double-digit drops in most sub regions except South Asia.
  • FDI flows to Africa continued to slide, reaching $59 billion, down 3 per cent from 2015, mostly reflecting low commodity prices.
  • The downward trend in FDI flows to Latin America and the Caribbean accelerated, with inflows falling 14 per cent to $142 billion, owing to continued economic recession, weak commodity prices and pressures on exports.
  • FDI in structurally weak and vulnerable economies remained fragile. Flows to the least developed countries fell by 13 per cent, to $38 billion. Similarly, those to small island developing States declined by 6 per cent, to $3.5 billion. Landlocked developing countries saw stable FDI, at $24 billion.

Flows to developed economies increased further, after significant growth in the previous year. Inflows rose by 5 per cent to $1 trillion. A fall in 2016 in Europe is more than compensated by modest growth in North America and a sizeable increase in other developed economies. Developed economies' share in global FDI inflows grew to 59 per cent.

FDI flows to transition economies almost doubled, to $68 billion, following two years of steep decline — reflecting large privatization deals and increased investment in mining exploration activities.

Major economic groups, such as the G20 and APEC, strongly influenced global FDI trends. Inflows to the G20 reached a record of more than $1 trillion for the FDI outflows from developed countries remained weak. They declined by 11 per cent to $1 trillion, mainly owing to a slump in investments from European MNEs. Outflows from North America remained flat, but those from developed countries in Asia-Pacific reached their highest level since 2008. The flow of outward investment from developing economies registered a 1 per cent decline to $383 billion, despite a surge of outflows from China, now the second largest investing country in the world.

Slower growth in international production contributed to lackluster global trade expansion. International production by foreign affiliates of MNEs is still expanding, but the rate has slowed in recent years. The average annual growth rates over the last five years of foreign affiliate sales (7.3 per cent), value added (4.9 per cent) and employment (4.9 per cent) were all lower than in the equivalent period before 2010 (at 9.7 per cent, 10.7 per cent and 7.6 per cent, respectively).

UNCTAD’s new database on State-owned MNEs shows their growing role in the global economy. About 1,500 State-owned MNEs (1.5 per cent of all MNEs) own more than 86,000 foreign affiliates, or close to 10 per cent of all foreign affiliates. They announced greenfield investments accounting for 11 per cent of the global total in 2016, up from 8 per cent in 2010. Their headquarters are widely dispersed, with more than half in developing economies and almost a third in the European Union

Investment prospects

A modest recovery in global FDI flows is forecast for 2017, although flows are expected to remain well below their 2007 peak. A synchronized upturn in economic growth in major regions and improved corporate profits will boost business confidence and MNEs' appetite to invest. A cyclical recovery in the manufacturing sector and in international trade is expected to result in faster growth in developed countries, while a likely strengthening of commodity prices should underpin a recovery in developing economies in 2017. As a result, global FDI flows are expected to increase by about 5 per cent in 2017 to almost $1.8 trillion. The moderate rise in FDI flows is expected to continue in 2018, to $1.85 trillion.

The 2017 UNCTAD business survey results indicate renewed optimism about FDI prospects. Unlike in 2016, a majority of the executives polled, particularly in developed economies, are confident that the economic upturn will strengthen, prompting increased investment in the coming years. A significant change in sentiment from last year is evident among corporations active in the primary sector. Having endured a hard downturn in the past two years, natural-resource-based MNEs, especially in the oil industry, seem to have turned the corner, and most executives now expect increased investment over the next two years.

The United States, China and India remain the top prospective FDI destinations. Executives maintain their confidence in developing Asia’s economic performance and predict increased investments in South- East Asia, with Indonesia, Thailand, the Philippines, Viet Nam and Singapore, in that order, all improving their ranking among the most promising host countries.

Responses to UNCTAD’s 2017 survey of investment promotion agencies (IPAs) point to the most promising industries in which they expect to attract FDI. IPAs from developed economies targeted information technology and professional services, while their developing-country counterparts singled out agribusiness as one of the most promising industries. Information and communications — which includes telecommunication, data processing and software programming — is also emerging as a target industry in selected developing countries. The 2017 list of top prospective investor countries, as indicated by IPAs, follows the trend of recent years: China remains the most promising source of FDI, closely followed by the United States, Germany and the United Kingdom.

Increased FDI expected in most regions

Developing economies are likely to see a 10 per cent increase of inflows in 2017, not yet fully returning to the 2015 level, while flows to developed economies are expected to hold steady. There will be significant variation among regions.

FDI inflows to Africa are expected to increase slightly in 2017, to about $65 billion, in view of modest oil price rises and a potential increase in non-oil FDI. Announced greenfield FDI projects in 2016 were high in real estate, followed by natural gas, infrastructure, renewable energy, chemicals and automotives. Advances in regional and interregional cooperation, through the signing of economic partnership agreements with the European Union (EU) by regional economic communities and the negotiations towards the Tripartite Free Trade Agreement should encourage stronger FDI. However, a slump in economic growth could harm investment prospects in 2017.

FDI inflows to developing Asia are expected to increase by 15 per cent in 2017, to $515 billion, as an improved economic outlook in major Asian economies is likely to boost investor confidence. In major recipients such as China, India and Indonesia, renewed policy efforts to attract FDI could contribute to an increase of inflows in 2017. In South and South-East Asia, several countries are expected to further strengthen their position in regional production networks. In West Asia, FDI is expected to remain flat, with the positive effect of gradually recovering oil prices offset by political and geopolitical uncertainty.

Prospects for FDI in Latin America and the Caribbean in 2017 remain subdued, as macroeconomic and policy uncertainties persist. Flows are expected to fall by about 10 per cent, to some $130 billion. Investment in the region’s extractive industries will likely be modest as operators continue to hold back on making capital expenditures. Investment in the region, especially in Central America, is also likely to be affected by uncertainties about economic policymaking in the United States.

FDI inflows by group of economies and region, 2014−2016, and projections, 2017 (Billions of dollars and per cent)

FDI flows to transition economies are likely to rise moderately in 2017, to about $80 billion, supported by the bottoming out of the economic downturn, higher oil prices and privatization plans. However, a range of geopolitical problems may hinder them.

FDI flows to developed countries are expected to hold steady, at about $1 trillion. Flows to Europe are projected to recover, as the large volume of negative intracompany loans in 2016 is unlikely to be sustained. However, political events may yet derail the FDI recovery. In contrast, FDI flows to North America, which reached an all-time high in 2016, appear to be running out of steam and MNE executives are likely to take a wait-and-see approach in the face of policy uncertainty.

Read also: TOP five 2017 year FDI Confidence Index changes, World Foreign Direct Investment Trends UNCTAD 2017 (Part 2)

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