In accordance with the No.25 Global Investment Trends Monitor of the United Nations Conference on Trade and Development (UNCTAD) (released on February 1, 2017), global FDI flows fell 13% in 2016, reaching an estimated US$1.52 trillion, in a context of weak global economic growth and a lacklustre increase in the volume of world trade, and equity investments at the global level were boosted by a 13% increase in the value of cross-border mergers and acquisitions (M&As), which rose to their highest level since 2007, reaching US$831 billion, while the value of greenfield projects announcements reached an estimated US$810 billion – a 5% rise from the previous year.

 

The share of developed economies in world FDI flows as a whole is estimated to have risen further, reaching 57% of the total. Nevertheless, developing economies continue to comprise half of the top 10 host economies. The United States remained the largest recipient of FDI, attracting an estimated US$385 billion in inflows, followed by the United Kingdom with flows of US$179 billion, vaulting up from 12^th position in 2015. China remained in third position with a record inflow of US$139 billion.

 

A dip in FDI flows to developed economies masks significant variations among countries

 

In 2016, FDI flows to developed economies saw a dip to US$872 billion, felling 9% from their high level recorded in 2015. Despite this decline, equity investment flows continued to exhibit vigor as cross-border M&As targeting the region registered an increase in value terms by 21% to US$779 billion. Significant shifts in inter-company lending across the region weighed on flows. The falling value of announced greenfield projects by 12% to US$243 billion points to some potential weakness in ongoing and future capital expenditures of affiliates of multinational enterprises (MNEs) in these markets.

 

Flows to developing economies weaken, led by a decline in Developing Asia and Latin America

Slowing economic growth and falling commodities prices weighed on FDI flows to developing economies in 2016. Inflows to these economies fell 20% over the previous year. There was significant falls in Developing Asia and in Latin America and the Caribbean. There was a widespread downturn in cross-border M&A activity across developing sub-regions during the year, which fell 44% in terms of aggregate value. The value of announced greenfield projects rose 19% to reach US$540 billion, but this was largely due to the announcement of a few very large investments in a small number of countries, as the majority of developing countries recorded falls.

 

The wave of cross-border M&As shows signs of ebbing, while greenfield announcements hint at stagnant capital expenditures by MNEs

 

Cross-border M&A activity remained substantial in 2016, reaching a new post-2007 high, but showed signs of slowing during the course of the year. The 13% increase in the value of net sales, which rose to US$831 billion, pales when compared to the 67% and 68% increases registered in 2014 and 2015. Nevertheless, sales in Europe also grew at markedly slower rates. The volume of cross-border M&As in developing and transition economies fell sharply in value terms (-44% and -52%, respectively), leaving their share in the global total at just 6%, compared with an average of 19% for the 2006–2015 period.

 

Fundamentals support a rise in FDI flows in 2017, but uncertainties abound

 

Looking ahead, economic fundamentals are supportive of a potential rebound in FDI flows in 2017. Global economic growth is projected to reach 3.4% compared to the post-crisis low (3.1% in 2016). Growth in developed countries is expected to improve, including in the United States, through fiscal stimulus. Emerging and developing economies are also forecast to rebound significantly in 2017, led by a sharp rise in growth in natural resources exporting countries as commodities prices are expected to increase, especially for crude oil. Moreover, greater economic activity will help boost world trade volumes, which are forecast to expand by 3.8% in 2017. In this context, investment activity may also quicken. UNCTAD projects that global FDI flows will increase by around 10% over the year.

 

Nevertheless, there are significant uncertainties that could have a material impact on the scale and contours of any FDI recovery in 2017. First, the "normalization" of monetary policy in the United States – after nearly a decade of historically low interest rates – could result in a significant shift in composition of capital flows, with implications for exchange rates and financial systems throughout the world and especially for developing economies. Rising cost of capital may hinder investment by MNEs which have taken on significant levels of corporate debt in recent years. There is also substantial uncertainty about the shape of economic policies in the near-future, especially in developed economies, which may serve to dampen FDI. Political developments such as the decision by the United Kingdom to exit the European Union (Brexit), announcements by the incoming administration in the United States to renegotiate key trade agreements such as NAFTA and to leave the TPP, as well as recent and upcoming elections in Europe have all heightened these uncertainties. For emerging and developing economies, a protracted period of developed-country investor uncertainty could serve to undermine the upswing in investment flows to their countries.

 

A key concern for policymakers continues to be how to reactivate productive investment in their economies to generate employment and spur advances in productivity. Despite the acceleration in economic activity, the International Labour Organization (ILO) estimates that global employment growth will continue to decelerate in 2017, falling to 1.1%. To take full advantage of the improving global economic environment countries must make boosting domestic and foreign investment key policy priorities. Within the ambit of foreign investment, in recent years FDI flows have largely been shaped by cross-border M&As that have not necessarily resulted in a concomitant increase in gross fixed capital formation. Investment promotion activities to attract greenfield projects could pay significant dividends, especially considering that the value of greenfield announcements globally, while an imprecise indicator, suggest that the capital expenditure levels of foreign affiliates remain well below their 2008 peak. To that end countries may consider bringing their investment policies in line with UNCTAD’s Investment Policy Framework for Sustainable Development with the objective of making investment work for sustainable development and inclusive growth.

 

Particularly of concern is the sharp drop-off in announcements of manufacturing investment projects, which play such an important role in generating badly needed productivity improvements in developing economies.

 

To sum up, the Global FDI recovery is still a tough task.

 

Source: Translated from Invest Guangzhou, February 15, 2017