ECONOMY: Foreign Investment Plummets Worldwide, Favours China

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Oct 24 2002 (IPS) - China will surpass the United States this year as the number-one recipient of foreign direct investment, say forecasts released here Thursday by the United Nations Conference on Trade and Development (UNCTAD).

But China’s ascent stands in stark contrast to the sharp decline in the global flow of foreign direct investment (FDI), which this year will total about 534 billion dollars, a whopping 27 percent less than last year, according to UNCTAD’s preliminary figures.

The sharp reduction will have greater economic impacts in industrialised countries, where FDI is expected to fall 31 percent, than in developing countries, which are to see a lesser – but still noteworthy – decline of 23 percent.

In contrast, the emerging economies of Central and Eastern Europe will suffer a mere one-percent FDI reduction, says the UN body.

Direct investment is defined as the purchase of a company’s shares, which gives the buyer a position of control and responsibility in running the company. FDI is differentiated from portfolio investments, which are guided solely by criteria of profitability through dividends and bonuses.

The outlook for Africa in terms of FDI this year is "dramatic" in the negative extreme, as the continent is expected to see capital inflows drop by two-thirds, says UNCTAD.

In 2001, Africa took in 17 billion dollars in FDI, while this year the total is to barely reach 6.0 billion dollars.

FDI earmarked for China has shown accelerated growth in medium- and high-tech manufacturing industries and services, according to UNCTAD numbers.

The investment dynamic in China continues the momentum of its sustained economic growth over more than a decade. This year, FDI inflows for the giant Asian economy will likely break the record with 50 billion dollars.

Two years ago, FDI for China totalled 41 billion dollars. In 2001, it rose to 47 billion.

Meanwhile, the United States has recorded a continued descent, from 301 billion dollars in FDI in 2000, to 124 billion last year, to this year’s predicted low of 44 billion dollars.

The UNCTAD report underscores that China has attracted foreign investment through its economic liberalisation process, industrial restructuring and as a result of its accession to the World Trade Organisation (WTO), which was finalised late last year.

On the global scenario, the waning flow of direct investment is related to the uncertain economic situation and weak stock markets, which, notes UNCTAD, "are undermining business confidence".

This lack of confidence is evident in the negative impact on cross-border mergers and acquisitions, as well as on plans for expanding investment in big companies.

UNCTAD drafted its preliminary report based on the available figures from just 85 economies, among which more than half are predicted to receive fewer FDI dollars this year than they did in 2001.

The final version of the study is to be distributed in July 2003.

In an explanation of the poor regional FDI performance of Africa, the study notes that comparison with last year is misleading, as 2001 was an unusual situation, with an exceptional rise in investment flows due to two large but "one-off" transactions in Morocco and in South Africa.

Even so, Africa has suffered from the economic slowdown in major countries around the world, particularly the United States, that are home to the big transnational corporations that invest in the continent.

And beyond the depressed global investment market, "geopolitical uncertainty" in several African countries has also had an impact on investor attitudes towards the region in general.

In the case of Asia’s developing countries, FDI is expected to fall 12 percent this year, after a drop twice as large – 24 percent – in 2001.

"The slide is largely the result of slowing FDI flows from Europe and the United States, despite the strong economic growth of the region’s leading economies," explains UNCTAD.

As China’s FDI inflows rise, the movement of such investment is expected to decline this year for Hong Kong, South Korea, Thailand and Taiwan.

In the big picture, potentially dramatic reductions in FDI in most of the region’s economies will probably fail to be offset by increases in countries like China, India, Malaysia and the Philippines, say UNCTAD projections.

In Latin America and the Caribbean, meanwhile, foreign direct investment flows are projected to decrease for the third consecutive year. The one-year decline will be 27 percent, from inflows of 85 billion dollars in 2001 to just 62 billion this year.

Mexico is the focal point of the region’s plummeting FDI as inflows last year were inflated by Citicorp’s acquisition of Mexico’s Banamex.

Brazil’s FDI inflows remained at about 20 billion dollars. The South American giant is poised to regain its position as the region’s top recipient of such investment due to the fact that its manufacturing industry is picking up, and attracting more foreign dollars.

The financial crisis that began to shake up Argentina in mid- 2001 cut into FDI inflows in the first half of this year, though total investments are expected to turn around in the last six months of the year.

Thanks in large part to the Brazilian state oil company Petrobras, with its 1.1 billion-dollar acquisition in July of Argentina’s Pérez Compac, the crisis-stricken nation is likely to record total FDI this year of approximately 3.0 billion dollars.

The countries of Eastern and Central Europe will repeat their performance of last year, with FDI inflows calculated at 27 billion dollars.

These investment flows are projected to increase in Albania, Bulgaria, Czech Republic, Latvia, Lithuania and Slovenia, while they are likely to decrease in Estonia, Hungary, Macedonia, Moldova, Poland, Slovakia and Ukraine.

The preliminary UNCTAD report describes the Czech Republic as "the star performer", as FDI is to rise from 5.0 billion to 9.0 billion dollars. In Poland, meanwhile, it is expected to drop from 9.0 billion to 6.0 billion dollars, and in Russia to hold steady at some 3.0 billion dollars.

As far as the industrialised countries, in addition to the fall- off of FDI in the United States, Britain will suffer a pronounced decline in its inflows, from 54 billion last year to just 12 billion dollars in 2002.

France and Germany, however, are looking forward to a more encouraging scenario, with FDI inflows for the first time in three decades reaching levels comparable to that of the United States.

ECONOMY: Foreign Investment Plummets Worldwide, Favours China

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Oct 24 2002 (IPS) - China will surpass the United States this year as the number-one recipient of foreign direct investment, say forecasts released here Thursday by the United Nations Conference on Trade and Development (UNCTAD).
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