ECONOMY: Investment Down but Set to Rally

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Sep 22 2004 (IPS) - Foreign direct investment (FDI) flows continued to decline in 2003 for the third year in a row, in "a very major fall" that UNCTAD blames on troubles facing the global economy last year, and especially industrialised nations.

Inflows of FDI plunged last year to 560 billion dollars, compared to a peak of 1.4 trillion dollars in 2000. Since that year, FDI flows have steadily diminished, by 41 percent in 2001, 17 percent in 2002, and 18 percent in 2003.

However, UNCTAD (United Nations Conference on Trade and Development) economist Kalman Kalotay said projections point to total global FDI flows of 600 billion dollars this year.

One of the reasons for the increase is the fact that "the most dynamic component" of FDI, mergers and acquisitions (M&A), "is picking up" this year, according to UNCTAD Assistant Secretary-General Carlos Fortín.

Fortín has been heading UNCTAD since Sep. 15, when former secretary-general Rubens Ricupero finished his second term (he led the U.N. agency for a total of nine years).

The global economy itself is recovering, which should "in principle suggest that (FDI) flows should pick up," said Fortín at the presentation of UNCTAD’s new World Investment Report 2004 in Geneva Wednesday.

Also giving cause for optimism, say the authors, were the legal reforms introduced in 2003 aimed at liberalising FDI flows. According to Fortín, there were 244 such changes worldwide in 2003, 220 of which were "in the direction of" bolstering FDI flows.

In the first quarter of this year, UNCTAD carried out a survey among 335 leading transnational corporations with programmes for investment abroad, and 87 experts "on location".

"The results of the survey also seem to confirm that all of them expect a picking up in the recovery of FDI flows in 2004 as compared to 2003," said Fortín.

The flows will mainly head towards Asia, particularly China and India, although Poland also appears to be emerging as an attractive destination.

The sector with the greatest appeal is services. But traditional manufacturing areas, especially the industries producing electronic equipment and home appliances, cars and machinery, will also draw new flows of FDI.

"And interestingly, in the case of developing countries most of the new investments will be green field investments, while in the case of investments among developed countries it would be essentially mergers and acquisitions," said Fortín.

Green field investments, such as new factories and power plants, have a greater impact on development than M&A, he pointed out.

At the same time M&A create problems, he added, such as the impact on competition, especially in the case of investment among developed countries.

The large new corporations created through M&A affect the level of competitiveness and competition in different sectors, Fortín noted.

The report states that the level of concentration of international production is "quite high." The figures (from 2002) show that the 100 largest transnational corporations accounted for 14 percent of global sales, 12 percent of international assets, and 13 percent of employment, which means they control a large share of the market, employment and assets, said Fortín.

Among the countries showing the greatest potential for drawing investment are the Czech Republic, Hong Kong, China and Ireland.

Meanwhile, countries like Japan, Thailand and South Africa are "failing to fulfil their potential" to draw FDI, the report adds.

With respect to the existence of transnational corporations in developing countries, the report observes that most are from the industrialised world, although there are some firms in developing nations that are becoming international and "transnationalising".

"We have been talking abut a new geography of trade," but "we are not really in a position to talk about a new geography of investment," as the investment market is not like trade, where "developing countries are increasingly important actors, and South-South trade is becoming a very dynamic part of the world economy," said Fortín.

Ninety percent of FDI flows still come from industrialised nations and only 10 percent from the developing world, he added.

In addition, only a handful of countries of the developing South participate in that flow, including Singapore, Malaysia and Chile, which means "we are still not in a situation in which we can talk about a transnationalisation of developing country investment," said Fortín.

One novel aspect of the performance of FDI flows in the past few years is their shift towards the services sector which now draws 60 percent of the inflows, compared to around 50 percent in the 1990s.

UNCTAD predicts that this trend will grow stronger. FDI was traditionally concentrated in trade and finance activities, but since the 1990s investment has been flowing into the services industry, particularly power, gas and water companies.

FDI flows towards developing countries rose nine percent between 2002 and 2003.

In Africa they climbed from 12 billion dollars in 2002 to 15 billion dollars in 2003, and in Asia and the Pacific from 95 billion dollars in 2002 to 107 billion dollars in 2003. Latin America and the Caribbean, by contrast, saw FDI shrink for the fourth year running.