Worldwide FDI Flows Grow in 2010, But Remain Short of Pre-Crisis Peak

Global Picture

Gaining an accurate picture of global foreign investment activity is extremely difficult given patchy data availability and problems capturing and classifying capital flows. UNCTAD provides the most comprehensive picture available in its annual World Investment Report, the latest instalment of which was launched on 26 July. In addition to documenting flow trends, the report looks at foreign direct investment (FDI) policy trends and makes prescriptions for governments around the world. The headline findings on investment flows are as follows:

• Total FDI flows grew by 5% to USD1.24 trillion in 2010, a modest gain on 2009. This figure remains 15% below their pre-crisis average and lags the recovery in global industrial output and world trade.
• Total flows are forecast to grow to USD1.4 trillion–1.6 trillion this year, the 2007 USD1.9-trillion peak unlikely to be attained before 2013.
• Developing and transition economies attracted more than half of global FDI flows for the first time. Developed countries saw continued falls in inflows.
• Despite the high-profile investments in natural resource extraction, total FDI to Africa fell 9% in 2010. The region accounted for just 4.4% of total global FDI inflows, down from 5.1% in 2009. What investment there was tended to be focused on oil (especially Ghana). North African investment was unsurprisingly hit by the political turmoil the region has experienced.
• South Asia also saw a decline, by a steep 25%, led down by India (-31%). On a brighter note, Bangladesh saw investment soar by 30% as its importance as a low-cost production centre grew.
• The main beneficiaries of the increased flows were East and South-East Asia plus Latin America. China saw inward investment climb 11% to USD106 billion, although patterns are changing as the country's labour-intensive manufacturing costs rise.
• FDI flows to Latin America and the Caribbean increased by an impressive 13% during 2010, led by Brazil. The latter country and Mexico were also big contributors to FDI outflows as large firms made cross-border mergers and acquisitions (M&A) purchases. Much of the investment going into Latin America originated in Asia and was directed at extractive industries.
• Looking at Central and Eastern Europe, Russia saw strong FDI growth, but South-East Europe was hit by weak outflows from the struggling Western European economies.
• State-owned corporations accounted for 11% of FDI flows, but this heightens concerns about their governance and preferential treatment.
• Developing countries are increasingly important outward investors, particularly in East Asia, with such flows growing 21% in 2010 to account for 29% of the global total.
• Strong sectoral discrepancies were evident in 2010. Service-sector FDI continued to fall, particularly in finance. Manufacturing saw the biggest growth. Extractive industries FDI softened in 2010, but it had not suffered during the global economic crisis.

Investment Policy Focus

Investment decisions will of course be critically influenced by the location of coveted resources and geographical position, but there are other key factors over which governments have more control. These include both the physical operational and regulatory/administrative environment. In the main, governments around the world are continuing to liberalise their investment regimes and the web of international investment treaties continues to grow at a pace of over three a week. UNCTAD warns, however, that with some 6,100 treaties in place the system is unmanageably complex, and still only covers a minority of potential bilateral relationships. This suggests there may be growing momentum behind reopening the push for a multilateral investment agreement. In terms of national policy developments, UNCTAD highlights the number of pro-FDI measures introduced in Asia and Africa in 2010. Globally, some 101 investment liberalisation measures were recorded by the authors. These tended to focus on admission for investors and the creation/enhancement of special economic zones.

The trend was not solely in the investment liberalisation direction, however. Around one-third of new measures recorded in 2010 (48 in total) represented additional regulation and restriction of foreign investment. These tend to focus on "strategic industries" such as natural resources where there is popular pressure on the government to extract higher returns. Financial services have also seen additional restrictions in many countries, largely related to government intervention in that sector during the financial crisis.

Outlook and Implications