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By M. Isi Eromosele
Prospects for foreign direct investment (FDI) continue to be
fraught with risks and uncertainties. At $1.5 trillion, flows of global FDI
exceeded pre-financial crisis levels in 2011, but the recovery is expected to
level off in 2012 at an estimated $1.6 trillion.
Despite record cash holdings, transnational corporations
have yet to convert available cash into new and sustained FDI and are unlikely
to do so while instability remains in international financial markets.
Even so, half of the global total will flow to developing
and transition economies, underlining the important development role that FDI
can play, including in least developed countries.
A broader development policy agenda is emerging that has
inclusive and sustainable development goals at its core. For investment policy,
this new paradigm poses specific challenges.
At the national level they include integrating investment
policy into development strategy, incorporating sustainable development
objectives and ensuring relevance and effectiveness.
At the international level it is necessary to strengthen the
development dimension of international investment agreements, manage their
complexity and balance the rights and obligations of States and investors.
Global foreign direct investment (FDI) flows exceeded the
pre-crisis average in 2011, reaching $1.5 trillion despite turmoil in the
global economy. However, they still remained some 23 per cent below their 2007
peak.
Oseme Finance predicts slower FDI growth in 2012, with flows
leveling off at about $1.6 trillion. Leading indicators - the value of
cross-border mergers and acquisitions (M&As) and Greenfield investments retreated
in the first six months of 2012 but fundamentals, high earnings and cash
holdings support moderate growth.
Longer-term projections show a moderate but steady rise,
with global FDI reaching $1.8 trillion in 2013 and $1.9 trillion in 2014,
barring any macroeconomic shocks.
FDI inflows increased across all major economic groupings in
2011. Flows to developed countries increased by 21 per cent, to $748 billion.
In developing countries FDI increased by 11 per cent, reaching a record $684
billion.
FDI in the transition economies increased by 25 per cent to
$92 billion. Developing and transition economies respectively accounted for 45
per cent and 6 per cent of global FDI. Oseme Finance’s projections show these
countries maintaining their high levels of investment over the next three
years.
Sovereign wealth funds (SWFs) show significant potential for
investment in development. FDI by SWFs is still relatively small. Their
cumulative FDI reached an estimated $125 billion in 2011, with about a quarter
in developing countries. SWFs can work in partnership with host-country
governments, development finance institutions or other private sector investors
to invest in infrastructure, agriculture and industrial
development, including the build-up of green growth
industries.
The international production of transnational corporations
(TNCs) advanced, but they are still holding back from investing their record
cash holdings. In 2011, foreign affiliates of TNCs employed an estimated 69
million workers, who generated $28 trillion in sales and $7 trillion in value
added, some 9 per cent up from 2010. TNCs are holding record levels of cash,
which so far have not been translated into sustained growth in investment. The
current cash overhang may fuel a future surge in FDI.
Investment Policy Trends
Many countries continued to liberalize and promote foreign
investment in various industries to stimulate growth in 2011. At the same time,
new regulatory and restrictive measures continued to be introduced, including
for industrial policy reasons.
They became manifest primarily in the adjustment of entry
policies for foreign investors (in e.g. agriculture, pharmaceuticals); in
extractive industries, including through nationalization and divestment requirements; and in a more
critical approach towards outward FDI.
Global investment policymaking is in flux. The annual number
of new bilateral investment treaties (BITs) continues to decline, while
regional investment policymaking is intensifying.
Sustainable development is gaining prominence in
international investment policymaking. Numerous ideas for reform of
investor–State dispute settlement have emerged, but few have been put into
action.
Suppliers need support for compliance with corporate social
responsibility (CSR) codes. The CSR codes of TNCs often pose challenges for
suppliers in developing countries (particularly small and medium-sized
enterprises), which have to comply with and report under multiple, fragmented
standards.
Policymakers can alleviate these challenges and create new
opportunities for suppliers by incorporating CSR into enterprise development
and capacity-building programs. TNCs can also harmonize standards and reporting
requirements at the industry level.
Investment Policy For Sustainable Development
Mobilizing investment and ensuring that it contributes to
sustainable development is a priority for all countries. A new generation of
investment policies is emerging, as governments pursue a broader and more
intricate development policy agenda while building or maintaining a generally
favorable investment climate.
New generation investment policies place inclusive growth
and sustainable development at the heart of efforts to attract and benefit from
investment. This leads to specific investment policy challenges at the national
and international levels.
At the national level, these include integrating investment
policy into development strategy, incorporating sustainable development
objectives in investment policy and ensuring investment policy relevance and
effectiveness.
At the international level, there is a need to strengthen
the development dimension of international investment agreements (IIAs),
balance the rights and obligations of States and investors and manage the systemic
complexity of the IIA regimes.
Foreign Direct Investment Trends And Prospects
Global foreign direct investment (FDI) inflows rose 16 per
cent in 2011, surpassing the 2005-2007 pre-crisis level for the first time,
despite the continuing effects of the global financial and economic crisis of
2008-2009 and the ongoing sovereign debt crises.
This increase occurred against a background of higher
profits for transnational corporations (TNCs) and relatively high economic
growth in developing countries during the year.
A resurgence in economic uncertainty and the possibility of
lower growth rates in major emerging markets risks undercutting this favorable
trend in 2012. UNCTAD predicts the growth rate of FDI will slow in 2012, with
flows leveling off at about $1.6 trillion, the midpoint of a range.
Leading indicators are suggestive of this trend, with the
value of both cross-border mergers and acquisitions (M&As) and Greenfield
investments retreating in the first six months of 2012. Weak levels of M&A
announcements also suggest sluggish FDI flows in the later part of the year.
Medium Term Prospects
Oseme Finance projections for the medium term based on
macroeconomic fundamentals continue to show FDI flows increasing at a moderate
but steady pace, reaching $1.8 trillion and $1.9 trillion in 2013 and 2014,
respectively.
Investor uncertainty about the course of economic events for
this period is still high. Results from Oseme Finance’s World Investment
Prospects Survey(WIPS), which polls TNC executives on their investment plans,
reveal that while respondents who are pessimistic about the global investment
climate for 2012 outnumber those who are optimistic by 10 percentage points,
the largest single group of respondents – roughly half – are either neutral or
undecided.
Responses for the medium term, after 2012, paint a gradually
more optimistic picture. When asked about their planned future FDI
expenditures, more than half of respondents foresee an increase between 2012
and 2014, compared with 2011 levels.
FDI Inflows Across All Major Economic Groups
FDI flows to developed countries grew robustly in 2011,
reaching $748 billion, up 21 per cent from 2010. Nevertheless, the level of
their inflows was still a quarter below the level of the pre-crisis three-year
average.
Despite this increase, developing and transition economies
together continued to account for more than half of global FDI (45 per cent and
6 per cent, respectively) for the year as their combined inflows reached a new
record high, rising 12 per cent to $777 billion.
Reaching high level of global FDI flows during the economic
and financial crisis it speaks to the economic dynamism and strong role of
these countries in future FDI flows that they maintained this share as
developed economies rebounded in 2011.
Rising FDI to developing countries was driven by a 10 per
cent increase in Asia and a 16 per cent increase in Latin
America and the Caribbean . FDI to the
transition economies increased by 25 per cent to $92 billion.
Flows to Africa , in contrast,
continued their downward trend for a third consecutive year, but the decline
was marginal. The poorest countries remained in FDI recession, with flows to
the least developed countries (LDCs) retreating 11 per cent to $15 billion.
Indications suggest that developing and transition economies
will continue to keep up with the pace of growth in global FDI in the medium
term. TNC executives responding to this year’s WIPS ranked 6 developing and
transition economies among their top 10 prospective destinations for the period
ending in 2014, with Indonesia
rising two places to enter the top five destinations for the first time.
The growth of FDI inflows in 2012 will be moderate in all
three groups - developed, developing and transition economies. In developing
regions, Africa is noteworthy as inflows are expected to
recover.
Growth in FDI is expected to be temperate in Asia
(including East and South-East Asia , South
Asia and West Asia ) and Latin
America . FDI flows to transition economies are expected to grow
further in 2012 and exceed the 2007 peak in 2014.
Rising Global FDI Outflows
FDI from developed countries rose sharply in 2011, by 25 per
cent, to reach $1.24 trillion. While all three major developed-economy investor
blocs - the European Union (EU), North America and Japan
contributed to this increase, the driving factors differed for each.
FDI from the United States
was driven by a record level of reinvested earnings (82 per cent of total FDI
outflows), in part driven by TNCs building on their foreign cash holdings. The
rise of FDI outflows from the EU was driven by cross-border M&As.
An appreciating Yen improved the purchasing power of
Japanese TNCs, resulting in a doubling of their FDI outflows, with net M&A
purchases in North America and Europe
rising 132 per cent.
Outward FDI from developing economies declined by 4 per cent
to $384 billion in 2011, although their share in global outflows remained high
at 23 per cent. Flows from Latin America and the Caribbean
fell 17 per cent, largely owing to the repatriation of capital to the region
(counted as negative outflows) motivated in part by financial considerations
(exchange rates, interest rate differentials).
Flows from East and South-East Asia
were largely stagnant (with an 9 per cent decline in those from East
Asia ), while outward FDI from West Asia
increased significantly, to $25 billion.
M&As Picking Up but Greenfield
Cross-border M&As rose 53 per cent in 2011 to $526
billion, spurred by a rise in the number of megadeals (those with a value over
$3 billion), to 62 in 2011, up from 44 in 2010.
This reflects both the growing value of assets on stock
markets and the increased financial capacity of buyers to carry out such
operations. Greenfield investment
projects, which had declined in value terms for two straight years, held steady
in 2011 at $904 billion. Developing and transition economies continued to host
more than two thirds of the total value of Greenfield
investments in 2011.
Although the growth in global FDI flows in 2011 was driven
in large part by cross-border M&As, the total project value of Greenfield
investments remains significantly higher than that of cross-border M&As, as
has been the case since the financial crisis.
Turnaround In Primary And Services-sector FDI
FDI flows rose in all three sectors of production (primary,
manufacturing and services), according to FDI projects data (comprising
cross-border M&As and Greenfield
investments). Services-sector FDI rebounded in 2011 after falling sharply in
2009 and 2010, to reach some $570 billion.
Primary sector investment also reversed the negative trend
of the previous two years, at $200 billion. The share of both sectors rose
slightly at the expense of manufacturing.
Overall, the top five industries contributing to the rise in
FDI projects were extractive industries (mining, quarrying and petroleum),
chemicals, utilities (electricity, gas and water), transportation and
communications, and other services (largely driven by oil and gas field services).
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control ©
2012 Oseme Group
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