Global foreign direct investment (FDI) inflows were only slightly higher in 2010 than in recession-hit 2009, according to estimates from the Economist Intelligence Unit (EIU). Growth in FDI inflows to emerging markets, by an estimated 14%, offset another decline in flows to the developed world, of an estimated 7%. Global FDI inflows are projected to increase by about 16% in 2011, to US$1.3 trillion, which will still be far below the peak of US$2.1 trillion recorded in 2007.
The global economic crisis in 2008-09 had a major impact on FDI flows. After declining in 2008 by 16.5% to US$1.77 trillion from US$2.11 trillion in 2007, global FDI inflows plunged by 40% to US$1.06 trillion in 2009. The fall reflected the credit crunch, the deep recession in the developed world and many emerging markets and a large-scale retreat from risk. It was generally expected that recovery from recession would be accompanied by a relatively robust rebound in global FDI flows in 2010.
In the event, global FDI inflows in 2010 are estimated to have been only slightly higher than in 2009, by some 4% in US dollar terms. According to Laza Kekic, the EIU’s director for country forecasting services, “a continued lack of confidence and the European sovereign debt crisis have clearly had a dampening effect on FDI flows to much of the developed world.”
The share of global FDI inflows in global gross domestic product (GDP) was in 2010 slightly lower than in 2009 – at 1.8% versus 1.9%. Global inflows of US$1.1 trillion were still only about half the peak level reached in 2007. The US remained the largest recipient of FDI in 2010. Among emerging markets, emerging Asia remained the largest recipient of FDI ($260bn) and China the single-largest recipient (US$100bn), ranking second globally.
Structural Shift in Global FDI
The sharp decline in global FDI flows in 2009 was accompanied by a distinct shift in the pattern of FDI; for the first time ever emerging markets attracted more FDI than developed countries. The trend continued and indeed strengthened in 2010. FDI flows to emerging markets have held up as the gap in economic performance with the developed world has widened. The trend of improving business environments in many emerging markets in recent years has strengthened the “pull factor” for FDI.
Strong competitive pressures on companies have increased the opportunity cost of not seizing opportunities in more dynamic and lower-cost destinations. Finally, the increased share of emerging markets in outward investment is also increasing the share of emerging markets in inward flows because a disproportionate share of outward investment by emerging markets goes to other emerging markets.
The Outlook for 2011
On baseline forecasts, in 2011 tailwinds propelling global FDI flows are expected to be somewhat stronger than headwinds that will hold back growth in capital flows. Utilising the very close relationship between cross-border merger and acquisitions (M&As) and global FDI flows, a growth of about 20% in cross-border M&As in 2011 would translate into growth of global FDI inflows of about 16%, to US$1.3 trillion. This would be equal to 2% of projected global GDP, the same as the average share during the previous global FDI slump in 2002-03, and well below the 3% average in 2005-08.
Interest rates remain low and strong growth continues in emerging markets. Relatively high commodity prices will underpin FDI into many emerging markets. Multinational companies (MNCs) have large cash reserves and motivation to make acquisitions. Business surveys suggest that MNCs´ intention to pursue foreign expansion in 2011 appears stronger than in 2010.
There are, however, significant downside risks to the outlook. The sovereign debt crises in the euro area cast a shadow over the global recovery and could yet unsettle global capital markets in a major way. Confidence remains fragile. Companies are worried about the sustainability of the recovery as impetus from the inventory cycle fades and fiscal policy is tightened. The uncertainty is aggravated by risk factors that may seriously affect FDI flows, such as that of currency wars and related escalation of trade protectionism. An existing tendency in much of the world to shield national companies from foreigners could strengthen.
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