Flows in 2013 forecast to remain close to 2012 level

(CPV) -Global foreign direct investment (FDI) inflows fell by 18 per cent to USD1.35 trillion in 2012. Recovery to more vigorous investment levels will take longer than expected, mostly because of global economic fragility and policy uncertainty, UNCTAD’s annual survey of investment trends reports.

The World Investment Report 2013 subtitled Global Value Chains: Investment and Trade for Development, was released on June 26th 2013.

UNCTAD forecasts FDI in 2013 to remain close to the 2012 level, with an upper range of $1.45 trillion. As macroeconomic conditions improve and investors regain confidence in the medium term, transnational corporations (TNCs) may convert their record levels of cash holdings into new investments. FDI flows may then climb to USD1.6 trillion in 2014 and USD1.8 trillion in 2015.

However, the report warns that factors such as structural weaknesses in the global financial system, the possible deterioration of the macroeconomic environment, and significant policy uncertainty in areas crucial for investor confidence might lead to a further decline in FDI flows.

Developing countries took the lead in attracting FDI in 2012. For the first time ever, developing economies absorbed more FDI than developed countries, accounting for 52 per cent of global FDI flows. The report finds that FDI inflows to developing economies nonetheless declined slightly (by 4 per cent), to USD703 billion – the second-highest level recorded.

Among developing regions, flows to Asia and to Latin America and the Caribbean remained at historically high levels, but their growth momentum weakened. Africa saw a year-on-year increase in FDI inflows in 2012.

FDI is also on the rise in structurally weak economies – comprising the least developed countries, landlocked developing countries, and small island developing States – the report says.

Developing economies’ FDI outflows reached USD426 billion, a record 31 per cent of the world total. Flows from developing Asia and Latin America and the Caribbean remained at their 2011 levels.

Developing Asia is the largest source of FDI, accounting for three quarters of the developing-country total. In the ranks of the top investors, China has moved up from sixth to third place, after the United States and Japan. FDI outflows from Africa almost tripled.

FDI inflows to developed economies declined by 32 per cent to USD561 billion – a level last seen almost 10 years ago, the report reveals. At the same time, FDI outflows from developed countries dropped to a level close to the trough of 2009.

The uncertain economic outlook led TNCs in developed countries to maintain their wait-and-see approach towards new investments or to divest foreign assets, rather than undertake major international expansion. In 2012, 22 of the 38 developed countries experienced a decline in outward FDI, leading to a fall of 23 per cent to USD909 billion.

Additional major trends in global FDI in 2012:

Internationalization of State-owned enterprises and sovereign wealth funds maintains pace. The number of State-owned TNCs increased from 650 in 2010 to 845 in 2012. Their FDI flows amounted to USD145 billion, reaching almost 11 per cent of global FDI. FDI by sovereign wealth funds in 2012 was only USD20 billion, but it nevertheless doubled compared to the year before. Cumulative FDI from sovereign wealth funds is estimated at USD127 billion, most of which was in finance, real estate, construction, and utilities.

Investments through offshore financial centres and special-purpose entities remain a concern. Investments through offshore financial centres (OFCs) and special-purpose entities (SPEs) are at historically high levels. Financial flows to OFCs are still close to the peak reached in 2007. Although most international efforts to combat tax evasion have focused on OFCs, financial flows through SPEs were almost seven times larger in 2011. The number of countries offering favorable tax conditions for SPEs is increasing.

International production is growing at a steady pace. In 2012, TNCs’ international production continued to expand at a steady rate because FDI flows, even at lower levels, add to existing FDI stock. FDI stocks rose by 9 per cent in 2012, to USD23 trillion.

Foreign affiliates of TNCs generated sales worth USD26 trillion (of which USD7.5 trillion were for exports), an increase of 7.4 per cent over 2011. The affiliates contributed value added worth USD6.6 trillion in 2012, up 5.5 per cent, which compares well with global GDP growth of 2.3 per cent. TNC foreign affiliates employed 72 million people in 2012, up 5.7 per cent from 2011.

Reinvested earnings can be an important source of finance for long-term investment. FDI income amounted to USD1.5 trillion in 2011 on a stock of USD21 trillion. The rate of return on FDI is 7 per cent globally, and is higher in both developing economies (8 per cent) and transition economies (13 per cent) than it is in developed countries (5 per cent).

Nearly one third of global FDI income was retained in host economies, and two thirds was repatriated (representing on average 3.4 per cent of the current account payments). The share of retained earnings is highest in developing countries; at about 40 per cent of FDI income it represents an important source of financing. However, the report warns that not all of this is turned into capital expenditure, and the challenge for host governments is to channel retained earnings into productive investment./.