G20’s FDI inflow, outflow decline

KATHMANDU: Group of 20 (G20) countries accounted for around two-thirds of both global foreign direct investment (FDI) outflows and inflows between 2007 and 2009, an UNCTAD survey revealed.

Outward and inward FDI flows of the countries declined by 10 per cent and 13 per cent, respectively in 2008 compared to 2007. It continued in the first half of 2009, UNCTAD said, leading to bleak prospects for the year.

Since the beginning of 2009, the impact of the financial and economic crisis, which intensified in October 2008, has dealt a sharp blow to FDI flows. As compared to the last quarter of 2008, G20 inward and outward FDI decreased by 37 per cent and 22 per cent respectively, in the first quarter of 2009.

As in 2008, the drop in the value of cross-border mergers and acquisitions (M&As) is the major driving force behind this additional decline in FDI. Shrinking corporate profits and plummeting stock prices have greatly diminished the value of and scope for these kinds of operations. M&A purchases and sales by the G20 fell by 66 per cent and 74 per cent, respectively, in the first half of 2009 as compared to the same period the previous year.

Transnational corporations (TNCs) have been hit by the consequences of the global economic slowdown, UNCTAD said, leading to falling market expectations, tighter credit conditions, reduced value of assets following stock market declines, and falls in corporate profits. At the same time, TNCS have been confronted by major uncertainties about the evolution of the economic situation in the short term.

As a consequence, many TNCs have announced plans to curtail output, lay off workers and cut capital expenditures, all of which have implications for FDI. According to the results of UNCTAD´s World Investment Prospects Survey 2009-2011, nearly two-thirds of respondent TNCs anticipate a decline in their FDI expenditures this year.

Preliminary data for the second quarter paints a mixed picture. During this quarter, cross-border M&As in the G20 appear to have stabilised but at a relatively low level compared to 2008 (down by 65 per cent for sales and 49 per cent for purchases, compared with the same period last year).

Some signs of a still fragile global economic recovery have popped up in recent months. According to the latest IMF analysis, the world economy is beginning to slowly escape from the worst recession experienced in the post World War II era. Corporate profits of the largest TNCs continued to rebound in the second quarter of 2009 after a sharp drop in the fourth quarter of 2008. While it is possible that these evolutions will positively influence FDI flows in the coming months, the forecast for the whole year remains one of decline, UNCTAD said.

Even with a potential mellowing in the decline of FDI flows, inflows for the G20 in the first half of 2009 were still roughly 40 per cent below 2008 levels. Thus, FDI inflows to the 19 members of the G20 in 2009 are likely to be around $700 billion, while those to the world — of which the G20 constitutes the bulk — will be between $900 to $1,200 billion.

These FDI trends raise questions about the policies that are needed to maximise the potential of foreign investment to achieving a sustainable global recovery, it said.