Global Foreign Direct Investment
Sep 14th 2006
From The Economist Intelligence Unit ViewsWire
Boom or backlash?
The first six years of this decade have been a roller coaster ride for global foreign direct investment (FDI). From an all-time peak in 2000, global flows plunged by nearly 40% in 2001 and dropped still further in 2002-03. It was the longest and deepest downturn on record. 2004 marked the start of a rapid recovery, now in its third year, during which global FDI flows have risen by over 20% a year. Global FDI is headed for calmer waters for the rest of this decade, according to a new report by the Economist Intelligence Unit and the Columbia Center for International Investment (World Investment Prospects to 2010: boom or backlash?). With single-digit growth from 2007 onwards, global FDI inflows will in 2010 match the 2000 peak of US$1.4trn in nominal terms.
The post-2003 bounceback has been driven by emerging markets. FDI inflows to these regions grew by 57% in 2004 and 26% in 2005, to reach a record high of almost US$400bn (more than 40% of the global total). This was underpinned by rising corporate profits, buoyant economic growth and—in resource-rich countries—higher prices for many commodities.
This year, however, inflows to emerging markets are expected to increase by only about 3% in US dollar terms, whereas inflows into the developed world are projected to rise by some 36%. In part this is because the recovery in flows to emerging markets is largely complete, while that for developed countries is just getting started. FDI flows to emerging markets will remain buoyant in 2006-10, averaging over US$400bn per year, but growth rates will be modest as privatisation tails off and the global economy slows.
The M&A road
Most of the increase in global FDI from 2007 onwards is expected to take place in developed countries, mainly because of cross-border mergers and acquisitions (M&A). The value of cross-border M&A surged to US$435bn in the first half of 2006, a 48% increase over the same period in 2005, and was concentrated heavily in the developed world.
The biggest threat to an M&A boom is rising protectionist sentiment in host countries. This is apparent in the European Commission’s diluted takeover directive and in two bills making their way through the US Congress that would subject potential foreign takeovers to more rigorous scrutiny. Unease with FDI is spreading to emerging markets too. Some are questioning the terms of existing contracts with multinationals; others fret about what they see as excessive dependence on foreign capital. So far this does not add up to a serious backlash. But approaches to FDI have changed in the past, and they could do so again. That economics will triumph over populism is probable but not certain.