Geneva: Global foreign direct investment (FDI) flows will fall 10% this year from their 2007 record as major companies scale back spending plans, the United Nations Conference on Trade and Development (UNCTAD) said.
FDI flows rose 30% to $1.83 trillion in 2007, despite the onset of the global financial crisis halfway through the year, UNCTAD said in a new report issued on Wednesday.
But they are falling this year, largely because of a sharp drop in merger and acquisition (M&A) activity, the main driver of FDI, it said in its yearly review of investment trends.
“FDI flows to developing countries as a group are likely to remain quite stable. The main drop will be found in the area of mergers and acquisitions,” UNCTAD secretary general Supachai Panitchpakdi told a news conference about the report.
Cross-border M&A, mainly between developed countries, was 29% lower in the first half of this year than in the second half of 2007, UNCTAD said. In 2007 as a whole it totalled $1.64 trillion.
A survey of 226 of the biggest multinationals conducted between April and June this year -- before the full force of the financial crisis set in -- shows 21% of companies expect a large increase in FDI over the next three years, UNCTAD said. That compares with 32% of companies in a similar survey a year ago.
The latest survey, which covers 2007 and offers hints into trends in 2008, showed that 68% companies still intend to increase their investments over the next three years, but the proportion planning a moderate increase has risen to 48% from 38% a year ago.
Risk of slowdown
Companies are sensitive to the risk of further deterioration of the global economic situation, UNCTAD said.
Half the respondents said the possibility of a global downturn is a significant additional threat to their investment plans, and 39% said financial instability has already had a significant negative impact on their intended spending over the next three years.
The UNCTAD survey shows that companies consider China, India, the United States, Russia and Brazil as the most attractive destinations for investment.
Last year’s strong investment inflows were seen in all regions, and governments continue to make their investment climates more attractive to multinationals and FDI, despite growing concerns about rising protectionism, UNCTAD said.
As a result the stock of FDI worldwide reached $15 trillion, representing the activities of some 79,000 multinationals owning about 790,000 foreign affiliates, it said.
The activities of these affiliates, employing 82 million people, accounted for 11% of world gross domestic product in 2007, and their sales rose 21% to $31 trillion.
Largest share of FDI is in developed countries; Asia picking up
Developed countries continued to attract the biggest share of FDI, with $1.25 trillion in 2007, led by the United States, where the weak dollar stimulated inflows, Britain, France, Canada and the Netherlands.
FDI inflows into developing countries jumped 21% to $500 billion, with Africa attracting a record $53 billion.
Recorded FDI outflows were estimated even higher at $2.00 trillion. UNCTAD said this discrepancy was due to differing ways that governments measure inflows and outflows, and because some governments only gather figures on one set of data.
Developed countries were again by far the biggest source of FDI, accounting for $1.69 billion in 2007, with the United States maintaining its position as the largest single provider at $314 billion.
Developing countries are gaining in importance as a source of FDI, however, thanks mainly to Asia-based companies, with outflows jumping to a record $253 billion. The biggest sources are China, Hong Kong and Russia, an economy in transition.
Sovereign wealth funds -- investment funds set up by government to hold foreign assets -- account for a relatively small but growing share of FDI, totalling $10 billion in 2007, almost all in the form of cross-border mergers and acquisitions.