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FDI is driven by M&A in developing nations

FDI is driven by M&A in developing nations

New Delhi: Foreign direct investment (FDI) inflows to developed countries increased by 45% to reach $857 billion (Rs33.6 trillion) in 2006, according to an annual report released Tuesday by the United Nations Conference on Trade and Development (Unctad).

The report said the surge in investment was mainly driven by cross-border mergers and acquisitions, with the increasing involvement of private equity funds.

The report focused on the role of international corporations in industries such as oil, natural gas and mining.

Global FDI inflows amounted to $1,306 billion in 2006—up 38% from 2005, of which South, East and SouthEast Asia accounted for $200 billion.

China remained the largest recipient in the region, despite its inflows reducing by 4% to $69.5 billion in 2006.

India ranked fourth in the region, with inflows of $17 billion.

The Unctad report identified the country’s surging economy, as well as a renewed interest by global multinationals and private equity firms as the reason for the inflow increase.

Despite absolute FDI outflows from China being bigger, India has scored higher on FDI outflows after adjusting for the size of the economy, said Masataka Fujita, chief of the investment trends and data section, division on investment, technology and enterprise development for Unctad, while releasing the report.

Ajay Shah, an independent consultant and former adviser to the finance ministry, however, said that when seen as a percentage of gross domestic product (GDP), the inflows for India were not big enough.

“It is a big country and we are not talking big numbers (in foreign investment inflows) yet," he said.

While the European Union, Japan and the US still are home to most of the world’s multinational corporations, the most significant change in recent years is the increasing number of such companies from developing countries that are part of the top 100 companies globally.

Seven of the top 100 companies are from developing countries in 2007 against five last year.

The report also showed increasing levels of foreign investment from Asia to Africa.

Singapore, India and Malaysia are the top Asian sources of FDI to the region, with combined investments estimated at $3.5 billion of cumulative approved flows from 1996 to 2004.

Access to technologies and a desire to build stronger positions in the global market are the main motives for Indian companies to engage in cross- border mergers and acquisitions.


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