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S. Gurumurthi

ACCORDING to the World Investment Report 2001 published in September by the UN Conference on Trade and Development (UNCTAD), global inflows of foreign direct investment (FDI) rose 18 per cent in 2000 to reach a record $1,300 billion, but they are expected to decline sharply by 40 per cent to $760 billion in 2001.

The main factor responsible for the growth in 2000 and the projected drop in 2001 appears to be cross-border mergers and acquisitions (M&As), which rose by almost 50 per cent last year to $1,100 billion but are now declining in line with the overall slowdown of global economic growth. According to the UNCTAD press release, the latest estimates were prepared before the September 11 terrorist attacks on the US and have no relation to those events.

The report notes that the rapid expansion of FDI makes it "the main force in international economic integration''. Though a total of 63,000 multi-national corporations, with over 800,000 foreign affiliates, are responsible for shaping trade patterns, accounting for about two-thirds of world trade, FDI is unevenly distributed.

The 30 largest host countries account for some 95 per cent of the total world FDI inflows and 90 per cent of stocks, while 30 home countries — mainly industrial economies — generate around 99 per cent of outward FDI flows and stocks.

The report notes that the projected 40 per cent decline in world FDI flows in 2001 would be the first drop in FDI since 1991 and the largest over the past three decades. The level of flows in 2001, however, would still be higher than that in 1998 and the 1996-2000 average. The projected drop in 2001, according to the report, is the result of a recent decline in cross-border M&As, with a significant decline in `megadeals' of more than $1 billion, which had characterised M&As in 1999 and 2000.

Given the importance of cross-border M&As between developed countries, FDI flows are expected to decrease significantly in developed countries, falling by 49 per cent — from $1,005 billion in 2001 to an estimated $510 billion in 2001.

According to the UNCTAD report, the decline in developing countries is estimated to be 6 per cent, from $240 billion to $225 billion. As a result of the decline in developed countries, the share of developing countries in world FDI inflows may rise to 30 per cent, while inflows to Central and Eastern Europe are expected to remain stable at $27 billion in 2001.

The UNCTAD report points out that as in previous years, nearly all of the 10 largest recipients and sources of FDI in 2000 were developed countries. The only exceptions were China and Hong Kong SAR. The developed countries accounted for more than three-fourths of global FDI totals in 2000, with over $ 1,000 billion in inflows, a 21 per cent increase over 1999. While flows to developing countries also rose to $240 billion, their share of global inflows has fallen to 19 per cent, the lowest since 1991. Though flows to the least developed countries also rose to some extent, they remain marginal since they constitute only 0.3 percent of world inflows.

The UNCTAD report observes that FDI flows in both the developed world and globally are dominated by what it terms the triad of the European Union, the US, and Japan, which together account for 71 per cent of inward flows and 82 per cent of outward flows, mainly on account of cross-border M&As. The UK and France have now replaced the US as the principal outward investors.

Though US is still the leading recipient of FDI, its inflows and outflows dropped by 5 per cent and 2 per cent respectively in 2000. Flows of FDI to Central and Eastern Europe rose by 7 percent in 2000 to $27 billion, or 2 per cent of global inflows. FDI was concentrated in Russia, Poland, and the Czech Republic and was dominated largely by transactions related to privatisation, with the bulk of investments continuing to come from Western Europe.

FDI flows to and from the developing countries of Asia were at record levels in 2000 as the region recovered from the crisis of the late 1990s. Inflows to the region rose 44 per cent to $143 billion, while outflows increased 140 per cent to $85 billion. The bulk of the inflows were to Hong Kong SAR, rising by 160 per cent to $64.4 billion, and China, $40.8 billion. The main reason why Hong Kong SAR overtook China as the single largest recipient of inflows in Asia, according to the report, was that FDI flows entered Hong Kong for the purpose of being invested in China. The report notes that other large recipients of FDI in Asia were Korea, $10.2 billion; Singapore, $6.4 billion; and Malaysia $5.5 billion.

Latin America and the Caribbean, where FDI flows had tripled during the second half of the 1990s, registered a 22 percent decline to $86 billion in 2000.

The report attributes this decline to a correction from 1999, when inflows were affected by some major cross-border acquisitions. Brazil, with $34 billion, and Mexico, with $13 billion, were the major recipients of FDI in 2000.

FDI inflows to Africa declined 13 per cent to $9.1 billion, bringing the continent's share of global inflows down to less than 1 per cent in 2000, largely owing to slowdowns in South Africa, Angola, and Morocco. The sub-Saharan African countries as a group also witnessed declines. The report notes that this decline of FDI flows to Africa contrasts sharply with a rise of $2.2 billion in 1999, and is the first major drop since the mid-1990s.

A major theme of the UNCTAD report is how to promote `backward linkages' between foreign affiliates and domestic firms.

According to the report, these linkages provide the strongest channel for diffusing skills, knowledge, and technology. From the standpoint of foreign affiliates, the report states, the local procurement that results from such linkages could lower production costs and allow more specialization and flexibility.

From the standpoint of domestic suppliers, the direct effect of linkages is generally a rise in the suppliers' output and employment. Linkages also transmit knowledge and skills, promoting efficiency, productivity growth, and increased market diversification.

The report provides specific examples of productive backward linkages in a number of countries, including China, India, Malaysia, and Singapore.

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