The Hindu Business Line : Economic slowdown hampers global FDI flows

New Delhi, Sept. 17 The worldwide economic and financial crisis has extracted its toll with global foreign direct investment (FDI) flows getting severely hampered this year, says the UN Conference on Trade and Development (Unctad).

In its World Investment Report 2009, released worldwide on Thursday, the Geneva-based UN body said inflows are expected to fall from $1.7 trillion to below $1.2 trillion in 2009, with a slow recovery in 2010 (to a level up to $1.4 trillion) and gaining momentum in 2011(approaching $1.8 trillion).

Stating that the global economic crisis has altered the FDI landscape, it said investments to developing and transition economies surged, increasing their share in global FDI flows to 43 per cent in 2008. This was partly due to a concurrent large decline in FDI flows to developed countries (29 per cent). However, in 2009, FDI flows to all regions would suffer from a decline, it added.

The report said a major contributing factor to the decline in global FDI flows has been growing divestments by transnational corporations (TNCs). Illustrative of this trend that was that roughly one third of cross-border mergers and acquisitions during 2008 and the first half of 2009 entailed the sale of foreign affiliates to other companies.

According to Unctad, available data in early 2009 point to “a significant downturn” in FDI flows to the South, East and South-East Asian region, besides casting doubts about FDI growth prospects in the short term. Inflows to China and India are inevitably hit by the crisis, too, but their medium-to long-term prospects remain promising, it said, adding that respondents to World Investment Prospects Survey of Unctad ranked China and India as the first and third, respectively, among the most attractive locations for FDI.

During 2008, 110 new FDI-related measures were introduced, of which 85 were more favourable to FDI. But, compared with 2007, the percentage of less favourable measures remained unchanged, it said adding that during 2008, 59 new bilateral investment treaties were concluded, bringing the total number to 2,676.

Overall trends

Unctad found that overall policy trends during the crisis have so far been mostly favourable to FDI, both nationally and internationally. However, in some countries a more restrictive FDI approach has emerged, it said noting that there is a “growing evidence of covert protectionism”.

Instances of ‘covert’ protectionism include favouring products with high ‘domestic’ content in government procurement (particularly huge public infrastructure projects), de facto preventing banks from lending for foreign operations, invoking ‘national security’ exceptions that stretch the definition of national security or moving protectionist barriers to sub-national levels that are outside the scope of the application of global obligations (e.g., in matters of procurement).

Looking to the future, a crucial question is which FDI policies would be applied by host countries; once the global economy begins to recover, Unctad said.

The expected exit of public funds from flagship industries is likely to provide a boost to private investment, including FDI.

This could possibly trigger a new wave of economic nationalism to protect “national champions” from foreign takeovers, it said.

In this context, Unctad suggested that policymakers consider strengthening the investment promotion dimension of international investment agreements through effective and operational provisions.

Investment insurance and other home-country measures that encourage outward investment are cases in point where continued international cooperation could be useful.

The worst global economic and financial crisis has slowed the global production of goods and services by the world’s estimated 82,000 TNCs and their 8.10 lakh foreign affiliates which account for not less than 10 per cent of world GDP and employ about 78 million people.

Unctad’s list of the world’s largest 100 non-financial TNCs is dominated by manufacturing and petroleum companies, which saw their profit margins reduced drastically on the weakening demand for both manufactured goods and fuels. Overall, the profits of the largest 100 TNCs in the world fell by more than 25 per cent in 2008.

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