Global FDI flows will exceed $1.2 trillion in 2010

Global foreign direct investment (FDI) flows bottomed out in the latter half of 2009 and then achieved a modest recovery in the first half of this year, sparking cautious optimism on FDI prospects, reports UNCTAD's annual study of worldwide investment trends.

The recovery appears set to gather momentum, with global FDI inflows expected to pick up to over $1.2 trillion in 2010, rise further to $1.3–1.5 trillion in 2011, and head towards $1.6–2 trillion in 2012. However, these FDI prospects are fraught with risks and uncertainties, including the fragility of the global economic recovery.

The World Investment Report 2010, released yesterday, estimates that FDI inflows worldwide plummeted by 37% to $1,114 billion in 2009 – following a 16% decline in 2008. After this freefall, a timid and uneven recovery appears on its way, thanks to better corporate profits and improved economic and financial conditions. According to a newly introduced quarterly index, global FDI inflows have shown renewed dynamism.

During recession-plagued 2009, global FDI outflows fell some 43% to $1,101 billion, outpacing even the 37% drop in inflows. Global FDI declined across the primary, secondary, and services sectors, and most FDI components – equity investment, intra-company loans or reinvested earnings – contracted. FDI by private equity funds decreased by 65%, although flows from sovereign wealth funds rose by 15%. These funds together accounted for one tenth of global FDI flows, compared to less than 7% in 2000, but were down from 22% in the peak year of 2007.

Some major changes in global FDI patterns preceded the global crisis and will most likely gain momentum in the short and medium term, the WIR predicts:
- The relative weight of developing and transition economies as both destinations and sources of global FDI is expected to keep increasing. Although FDI to developing and transition economies declined by 27% in 2009 and FDI outflows from these two groups of economies contracted by 21%, they absorbed almost half of FDI inflows in 2009 and accounted for one quarter of global FDI outflows. These countries are leading the FDI recovery and will remain major destinations for foreign investment.

- The recent further retreat in manufacturing FDI relative to that of the services and primary sectors is unlikely to be reversed. Based on cross-border mergers and acquisitions (M&A) value, the manufacturing sector was the worst affected in 2009, recording a decline of 77% compared to 2008. The contraction in the primary and services sectors was less pronounced on average, at 47% and 57%, respectively. Yet some industries in those sectors were severely affected: the value of transactions in financial services, for instance, plummeted by 87%.

- Despite its serious impact on FDI, the crisis has not halted the growing internationalization of production. During the past two years, the reduction in the value-added of foreign affiliates owned by TNCs was less pronounced than the overall contraction of the global economy. Thus, TNCs' share in world GDP rose to a historic high of 11%. TNCs’ total foreign employment increased slightly, to 80 million.