International production, undertaken by multinational enterprises (MNEs), is the productive core of the globalising world economy. FDI inflows grew from just $58m in 1982 to nearly $1000bn in 2005 and to more than $1400bn in 2008. The global stock of FDI is in excess of $15,000bn. There are more than 80,000 MNEs globally, with ownership stakes in more than 800,000 foreign affiliates employing more than 82 million people. MNEs have sales of more than $30,000bn, exports of more than $6000bn and account for about half of the world’s total R&D expenditure and more than two-thirds of the world’s business R&D.

Greenfield investment has also grown rapidly, with a 50% growth in projects and a doubling of capital investment from 2005 to 2008. In 2008, the new capital investment companies announced in foreign subsidiaries reached a record $15,000bn. New jobs created by greenfield investment projects also reached a record 4 million in 2008.

Recession hits

However, the global recession and financial crisis had brought these impressive growth figures to an abrupt halt. FDI flows declined by 21% in 2008 to $1450bn and the Economist Intelligence Unit forecasts a further 49% decline in FDI flows in 2009. The decline is driven primarily by the fall in crossborder mergers and acquisitions (M&As). The financial crisis is restricting the ability of firms to finance them so the value of M&As will be lower in 2009 as share prices – and hence the values of companies – have declined, depressing the value of FDI flows. Likewise, as companies in the technology sector find it harder to raise financing for initial public offerings, the level of M&A and greenfield investment will drop.

Greenfield FDI projects, which peaked in 2008 at nearly 15,500 projects recorded, are also forecast to decline in 2009, albeit with a slower fall of 13%, predicted by the fDi Intelligence. Greenfield investment in developed economies is expected to fall significantly more than this and investment in developing countries is expected to achieve similar levels to 2008.

Energy rising

Table 1 shows the forecasts of fDi Intelligence for the sectors that are expected to be resilient or decline due to the global recession and financial crisis. The resilient sectors include renewable energy, and coal, oil and natural gas, which are expected to maintain levels of greenfield investment – and in the case of renewable energy, to continue to record significant growth. Healthcare is a sector which typically grows in a recession. Food and beverages and aerospace are generally fairly resilient during harsher economic times as demand for food is ongoing and aerospace investment is long-term. Professional services and headquarters are growing strongly, with market-seeking investment to exploit the growing markets in developing countries.

In terms of the declining sectors, most of these are linked to major declines in global demand for consumer goods and related sub-supply. Communications is typically resilient in times of recession, but given the depth of the downturn, communications companies are expected to cut back on their global investments.

Key distinctions

The global recession is hastening the shift of focus to developing countries as they remain the only source of growth in the world economy. At the same time that these countries have become key destinations for FDI, their companies are rapidly internationalising and becoming multinational enterprises.

FDI outflows from developing countries increased nearly 10-fold from 2003 to 2007, reaching almost $253bn in 2007, while FDI outflows from developed economies increased only three-fold. The number of greenfield FDI projects from developing countries nearly doubled between 2003 and 2008, while the value of crossborder M&As by developing countries increased three-fold from 2003 to 2007, reaching $180bn in 2007.

Greenfield rising

The most recent 2008 data on greenfield investment shows a significant growth in FDI from developing countries. The number of projects from developing countries increased by 50% in 2008, compared with a 25% increase in investment from developed economies. Africa was the fastest growing region, with a tripling of outward FDI projects, followed by west Asia (the Middle East and Turkey) where there was a doubling of investment projects. Asia and Oceania and the transition economies recorded a 50% growth in outward projects. The market share of developing countries in global greenfield FDI projects increased from 14% in 2007 to 17% in 2008.

Developing markets power on

Also in 2008, the Financial Times’ Global 500 list, which ranks companies by market capitalisation, showed that developing countries accounted for 17% of world’s leading companies. In terms of banks, which in 2008 became the leading sector for FDI worldwide, more than 20% of The Banker’s Top 1000 banks and more than one-third of top 20 are from developing countries.

Table 2 shows the fastest growing countries for outward FDI projects in 2008 in more detail. All but one of the 20 fastest growing countries for outward investment were developing countries in 2008. Many of these countries had a very low level of outward investment in 2007 so a small increase in projects led to large growth rates. The right side of the table therefore presents the fastest growing countries, but only those with more than 50 overseas FDI projects in 2008. It is clear that 12 of the top 20 (60%) growth countries were from developing countries, with four of the top seven from west Asia. These trends clearly show the rapidly growing role of developing countries in outward FDI.

Outward investment growth

Outward investment from developing countries is expected to continue to grow faster than that from the developed economies because developing countries achieve much higher levels of economic growth. Also, because their already large base of companies have the resources, they have the know-how and critical mass to expand overseas. Table 3 shows the number of companies in major emerging markets and developed economies for three key sectors of FDI. It is apparent that for each of the sectors, emerging markets have built up a critical mass of companies which is at least as big as many of the largest developed economies.

In software and IT services, Russia is second only to the US and is set to become a major player in the sector, and Brazil and India are ahead of France, Spain and Canada in terms of numbers of software and IT services companies. In automotive components, China is number one, with double the number of companies in the US, indicating the potential for China to become a leading global player in the sector.

Automotive success

India, Brazil, Russia and Turkey all have more companies in automotive components than Germany and other major developed economies, except for the US and Japan. Mexico is ahead of Spain, Canada and France. In chemicals, China is again number one. Russia, India and Brazil have more chemicals companies than Japan and all the major developed economies except for the US. Turkey is ahead of the UK, Spain and France, and Mexico is ahead of Canada.

Economic development in the developing world is expected to accelerate as urbanisation grows. China is expected to add at least 342 million people to its cities by 2030; in India the figure is 271 million; and Latin America 169 million. In sub-Saharan Africa, it is anticipated that 395 million people will be added to the cities over the same period, more than double its current population – a far larger absolute increment than China will experience. This urbanisation will offer huge opportunities for accelerating economic development and FDI.