FDI has secured its place as a more prominent source of economic activity, says the European Central Bank.

The past two decades have seen major transformations in the global map of FDI flows, with emerging markets becoming an increasingly attractive destination for investment, reports the European Central Bank (ECB).

In 2013, for the first time, more than 50% of global incoming FDI flows were received by emerging markets, which have also increased in prominence as benefactors of FDI, with emerging economies accounting for 41% of global outgoing FDI flows in 2014.

The most common form of investment in emerging markets continues to be greenfield investments, which in 2016 accounted for 80% of global FDI into emerging economies. However, the dominant form of FDI travelling into and stemming from advanced economies – including the EU – are mergers and acquisitions, which in 2016 were responsible for 80% of global FDI flows into these economies, according to the ECB.

Notably, in conjunction with emerging markets gaining more attraction as locations for investment, there has been a global shift away from the countries of the EU, which until 2008 dominated global FDI. Since the financial crisis, the EU’s global share of FDI has decreased, particularly in the case of non-euro area countries, which have demonstrated a more significant decline in FDI inflows and outflows than eurozone countries.

Despite this, EU economic integration is a factor that significantly stimulates FDI flows among member states, in part due to the lack of restrictions on inward investment across the bloc.

The ECB’s report also highlighted the numerous benefits imparted on multinationals by foreign investment, including, but not limited to, international market penetration, access to promising emerging markets and the natural resources that usually come with them, and lower production costs, particularly in emerging market economies.

Although resource-rich economies carry many risks for investors, including the so called ‘natural resource curse’, the wealth of benefits of investing in such markets typically mitigate the costs.  

Moreover, foreign investment ventures allow companies to benefit from new technologies, managerial skills, and labour sources within the recipient countries, reports the ECB. This is particularly the case when FDI flows to advanced economies, such as EU countries, where “technological progress has been among the main drivers of FDI”.

The ECB reports that as opposed to investment being a substitute for trade, multinationals typically complement their trade, particularly their exports, with FDI. In many cases, opening up FDI channels into certain economies can provide opportunities for enhanced market penetration with exports, resulting in a positive correlation between exports and FDI.

This article is sourced from fDi Magazine
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