Increased uncertainty in the global economy, marked by fears of an exacerbated sovereign debt crisis in Europe and slowing growth in major emerging markets, has led to an 8% contraction in global FDI flows in the first half of 2012, compared with the same period in 2011, according to the United Nations Conference on Trade and Development’s (Unctad) recent Global Investment Trends Monitor.

Global FDI fell from $729bn in the first half of 2011 to $668bn in the first half of 2012, with a decline of $37bn in FDI flows to the US and a $23bn fall in FDI flows to Brazil, Russia, India and China. Unctad’s estimates, which include among others greenfield investment projects, show that FDI flows will, at best, level out in 2012, reaching just less than $1600bn.

According to Unctad, weak global demand and elevated risks related to regulatory policy changes have led many transnational companies to maintain a “wait-and-see attitude” towards investing abroad. The recent contraction in global FDI was caused by a 40% fall in greenfield FDI and a 60% fall in cross-border merger and acquisition transactions. 

The first half of 2012 was the first six-month period during which developing countries accounted for half of all FDI flows, which was mainly down to steep falls in FDI into the US. Although inflows to China in the first half of 2012 declined by 3% compared with the first half of 2011, China emerged as the world’s largest recipient of FDI in the period, attracting $59bn of FDI.

FDI inflows to South America and the Caribbean increased by 11% and 14%, respectively. FDI growth in South America was due to strong growth in Argentina, Chile, Colombia and Peru, while offshore financial centres were the main drivers of FDI growth in the Caribbean.

After three consecutive years of decline, FDI flows to Africa showed signs of recovery, increasing by 5% in the first half of 2012, compared with the same period in 2011. Egypt emerged as one of the strongest performers in Africa, while South Africa was one of the weaker, suffering a significant fall in FDI flows over the period, due to slower economic growth. Developing Asia witnessed an 11% decline in FDI flows in the first six months of 2012, compared with the first six months in 2011. This was due to a protracted period of weak external demand that negatively affected the region’s exports, according to Unctad.