Companies’ reluctance to invest overseas and expand their businesses in 2012 was one of the main factors that caused global FDI to contract by 18% in the year, the United Nations Conference on Trade and Development (Unctad) asserted in its 2013 World Investment Report. Global FDI fell by 18% to $1350bn in 2012, and global crossborder flows in 2013 could remain subdued as significant risks to growth remain.

“The overall news is not good,” said Mukhisa Kituyi, Unctad’s newly appointed secretary-general, in his first public speech at the International Investment Forum in China at the start of September 2013. “Skittishness about the fragile economic environment globally, as well as policy uncertainty in the face of this fragility, led investors to stash their cash, rather than invest it. Major investors globally have about $6000bn-worth of cash on their balance sheets.”

The uncertain global economic backdrop has led transnational corporations (TNCs) from developed countries to adopt a ‘wait-and-see’ approach. As a result, 22 out of 38 developed countries tracked by Unctad experienced a decline in outward FDI last year, leading to an overall decline of 23% among developed countries. TNCs have held back from undertaking major international expansions, and Unctad reported that more companies have opted instead to divest foreign assets.

Unctad also noted a growing trend of FDI into offshore financial centres and special purpose entities, which it noted was “a concern”. Despite ongoing international efforts to combat tax evasion, investments into offshore financial centres are still close to the peak levels recorded in 2007. In addition, capital invested in special purpose entities was seven times larger than financial inflows into offshore centres, and this was a result of growing numbers of countries offering favourable tax conditions for such entities.

Developing economies, for the first time ever, attracted more FDI than developed countries in 2012. According to Unctad, they attracted 52% of global FDI flows in 2012. FDI into Africa increased by 5% to $50bn in the year. This was mainly due to extraction activity, although FDI into the manufacturing and services industries also increased.

FDI into developing Asia fell by 7% to $407bn in 2012. According to Unctad, Cambodia, Myanmar and Vietnam emerged as the region’s “bright spots” as labour-intensive industries were drawn to these low-income economies. While FDI into South America increased by 12%, driven by natural resources and market-seeking activity, as a whole FDI into the Latin American and the Caribbean region declined by 2% to $244bn.

“Our projections for investment flows remain sober for 2013,” said Mr Kituyi. “Levels may start to pick up speed again from 2014, but we also have to face up to some significant risks. Structural weaknesses in the global financial system, the possible deterioration of the macroeconomic environment, and continued policy uncertainty in areas crucial to investor confidence might lead to a further delay in FDI recovery.”