Global FDI flows fell by 13% to $1300bn in 2018, as crossborder investment declined for the third year running, according to Unctad’s 2019 World Investment Report (WIR).
Developed economies were hit hardest: flows fell by 27% to $557bn, the lowest level since 2004. Positive figures for greenfield investment were not enough to prevent a decline in overall headline FDI flows.
This contraction, particularly in developed countries, was provoked by US multinationals repatriating their accumulated earnings from abroad, making the most of the tax reforms introduced by President Donald Trump at the end of 2017. The reforms led US multinationals to repatriate $478bn in the first two quarters of 2018, equivalent to 37% of total global FDI flows.
“The current decline is policy-driven, rather than shaped by economic cycles," Dr James Zhan, lead author of the report, told fDi. “There are several factors, including US tax reforms at the end of 2017, government intervention in large crossborder M&A deals and the Brexit process. Also the escalation of trade tensions will not reduce FDI per se, but more investment diversion from China to other south-east Asian countries.”
On the positive side, developing economies experienced a modest increase of 2%, increasing the developing world’s share of global FDI flows to more than half (54%), from 46% in 2017. Half of the top 20 host economies in the world were developing and transition economies.
Despite a 9% fall to $252bn, the US remained by far the world’s largest recipient of FDI, followed by China, Hong Kong and Singapore. Japan became the largest source country, followed by China and France, and the US dropped out of the top 20 list due to the significant repatriation of earnings.
Unctad pointed to a substantial rise in greenfield project announcements as an indication of forward spending plans, expecting FDI to recover in 2019 as the US tax reforms wind down. The fDi Report 2019 corroborated this greenfield growth, revealing that greenfield capital investment increased by 42% to $917.3bn in 2018 from a low in 2017, while the number of FDI projects rose by 7% to 14,845.
“The overall assessment is that there will be a fragile recovery, roughly around 10% and back to 2017 levels,” said Mr Zhan. “We think this is quite obvious as US multinationals have kind of slowed down their repatriation. The second thing is that we feel that Europe’s level of investment has bottomed out, and this year’s actual FDI flow data is already approaching that.”
Despite the potential recovery, risks remain including geopolitical risks, trade tensions and shifts towards more protectionist policies, which could obstruct FDI in the coming year.