The global investment climate remains somewhat subdued as uncertainties – particularly the heightened political risk in Europe and the US, combined with China’s 'new normal' phase of slower economic growth and the end of the commodity super-boom – weigh on crossborder investment everywhere.
“Uncertainty is the big word these days,” says Michael Gestrin, senior economist at the OECD’s investment division.
At the same, emerging disruptive forces are inevitably affecting the global FDI matrix. While in the West investment remains weak, intra-Asian investment is rapidly increasing as the region strengthens its internal trade and investment ties, and gradually pivots to China away from its established but weakening Western partners.
Africa is slowly delivering on its investment potential, and the worst seems to be over for the Middle Eastern countries, whose investment recovery tracks the rebound that oil prices experienced in 2016. Besides, the fourth industrial revolution and the Internet of Things are creating new models and disrupting value chains, also creating new forms and methods of foreign investment.
There is no doubt that 2016 will go to the history books as one of the most eventful political years on record. The vote for Brexit in the UK and the election of Donald Trump as US president sent shockwaves across the globe as they threaten to unravel established centres of interests such as the EU, or long-awaited developments such as the lifting of US sanctions on Cuba and Iran or the once US-sponsored Trans-Pacific Partnership. The political landscape saw the rise of other outsiders such as Rodrigo Duterte in the Philippines, the fall of Dilma Rousseff in Brazil, and the death of long-serving leaders such as Islam Karimov in Uzbekistan, Fidel Castro in Cuba and King Bhumibol Adulyadej in Thailand.
All of these events resonated deeply in the minds of investors, creating great uncertainty over the future of trade and investment in their respective countries, regions and, eventually, in the world as whole – an uncertainty that will not fade overnight.
“There’s a kind of weak aggregate demand, policy uncertainties, including the election years for a number of major counties, plus the geopolitical risks; all these things will continue into 2017,” says James Zhan, director of investment and enterprise at Unctad.
Global greenfield FDI is about 5% lower in terms of project numbers, but 3.2% higher in terms of capital expenditure in the first 10 months of 2016 when compared with the same period in 2015, according to figures from greenfield investment monitor fDi Markets. However, Unctad predicts the total value of global FDI (greenfield investment plus M&A and other crossborder financial flows) will fall by 10% to 15% in full 2016, although this decline is “unsurprising” considering that 2015’s 35% growth was mostly driven by the group reconfiguration, tax avoidance or ‘inversion’, that has now been discouraged by the EU and US government, according to Mr Zhan.
Looking forward, “we’re predicating a kind of moderate recovery in 2017”, he says. “It’s a modest recovery because this year investment was very low. Also, economic forecasts still signal a moderate improvement. Second, we see that companies are still holding huge amounts of cash. So there’s still potential for investment there.”
IPAs across the globe will have to come to terms with the quickly changing political landscape, which will evolve further in 2017 as France, Germany and the Netherlands hold elections that will be key to the future of the EU.
“Investors are keeping their money and hesitating a bit,” Bostjan Skalar, CEO of the World Association of Investment Promotion Agencies (Waipa), told fDi Magazine on the sidelines of Waipa’s annual World Investment Conference in October.
“We know there is a need for $1300bn a year to fill the current investment gap across the world. There’s a lot of liquidity in the market, but it’s not equally spread. The new narrative of the investment promotion should go in the direction of promoting sustainable investment and empowering IPAs,” he added.
Beyond these global uncertainties and imbalances, the overall FDI picture appears very uneven when broken down by geographical regions.
The Asia-Pacific region remains by far the world’s largest recipient of foreign investment, with total announced greenfield FDI reaching $269.1bn between January and October, 2016 up by 3.1% from a year earlier, according to fDi Markets figures. Intra-Asia investment makes up 60.5% of that figure.
India is the region's hottest FDI play, as prime minister Narendra Modi continues his aggressive reform agenda, although overall greenfield FDI was down by 8.5% in the period from the record levels of a year earlier.
China came in as second but also recorded a slight drop in greenfield FDI (-1.1% year-on-year) as Beijing shifted the country’s development mode to consumption from its previous focus on infrastructure investment and labour-intensive, export-oriented sectors.
On the other hand, several other south-east Asian countries are capitalising on the relocation of labour-intensive productions out of China as global corporations chase cheaper workforces elsewhere. Vietnam stands out among the biggest beneficiaries of this latest trend, with FDI growing by annual 60.8% to $29.7bn in between January and October, alongside Bangladesh (161% to $6.3bn) and Cambodia (37% to $4.4bn).
Middle Eastern countries also fared well as oil prices recovered throughout the year from the lows touched in January. The whole region attracted $45.5bn in FDI in the first 10 months of the year, from $18.3bn a year earlier. Conversely, sluggish economic growth and political uncertainty over the future of the EU hampered investment in western Europe, which saw greenfield FDI falling at annual 17.8% to about $82bn over the period.
Greenfield FDI in the US also decreased by 26.7% to $46.5bn as investors remained in wait-and-see mode in the run-up to the November 8 presidential elections.
Africa came in as the world’s second largest regional recipient of greenfield FDI with $85.5bn in the first 10 months of the year, which represents a leap forward from the $57.8bn recorded in the same period of 2015, fDi Markets figures show.
“Some countries will keep doing quite well, such as Rwanda or Mauritius, or even Ethiopia, despite some of the political issues,” says Celestin Monga, chief economist at the African Development Bank. On the other hand, others are experiencing greater difficulties, such as Nigeria, which represents one-third of Africa’s GDP and is witnessing negative growth due to declining oil prices.
As importantly, “more and more countries, from Senegal to Rwanda, are copying the strategy that Mauritius successfully used” in developing labour-intensive industries, as opposed to capital-intensive industries in which they have less comparative advantage, says Mr Monga.
Humans vs robots
Beyond geographical differences, there are several trends that will affect global FDI in future – first and foremost being the way technology is changing production, investment and the form of globalisation.
“How quickly these changes then translate into investment is a tricky thing,” says the OECD’s Mr Gestrin. “There are now certain technologies – 3D print is the one that’s often cited. If I’m a foreign investor now with the sort of advance in 3D printing, I might not necessarily need to set up a factory in a foreign country. I can lease 3D printing facilities and then set up my desk at my computer and send the information to the 3D printer that’s closer to the customer, and then the product in question is being generated on a on-demand basis.”
It is too early to assess the long-term impact on global crossborder investment from the ongoing fourth industrial revolution. Yet its rise, together with political headwinds in the West and the rapid rebalancing of political and economic power towards Asia, are historic occurrences that will inevitably affect global investment for years to come.