Within the services sector, the dominance of financial and trading services declined from some two-thirds to less than half. Instead, FDI in services such as telecommunications, power generation and business services surged, often reflecting the opening of these industries to foreign investment.
What will the future bring? As Unctad’s report suggests, all indications are that the FDI downturn is over and that 2004 will see growth again, even if this growth will be unevenly distributed. In particular, developing countries are in the best position to capitalise on the upturn, while developed countries may well see a further drop in inflows.
The driving forces are economic growth, the increased profitability of transnational corporations, the rise in stock prices, an increase (partly related to the two latter factors) in cross-border M&As, and the further liberalisation of investment regimes. In some regions, additional factors kick in: Africa also benefits from the boom in commodity prices; Asia from the recovery of a number of industries with a strong FDI presence (especially electronics); and central Europe ought to be able to cash in on its accession to the EU.
As the shift in the sectoral composition shows, opportunities to attract FDI arise particularly in the services sector, especially in activities relating to the offshoring in services.
So the outlook is partly sunny, but the forecast is still uncertain. Macro-economic imbalances in the world economy may affect the final outcome. What is certain, however, is that competition for FDI will intensify. To get a place in the sun will require strenuous efforts by investment promotion agencies.
Karl P. Sauvant, director, Division on Investment, Technology and Enterprise Development, Unctad