Between 2003 and 2008, global greenfield FDI projects grew 11% annually, creating millions of jobs and raising trillions of dollars in capital investment. Dr Henry Loewendahl analyses trends during this boom time for FDI and looks at the long-term prospects for further growth.

This report provides a comprehensive analysis of crossborder greenfield investment trends in 2008 and the outlook for 2009, prepared by the fDi Intelligence division of the Financial Times Ltd. It is an essential guide to what happened in the global FDI market last year and a forecast for this year and beyond.

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The report starts with an overview of global FDI, examining trends in greenfield investment during the period between 2003 and 2008. There has been considerable year-on-year growth in crossborder investment as companies have globalised their operations. Greenfield FDI projects recorded an average annual growth of 11% during this period, job creation grew by 12% and capital investment associated with these projects 15% a year. During the period 2003 to 2008, the Financial Times Ltd tracked 69,809 FDI projects, $5700bn-worth of capital investment and 16.8 million direct jobs created by multinationals in their overseas subsidiaries.

Greenfield growth

The growth in greenfield FDI is very much in line with the growth of world exports, which has averaged about 15% a year. Trade and investment are closely linked. Typically, a company will establish overseas operations in a particular country or region once business there reaches a critical threshold. As international production networks are put in place, this leads to a growth in intra- and inter -company trade.

Some 15,551 greenfield FDI projects worth about $1500bn were recorded in 2008. These projects are expected to create approximately 4 million direct jobs around the world. When the indirect employment created by FDI is taken into account, FDI helped created an estimated 12 million jobs in 2008.

 

Influencing investment

FDI is highly correlated with GDP and market size. Investment is also influenced by the

ability of companies to raise financing, especially in technology sectors, and by mergers and acquisitions (M&A). With the global recession reducing global GDP and the financial crisis making it more difficult to raise financing, greenfield FDI projects can be expected to fall by about 10 to 15%. The preliminary data for January to March 2009 show a few percentage points decline in FDI and this is expected to escalate.

The fDi Intelligence forecasts for greenfield FDI in 2009 are in line with the 9% decline in world exports expected by the World Trade Organization. However, they differ significantly from forecasts made by the Economist Intelligence Unit, UNCTAD and Columbia University, which expect FDI flows to fall by up to 50% in 2009. The main reason for this difference is because global FDI flows are dominated by M&A activity, which is expected to decline sharply this year, not only because of the difficulty in raising finance but also because the value of deals will go down because companies’ market capitalisation is far lower.

The impact of the global recession and credit crunch on real investment is therefore far lower than on overall FDI flows. The analysis in the 2008 review of destination and source markets for FDI provides key insight into why the greenfield FDI market continued to grow so strongly in 2008 and what the drivers are for long-term growth in FDI.

 

Recent transformation

The analysis of destination markets indicates how the global FDI market has transformed in recent years. In 2008, Asia-Pacific was the leading region for FDI, accounting for 30% of global FDI projects, 29% of capital investment and 36% of FDI jobs. While FDI levels are still relatively low compared to the other regions of the world, FDI in Latin America and the Caribbean, Middle East and Africa boomed in 2008. The number of FDI projects recorded in Africa nearly doubled.

The shift to emerging markets is also clear at city level – in 2008, for the first time, Dubai became the number one city in the world for FDI, usurping London. Shanghai and Beijing were also among the top five cities. The importance of cities as growth poles of the global economy is indicated by the fact that the top five cities attracted 8% of global FDI projects. The huge urbanisation taking place, foremost in Africa but also in China and Latin America, is likely to lead to cities from developing countries rapidly rising in the ranks of the leading FDI locations in the world.

 

Slow growth in China

Within each region of the world, the 2008 review reveals some interesting trends. In Asia-Pacific, the leading region for FDI, growth slowed in China in 2008. A decline is forecast in greenfield investment in China in 2009 as the sharp reduction in GDP growth reduces China’s market size by about $150bn compared with what investors were projecting just a year ago. The growth economies for FDI in 2008 were Thailand, Azerbaijan and Kazakhstan.

In Europe, Turkey was the fastest-growing location for FDI, followed by Russia and Serbia. Russia became the sixth leading location for greenfield FDI projects in the world in 2008.

In Latin America and the Caribbean, Mexico was the number one location for FDI projects and Brazil was top for capital investment. The other leading countries for FDI were Argentina, Colombia and Chile. These top five countries accounted for three-quarters of FDI in the region. Peru was the fastest-growing country for FDI, and former star performer Costa Rica recorded the biggest decline in projects – although relative to its size, Costa Rica remains hugely successful in attracting FDI.

In Africa – the fastest-growing region for FDI in the world – the top countries for FDI projects in 2008 were South Africa, Morocco, Egypt, Algeria and Tunisia. In terms of capital investment, Nigeria was the leading location and Libya was among the top five. Uganda, Mozambique and Ghana were the fastest-growing locations for FDI.

Greenfield investment in the Middle East is dominated by the United Arab Emirates – and Dubai in particular. In 2008, Dubai accounted for 35% of FDI projects in the region. Dubai was also among the top five cities in the world for outward investment – measured by capital investment by Dubai headquartered companies overseas. And Oman was the fastest-growing country in the Middle East for inward investment.

 

Industry trends

The 2008 review also examines FDI trends by industry. It reveals the shift of the global FDI market to services, reflecting the wider shift in the world economy. For the first time, financial services overtook software and IT services to become the leading sector for FDI. These two sectors, combined with business services, accounted for 27% of global FDI projects, more than the 23% share accounted for by manufacturing projects.

Manufacturing projects have declined sharply from their peak of 34% of FDI projects in 2003. The growth of emerging industries, in particular environmental technologies, is also a key trend, with the number of FDI projects in alternative and renewable energy increasing 10-fold from 2003 to 2008.

Overall, the key trends and main drivers of the FDI market include the shift to developing countries and rapidly urbanising cities, and to service sectors and the emerging environmental technology sectors.

 

About the data

This report is based on the fDi Markets database of the Financial Times Ltd, which tracks greenfield investment projects. It does not include M&A or other equity-based or non-equity investments. Only new investment projects and significant expansions of existing projects are included. fDi Markets is the most authoritative source of intelligence on real investment in the global economy and the only source of greenfield investment data that covers all countries and industries worldwide.

The data presented includes FDI projects that have either been announced or opened by a company. The data on capital investment and job creation is based on the total investment a particular company is making at the time of the project announcement or opening. Because companies can raise capital locally, phase their investment over a period of time, and channel their investment through different countries for tax efficiency, the data used in this report is different to the official data on FDI flows. The data from fDi Markets is an accurate and real-time indicator of the real investment that companies are making in their overseas subsidiaries.

The data presented includes estimates for capital investment and job creation made by algorithms (patent pending) when companies do not release the required information. Over the dataset used in this report, the algorithms achieve almost 100% accuracy.

The investment projects tracked by fDi Markets are being constantly updated and revised based on new intelligence received and by algorithms constantly improving their accuracy over time. The data presented in this report may therefore differ slightly from the real-time data which is available on the website: www.fdimarkets.com.

The World Bank, UNCTAD, Economist Intelligence Unit and more than 100 governments around the world, as well as major corporations, use this data as their primary source of intelligence on greenfield investment trends.

 

Dr Henry Loewendahl is product director for fDi Intelligence.

 

IN FOCUS

 

FDI trends 2003-2008

Global FDI accounted for a total of 69,809 projects, which generated nearly $5700bn

of capital investment and created more than 16.8 million jobs between 2003 and 2008. Over the six-year period, figures have steadily increased with an average annual growth of 11% in project numbers, 16% in capital investment and 12% in job creation.

Despite the global recession in 2008, figures reached a peak during the year with a 30% increase in project numbers, 56% in capital investment, and 37% in job creation when compared with the 2007 figures. Due to the lag effect of FDI, the effects of the global recession may not be seen until 2009.

In terms of individual project value, this peaked in 2008 with projects involving an average of $97m in investment and the creation of 257 jobs. In comparison, between 2003 and 2008 the average investment was $81.5m per project, with the creation of 241 jobs. Surprisingly, 2003 posted second highest valuable projects after 2008, with

an average investment of $85m and 248 jobs created.

In 2008, fDi Intelligence tracked a total of 15,551 FDI projects, which together consisted of more than $1500bn in capital investment and resulted in the creation of almost 4 million jobs.

There was generally a slow start across FDI in 2008 with figures picking up in the second quarter then eventually slowing down again at the end of the year. There was a notable dip in project numbers in July and August, although August consisted of the highest average investment, $124.8m per project. This was primarily due to the biggest project of the year being recorded in August when TransCanada Corp announced its plan to build a pipeline to deliver natural gas from the Alaska North Slope. With costs estimated up to $30bn, the gas line could be the largest capital project in North America in the coming years.

As the credit crunch intensified, the average percentage fall in the months from October to December was 11%. However, in November and December 2007 there was also a drop in project numbers – an average fall during these two months of 10%, suggesting that a fourth quarter fall could be accredited to seasonal trends as opposed to the recession.

Global FDI by number of projects and Capex, 2003-2008

Global FDI by number of projects and Capex, 2008