Q: What trends are driving FDI? What factors are constraining it?
A: Last year was a tough one for foreign investment. We saw global FDI inflows drop by 16% to $1230bn, which means flows are back at levels seen in 2009 at the height of the crisis. The fragility of the global economy remains at the top of the list of issues holding investors back, coupled with the uncertainty created by some investment-related policy developments and risks associated with geopolitical tension. New investment was also offset by some large divestments, notably in some developed markets, which explains in large part why FDI flows shrunk so drastically in 2014.
But there are also some factors that have been propping up investment. We have seen a reshuffle of the foreign investment profile in recent years. Developing country multinationals have built up a healthy appetite for investing, overtaking their developed country counterparts to become the dominant force behind global investment inflows. This has helped stem the decline in FDI. Relatively new sources of investment, such as private equity, sovereign wealth funds and state-owned multinationals, have helped to oil the flows, while infrastructure needs, industrial restructuring plans and the growing imperative to support sustainable development have also been drivers of FDI growth.
Q: From a corporate perspective, what is the outlook? Are companies bullish or bearish? Where do they see the greatest opportunities?
A: The overall mood is one of cautious optimism. As global economic indicators improve – GDPs notching up, trade flows easing, profitability improving – the appetite to invest also picks up. But of course the prognosis varies depending on regional and sectoral dynamics. For instance, executives from Africa and the Middle East are the most optimistic, with 67% expecting global FDI activity to improve over the next few years. Their counterparts in developing Asia share this sentiment.
Among developed countries, investment enthusiasm is most palpable among European executives, despite the continuing problems besetting that economic bloc. The mood is propped up by factors such as the European Central Bank's quantitative easing programme and large cash stockpiles that have been built up. Company heads in Latin America, North America and other developed economies, however, are less upbeat.
On a sectoral basis, the spending intentions of company heads suggest the financial and business services industries should see FDI expansion next year, while hi-tech, telecommunications, pharmaceuticals and other manufacturing industries could also grow. In developing countries the prospects are strong for agriculture and agribusiness, transport, telecommunications, hotels and restaurants, construction and extractive industries. Of course there is also a strong push towards a new frontier, with companies and venture funds moving towards impact investment, and pension funds and other public sources of finance working to mobilise finance for sustainable development. All of this could spur activity in development-related sectors such as water, infrastructure, energy and health.
Q: What's the global FDI outlook for 2015 and beyond?
A: Both Unctad's forecast model and our survey of large multinationals signal a recovery over the coming years. Current levels of FDI are still well below the boom period between 2005 and 2007. The percentage of big corporates indicating an appetite to invest over the next three years has risen to almost one-third and current crossborder M&A trends also augur a reversal of fortunes.
We expect FDI to rise to $1.5bn next year and $1.7bn in the year after, which should help put us back on track. However, a number of political and economic risks may still bedevil a recovery. Eurozone uncertainty is a concern, while geopolitical tensions and vulnerability in emerging economies persist. The environment is fragile, and fraught with uncertainty, unpredictability and instability, which is never a good bet for investors.