Q: What are the most striking findings in this year’s World Investment Report? What headline trends are identified, and why are they significant?
A: Global FDI flows fell by 23% to $1430bn [in 2017]. This is in stark contrast to the accelerated growth witnessed in GDP and trade. The drop was caused in part by a 22% [decline] in the value of crossborder M&A. But even discounting the large one-off deals and corporate restructurings that inflated FDI numbers in 2016, the 2017 decline remained significant.
Q: How is the current climate of protectionism in many key economies impacting global investment flows?
A: Unctad's data shows most new measures in 2017 are not protectionist in intent. Of the 126 foreign investment-related policy measures adopted by 65 countries, 84% sought to liberalise or promote investment. Entry restrictions for foreign investment were eased in a number of industries, including transport, energy and manufacturing, with emerging economies in Asia most active.
Many countries encouraged investment by simplifying administrative procedures, providing incentives and establishing special economic zones. New investment restrictions mainly reflected concerns about national security and the foreign ownership of land and natural resources.
However, it is true that the share of restrictive measures has spiked in recent months. From October 2017 to April 2018, one-third of new measures were restrictive or regulatory in nature. Some countries have adopted a more critical stance towards foreign takeovers, especially when national security, strategic domestic assets and technology firms are involved. Moreover, several countries are considering strengthening foreign investment screening.
Q: Is there any divergence in investment trends being seen in developed versus developing economies?
A: FDI flows to developed economies and economies in transition fell sharply, while those to developing economies were stable. As a result, developing economies’ share of global FDI grew to 47% in 2017, from 36% in 2016.
The $712bn FDI in developed economies was one-third below 2016’s level and this was largely due to a normalisation after last year’s flurry of M&As and corporate reconfigurations. Developing economies received $671bn, which means there was no recovery of the 10% decline in 2016.
Q: Which regions of the world are witnessing a downturn or are struggling with FDI, and why? Which ones are on an upswing?
A: Flows to Africa continued to slide, down 21% to $42bn, largely affecting the larger commodity exporters. Flows to developing Asia were steady, at $476bn. The region regained its position as the largest FDI recipient globally.
FDI in Latin America and the Caribbean rose 8%, to $151bn, lifted by the region’s economic recovery. It was the first rise in six years, but flows remained below the 2011 commodities-supported peak.
Flows to Europe declined by 92%, to $15bn, as FDI in the UK normalised after a burst last year. Flows to France and Germany rebounded. In North America, diminishing intracompany loans and divestments contracted inflows, largely on the back of a clampdown on tax inversions in the US. The latter saw flows decline 40% to $275bn. Nevertheless, US remained the largest FDI recipient in the world.
Flows to transition economies declined by 27% to $47bn, the second lowest level since 2005.
Q: What is your outlook for FDI flows in 2018, and what future trends or developments will impact investment in the near to medium term?
A: Unctad's projections for global FDI in 2018 show fragile growth. Global flows are forecast to increase marginally by up to 10%, below the past decade’s average. Higher economic growth projections, trade volumes and commodity prices would normally point to a larger potential increase in FDI. However, risks – including geopolitical – are significant and policy uncertainty abounds. Escalating trade tensions could negatively affect investment in global value chains.
Moreover, tax reforms in the US and increased tax competition may affect investment patterns. Longer term forecasts for macroeconomic variables contain downsides, including the prospect of interest rate rises in developed economies, with potentially serious implications for emerging market currencies and economic stability.