Inward FDI (IFDI) has accounted for the largest share of foreign capital inflows into developing countries, which have also become important sources of outward FDI (OFDI). Unfortunately, during the global financial and economic crisis of 2008-2009, FDI flows, like world trade, contracted sharply. Now, however, global FDI flows have begun to recover, according to the United Nations Conference on Trade and Development (UNCTAD)’s 221-page “World Investment Report 2010” (WIR 2010), released last week, its 20th annual authoritative report on global FDI trends. WIR 2010’s findings for Turkey’s recent IFDI flows were already reported on Friday in Today’s Zaman under the title “FDI flows to Turkish market dry up amid 2009 crisis.” In this column, I will summarize the report’s major conclusions to shed light on Turkey’s global relative FDI performance. Next week, taking a broader and longer perspective, I will discuss, based on the latest UNCTAD data, Turkey’s FDI performance and potential.
WIR 2010, after reviewing the recent global and regional FDI trends as well as the FDI-related policy developments in its first three chapters, focuses in its fourth chapter on a special topic related to FDI, as the previous annual reports had done. This year’s report focuses on climate change under the special topic “Leveraging Foreign Investment for a Low-Carbon Economy.” It highlights the role multinational corporations can play in dealing with climate change through mitigation and adaptation, especially by reducing greenhouse gas emissions in developing countries.
The report’s findings in its first two chapters on the recent global and regional FDI trends can be summarized as follows: (1) All components of IFDI flows, i.e., equity investment, intra-company loans and reinvested earnings, after declining 16 percent in 2008, falling a further 37 percent to $1.1 trillion in 2009 and bottoming out in second half of 2009, staged a modest but uneven recovery in the first of half of 2010. (2) Cross-border mergers and acquisitions (M&As) registered a faster recovery -- with the help of sovereign wealth funds that partially compensated for the sharp decline in FDI by private equity funds -- while greenfield FDI proved to be more resilient during the crisis. (3) The services and the primary sectors continued to increase their shares of IFDI flows over the manufacturing sector. This trend is expected to continue. (4) Developing and transition economies, led by large emerging economies such as China -- the second largest global recipient of FDI after the US -- have led the recovery as favored destinations for FDI, capturing half of global IFDI flows and a quarter of OFDI flows. (The larger emerging economies, again led by China, are also becoming increasingly important home countries for OFDI.) But many structurally small, vulnerable and weak least developed economies still failed to overcome the barriers to attracting IFDI. (5) Global IFDI stocks and assets continued to rise despite the reductions in the sales and value-added of multinational corporations’ foreign affiliates due to the financial and economic crisis. (6) Based on UNCTAD’s “World Investment Prospects Survey 2010-2012” of investment promotion agencies and FDI experts, there is cautious optimism for FDI prospects in the short term. Global IFDI flows, led by cross-border M&As, are expected to reach $1.2 trillion in 2010. They are expected to regain momentum in the medium term, with global flows projected to rise further in the range $1.3-1.5 trillion in 2011, and to approach the pre-crisis levels in the range $1.6-2 trillion in 2012. Developing and transition economies, which now host globally the majority of foreign affiliates’ labor force, are expected to further increase their shares in global IFDI flows. These flows will be destined increasingly for the more technology-intensive sectors instead of the most labor-intensive ones. But all these encouraging prospects face serious risks and uncertainties, primarily due to the fragility of the global economic recovery, threatened by the murky state of financial regulatory reform and the sovereign debt crisis, especially in the EU.
I will continue this discussion in my column tomorrow by looking into the main findings of the report.
