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February 28, 2011, Monday

Slow recovery of foreign direct investment (1)

For several decades, foreign direct investment (FDI), through the integrative activities of multinational corporations, has been the most important instrument of globalization.

The global financial and economic crisis led to a steep fall in FDI flows to developing countries, their largest source of international private capital that also includes portfolio equity and debt finance. It also ended in 2008 Turkey’s six-year-long inward FDI (IFDI) surge. FDI, more dependable and stable than other forms of international private capital, especially “hot money,” can provide important macroeconomic benefits, by financing the current account deficit and creating employment, and microeconomic benefits, by transferring new technology and creating positive spillovers. As the world economy has rebounded from the global crisis, FDI in developing countries, which are expected to grow twice as fast as developed countries, is recovering but slowly, and concentrated in only a few emerging market economies.

According to the table below, Turkey’s IFDI surge, which accelerated in 2004, reached its peak and slowed down in 2007. IFDI decreased by 12 percent in 2008 and this decline accelerated in 2009, when it shrank by 57 percent. It began to recover in 2010, rising by 6 percent, boosted by a 40 percent rise in real estate investments. The slump in Turkey’s IFDI reflected the sharp decline in global FDI since 2007. Turkey had been fortunate to ride the upward global FDI trends since 2004, which reflected the existence of favorable high growth-low inflation conditions around the world. But with the outbreak of the global crisis, FDI outflows -- whose growth generally trails trends in economic growth by at least two quarters -- from leading source-countries plummeted as major multinational companies cut back on both domestic and foreign investments.

What are the prospects for Turkey’s IFDI to resurge? They depend on both external and domestic factors, as had been the case with the initial surge. According to the United Nations Conference on Trade and Development’s (UNCTAD) latest Global Investment Trends Monitor issued last month, worldwide FDI recovery is still hesitant. Global FDI inflows increased marginally from $1.11 billion in 2009 to $1.12 billion in 2010, reflecting the strong rebound in Brownfield (mergers and acquisitions) FDI, which normally react faster to changing economic conditions, from $250 billion to $341 billion, against the continued decline in Greenfield FDI. Although FDI flows to developed countries continued to decline from $566 billion in 2009 to $527 billion in 2010, flows to developing and transition economies rose, reflecting their relatively fast economic recovery and rising South-South flows. Developed countries, whose steady economic growth and FDI recovery are still critical to a sustained resurgence in global FDI, absorbed less than half of global FDI for the first time. UNCTAD estimates that Turkey’s FDI inflows contracted from $7.6 billion in 2009 to $7 billion in 2010, with net Brownfield FDI dropping from $2.8 billion to $2.1 billion. UNCTAD projects global FDI flows in 2011 between $1.3 trillion and $1.5 trillion, helped by continued global economic recovery that will boost the profits and market valuation of multinationals. UNCTAD notes that expected global FDI recovery in 2011 could be derailed by risks related to currency volatility, sovereign debt and FDI protectionism. The current political turmoil in the Arab countries of North Africa and the Middle East has the potential to exacerbate not only regional but also global risks to a sustained resurgence in FDI flows.

The 116-page report, World Investment and Political Risk, issued by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) last December, found that investors were cautiously optimistic about the prospect of a global recovery in IFDI led by developing countries. For the second year in a row, however, MIGA’s survey of the executives of large multinationals operating in developing countries revealed that their major concern in the next three years was political risk, dominating their business concerns such as small market size, scarcity of finance and poor infrastructure. Tomorrow I will conclude my discussion of the prospects of IFDI resurgence in Turkey.

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