The decreasing value of foreign direct investment in the world

GRZEGORCZYK Inwestycje spadły i na świecie i w Polsce jamnik

In the last year there were fewer international mergers and acquisitions (M&A) and fewer investment projects of factories built from scratch. The value of FDIs in Poland fell by more than a half.

The experts from United Nations Conference on Trade and Development (UNCTAD) are hoping for a slight recovery this year. Most of the countries in the world participate in the fierce competition to attract investments — over 80 states have already adopted industrial development strategies.

According to the annual World Investment Report published by UNCTAD, in 2017 the value of foreign direct investments (FDIs) in the world fell by 23 per cent. A sharp drop was recorded in developed nations and in countries undergoing economic transition, while in developing economies the rate of growth was close to zero.

Last year the value of global FDIs fell to USD1.43 trillion, which contrasted with the increase in GDP and trade. The decrease in the overall value of FDIs resulted from a 22 per cent decline in the value of international mergers and acquisitions (USD694bn compared with USD887bn in 2016) and a 14 per cent decline in the value (amounting to USD720bn) of announced greenfield investment projects.

  • FDI flows to developing countries remained at a stable level of USD671bn, but this means that they did not make up for the 10 per cent decrease recorded in 2016;
  • Investments in transition economies fell by 27 per cent to USD47bn. This is the lowest level recorded since 2005;
  • Investments in Africa continued to shrink — they amounted USD476bn, i.e. down 21 per cent from the year before;
  • Asia regained the title of the largest recipient of FDI in the world. In 2017, the value of such investments in that region was USD476bn;
  • FDI in Latin America and the Caribbean grew by 8 per cent, to USD151bn. This was the first increase in six years, but the inflows of investments are still below the peak levels recorded in 2011;
  • The inflow of FDI to the least developed countries declined by 17 per cent (USD26bn); and
  • The value of FDI flows to developed countries decreased by 37 per cent, and was USD712bn.

How does Poland match up?

Last year, the value of FDI inflow fell to USD6.43bn from USD13.9bn in 2016, which means a decrease of more than a half. The Czech Republic attracted investment projects worth USD7.4bn and has beaten Poland for the first time since 2013. The situation clearly improved in Hungary — in 2017 the inflow reached almost USD2.5bn. Slovakia also moved from a negative to a positive balance, acquiring investments worth nearly USD2.3bn. The value of FDI in Latvia increased almost fivefold compared with the year before (amounting to USD721m), and in Lithuania the increase was twofold (with investments reaching USD596m).

Changes among the leaders

In 2017, the United States maintained its leadership among the countries receiving the most foreign investments. China was ranked second, replacing the United Kingdom, which had dropped out of the top twenty. The third spot belongs to Hong Kong.

According to UNCTAD experts, the sharp decline in the value of investments in the United Kingdom (to USD15bn) is the result of a drop in the number of so-called megadeals — globally there were fewer M&A transactions and fewer ownership changes in international corporations, which had significantly raised the level of FDI in the previous year. The value of M&As had decreased by 29 per cent. Even the United States were heavily affected by this change. Despite having retained the first place in terms of received investment, the value of FDI inflow to this country decreased by USD182bn.

Meanwhile, the United Kingdom significantly changed its position in the ranking of the countries with the highest FDIs outflows — from the 158th to the 4th place. The United States, Japan and China also remained near the top of this list.

In 2017, Polish companies invested USD3.6bn abroad, while in 2016 the value of their investments reached over USD8bn, and in 2015 amounted to USD4.9bn. That was still the best result among the countries of Central and Southeast Europe (CSE). However, in this respect Poland still falls far behind the United Kingdom (USD99.6bn in investments in other markets), Germany (USD82.3bn) or France (USD58.1bn). Among the member states of the European Union, better results were also recorded in Austria, Belgium, Denmark, Ireland, Luxembourg, the Netherlands, Spain and Sweden (the table below shows data for 2016 and 2017).

Opportunities and threats

UNCTAD experts predict that this year the value of FDIs in the world will increase slightly, by 5 percent, to USD1.5 trillion, but that will still be below the average for the last decade.

  • FDI flows to Africa are forecast to increase by about 20 per cent;
  • FDI flows to Asia will remain at the level recorded in 2017;
  • FDI flows to Latin America will fall slightly;
  • FDI flows to transition economies will increase by 20 per cent;
  • FDI flows to developed countries are projected to grow by 5-10 per cent, and will amount to USD770bn;
  • FDI flows to Europe will increase by 15 per cent;
  • and the FDI flows to North America will grow by 5 per cent.

The flow of capital may be hindered by political tensions. UNCTAD assumes that multinational enterprises will probably delay their investments until the climate is more stable. The Committee on Foreign Investment in the United States (CFIUS), has been more active recently in blocking and discouraging the acquisitions of American companies. The European Commission, Germany, Italy and the United Kingdom have all announced reforms to their investment control regimes already in 2017. Meanwhile, the tax reform adopted in the United States, which encourages companies to repatriate capital (over USD3.2 trillion) from their overseas businesses, will result in a drop in investments originating from the Unites States.

For the time being, the survey conducted among the executives of multinational enterprises, and published in the UNCTAD report, provides a slightly different picture. Almost 80 per cent of the respondents are planning to increase their investment this year. Out of the group of respondents who consider investments in the next three years as highly probable or probable, 30 per cent chose destinations in developed countries, and almost 20 per cent are targeting the developing economies in Asia, Latin America and the Caribbean.

Strategic approach

Many countries are continuing policy efforts aimed at attracting FDI. Last year, in 65 countries, as many as 126 policy measures were introduced, out of which 84 benefited investors. They involved liberalization of entry conditions in many industries including transport, energy, and manufacturing. They facilitated the investment process through simplifying administrative procedures, coupled with incentives and the creation of new special economic zones.

At the same time, however, more countries are adopting a more critical attitude towards foreign investment. Restrictions are associated with concerns regarding national security and the acquisition of land and natural resources by foreign entities. Some countries have increased the supervision of foreign takeovers, especially in the case of strategic assets and technological companies.

Over the last five years at least 84 countries — including developed and developing nations accounting for approx. 90 per cent of the global GDP — have adopted industrial development strategies. Development policies are focused on reducing unemployment and stimulating growth, joining global supply chains or promoting industrialization.

Governments, especially in developed countries, are increasingly focusing on the so-called fourth industrial revolution. António Guterres, the Secretary-General of the United Nations, believes that the world is on the eve of a revolution, in which, thanks to technology, production becomes better, cheaper and faster than ever before. This provides an enormous opportunity for developing countries to achieve economic development, to leapfrog to higher levels of development and to join the global value chains thanks to cheaper transport and communication, and could ultimately enable emerging economies to achieve the positions of global leaders in specific sectors.

At the same time, however, the changes constitute a threat to the least-developed countries, which may lose the most due to the lack of adequate infrastructure or access to financing. In a world of increasingly automated manufacturing, cheap labor is becoming less and less relevant. “Meanwhile, an improvement in the living conditions is only possible when new jobs are created, and these still rely heavily on production,” wrote António Guterres in the foreword to the Global Investment Report.

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