UNCTAD forecasts a 10 percent decline in global foreign direct investment

Global foreign direct investment is expected to decrease by 10 percent this year compared to the record level recorded in 2007, as leading companies have cut back on spending plans, the United Nations Conference on Trade and Development (UNCTAD) announced on Wednesday in its annual report.

Foreign direct investment rose by 30 percent in 2007 to $1.83 trillion, despite the outbreak of the international financial crisis in the middle of the year, UNCTAD highlighted in its annual report on investment trends. This year, investments are expected to decline, mainly due to a sharp drop in merger and acquisition activity, their main driver, according to the UN agency.

“Foreign direct investment in developing countries as a whole is likely to remain fairly stable. The main decline will be recorded in the area of mergers and acquisitions,” said UNCTAD Secretary-General Supachai Panitchpakdi at a press conference announcing the report. Cross-border mergers and acquisitions, mainly among developed countries, decreased by 29 percent in the first half of the year compared to the second half of 2007, UNCTAD reported. In the entire previous year, their total value reached $1.64 trillion.

A survey conducted among 226 of the largest multinational companies from April to June, before the financial crisis escalated, showed that 21 percent of companies expect a significant increase in foreign direct investment over the next three years. In comparison, the corresponding share in the previous year was 32 percent. The latest survey covering 2007 and providing hints about trends in 2008 showed that 68 percent of companies still intend to increase investments over the next three years, but the share of those planning only moderate increases in investment rose to 48 percent, compared to 38 percent in the previous year.

Companies are sensitive to the risk of further deterioration in the global economy, concluded UNCTAD. Half of the respondents said that the possibility of a decline in economic activity poses a significant additional threat to their investment plans, and 39 percent said that financial instability has already significantly negatively affected their investment intentions for the next three years.

UNCTAD’s report showed that companies consider China, India, the USA, Russia, and Brazil to be the most attractive investment destinations. Last year, strong investment flows were recorded in all regions, and governments continue to improve the investment climate for multinational companies and foreign direct investment, despite growing concerns about rising protectionism, the UNCTAD report further states.

This resulted in a level of foreign direct investment worldwide of $15 trillion, representing activities from about 79,000 multinational companies, which own 790,000 foreign subsidiaries, the report further states. Developed countries continue to attract the largest share of foreign direct investment, amounting to $1.25 trillion in 2007, led by the USA, where a weak dollar spurred the inflow of these investments, followed by the UK, France, Canada, and the Netherlands.

Foreign direct investment in developing countries surged by 21 percent to $500 billion, with Africa attracting a record $53 billion. Developed countries were again by far the largest source of foreign direct investment, with $1.69 trillion last year, with the USA still holding the position of the largest investor at $314 billion. Sovereign wealth funds make up a relatively small but growing share of foreign direct investment, totaling $10 billion in 2007, primarily in the form of cross-border mergers and acquisitions, the report further states. (H)