Global FDI inflows decline by 25 per cent

As governments are gradually winding down stimulus packages and in some cases reducing public investment in the face of mounting deficits and debt levels, private investment in the form of foreign direct investment (FDI) does not appear ready to step up to the plate.
Global FDI flows actually declined again in the second quarter of 2010, after four quarters of low-level recovery in the wake of the financial crisis. FDI inflows in the second quarter were down by 25 per cent compared to the previous quarter and by 17 per cent compared to the same quarter of last year, and UNCTAD’s FDI Global Quarterly Index fell from 113 to 85.
Early estimates for 2010 based on FDI flows for the first and second quarters, combined with data on greenfield investments and merger and acquisitions (M&A) -related flows for the third quarter, now present a picture of stagnant FDI activity for the year. That would imply that 2010 flows will still be 25 per cent less than the average pre-crisis levels, and 40 per cent less than those of the peak year of 2007, the report said. "Even though FDI may increase modestly towards the end of this year, a new FDI boom clearly remains a distant prospect."
The low second-quarter results were due to a marked decline in intra-company loans – one of the three components of FDI flows – as parent firms called back loans from their affiliates, especially those in the US and UK. Reinvested earnings, usually a stable component of FDI, also tumbled by 52 per cent as firms repatriated a larger share of the earnings of their foreign affiliates.
These developments, aggravated by new risk factors such as potential currency wars and mounting trade protectionism, indicate that a full recovery of FDI may require renewed global efforts to improve the functioning of world financial markets and to promote stronger economic growth.
FDI flows are especially sensitive to the risk of competitive depreciations of currencies – a potential currency war – as they affect asset prices, the competitiveness of affiliate exports, the value of profit transfers and the cost of production. As such, depreciations are a double-edged sword for FDI, affecting different types of FDI in different ways, with positive effects for the purchase of assets and for export-oriented investments, but negative effects for services investments and for market-seeking FDI.
In the face of a significant uncertainty, transnational corporations (TNCs) will tend to delay investment commitments.
As governments recognise the need for private investment to reassume its leading role, the overall trend towards investment liberalisation, facilitation, and promotion continues.
"At least 41 countries recently adopted policy measures affecting foreign investment, 28 of which were in the direction of greater liberalisation or facilitation," the report said adding that countries in Asia were particularly active.
At the same, the crisis has led many countries to strengthen the role of the state in the economy, and clearly stronger regulation of the financial sector is a broad trend in the wake of the financial crisis. Investment protectionism remains a serious potential threat to the recovery of foreign direct investment (FDI), particularly protectionism that is 'hidden' in the implementation of existing laws and regulations.
At the international level the investment regime continues to be shaped by bilateral agreements – 46 of the 50 new agreements that were signed since April 2010 are bilateral taxation, investment, or free trade agreements. Especially notable is the continued trend towards signing double taxation treaties.