Global FDI to fall 30%; to remain subdued in 2010: UNCTAD

Painting a grim picture on cross-border investments, UNCTAD today said global Foreign Direct Investment flows will shrink by 30 per cent this year and recover only marginally during the next year.

"FDI inflows will fall from about $1.7 trillion in 2008 to below $1.2 trillion in 2009. Recovery is expected to be slow in 2010, reaching no more than $1.4 trillion, but gathering momentum in 2011 to approach $1.8 trillion," the United Nations Conference on Trade and Development said in a report.

The UNCTAD said that a major contributing factor to the decline in global FDI flows has been growing divestments by transnationals worldwide.

Since mid-2008, these divestments, which can take the form of repatriated investments, reverse intra-company loans, or repayments of debt to parent firms, have exceeded gross FDI flows in a number of countries, it said.

The report said FDI inflows declined in the developed countries, where the financial crisis originated, while in developing countries and the transition economies of South-East Europe and the Commonwealth of Independent States (CIS) continued to rise last year.

"The crisis has changed the FDI landscape, with a surge in the developing and transition economies' share in global FDI flows to 43 per cent in 2008," it said.

Citing the reasons for the changing pattern, it said there is a large decline in FDI inflows to developed countries, which in 2008 shrank by 29 per cent to $962 billion as against last year.

Despite this, the US remained the world's largest recipient country followed by France, China, UK, and Russia.

FDI inflows to developing economies rose by 17 per cent in 2008 to $621 billion compared to the previous year. However, the report said that in 2009, FDI flows to all the regions would "suffer a decline".

The report also said that cross-border mergers and acquisitions (M&As) - a major source of growth of FDI in previous years- declined significantly as financial markets seized up in the second half of 2008. 

"Taking that year (2008) as a whole, the value of such transactions fell by 35 per cent to $673 billion and sop far in 2009 the rate of M&As has continued to fall," it added.

Private equity firms, which had earlier fuelled the rise in M&As, saw the value of their cross-border transactions drop 38 per cent in 2008, with a sharper decline registered in the first half of 2009, it said.    

"Once the global economy is on its way to recovery, the exit of government funds from ailing industries could provide the catalyst for a new wave of cross-border M&As," the report said.    

The report further said that last year, 110 new FDI-related measures were introduced globally, of which 85 were more favourable to FDI.