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Robust cross-border flows

UNCTAD’s World Investment Report 2007 released recently brings out the strong growth momentum in global foreign direct investment (FDI) inflows during 2006. For the third year in a row, the FDI inflows touched $1,306 billion, 38 per cent higher than in 2005 and not very much below the all-time record of $1,411 billion achieved in 2000. Economic growth across the world was generally robust and most economic regions — the developed world, the developing countries as well as the transition economies of South Eastern Europe and the Commonwealth of Independent States — have benefited. These findings are broadly in line with UNCTAD’s two previous reports, which also recorded the fact that cross-border mergers and acquisitions (M&As) rather than greenfield investments had emerged as the principal conduits of such flows. During 2006, on the back of strong stock market performances, the aggregate value of such deals increased substantially. Higher corporate profits made it possible for many transnational companies to plough back significant amounts. Retained earnings have thus become an important component of the FDI, accounting for nearly half of all inflows of developing countries during 2006. Favourable financing conditions as also the emergence of private equity have helped in cementing cross-border deals to a greater extent. The developed world led by the U.S. and followed by the U.K. and France received $857 billion of the FDI inflows. Among developing countries, which together accounted for $379 billion, the largest recipients were China, Hong Kong, and Singapore. India’s $17 billion is a fourth of what China received but is nevertheless significant because it is equal to the combined inflows into the country during the three preceding years.

India along with China has emerged as a major investor abroad. In India, the private sector companies — the Tatas and the A.V. Birla group among others — have gone in for major acquisitions abroad while in China the state-owned companies have pursued strategic assets abroad. This development heralds another phase of globalisation as large companies move nearer to their markets or acquire access to critical materials including oil and gas. A welcome development is that the geographical pattern of FDI is changing, with increasing inflows among the developing countries themselves. The outlook for FDIs is expected to be generally favourable over the near-term. Factors such as a possible slowdown in the U.S. and the developed world may well dampen the flows.

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