Financial Times: Record flows to developing world boost global FDI

Record flows to developing world boost global FDI
By Vanessa Houlder
Published: January 12 2005 02:00 | Last updated: January 12 2005 02:00
Financial Times

Record investment flows to developing countries have sparked a recovery in global foreign direct investment, the United Nations said yesterday.

After three years of decline, world foreign direct investment (FDI) rose 6 per cent to $612bn (€466m, £326m) in 2004 as increased flows to developing countries and central and eastern Europe offset a slump in developed countries.

The UN Conference on Trade and Development (UNCTAD) predicted that a continuing improvement in economic activity, equity market valuations and mergers and acquisitions would fuel expansion of FDI over the medium term.

The positive outlook was underlined yesterday by A.T. Kearney, the consultancy, which declared that "a fundamental shift in investor outlook and risk perception is under way" as corporate investors perceive increased profit opportunities and reduced risk in leading emerging markets.

FDI in developing countries rose 48 per cent to $255bn from 2003. Karl Sauvant, director of UNCTAD's investment division, said the data was "good news" for developing countries, which now accounted for an estimated 42 per cent of global FDI inflows. This compared with 27 per cent in 2001-2003.

The US was the world's largest recipient of FDI with inflows of $121bn, pushing China into second place with half as much. The UK also rose to the top of the European league table with FDI more than doubling to $55bn from $21bn thanks to a revival of corporate profitability and mergers.

But overall, developed countries experienced a 16 per cent fall in FDI to $321bn, largely due to the repayment of intra-company loans in some countries, particularly Belgium, Germany and the Netherlands. These repayments do not appear in the FDI inflow statistics of the country where the parent company is based.

FDI flows to Asia and the Pacific reached $166bn, a 55 per cent increase over 2003. Improved economic performance, a more favourable policy environment, higher corporate profitability and a rise in mergers and acquisitions fuelled the growth.

A strong rebound in commodity prices helped FDI inflows to Africa increase for the second consecutive year to $20bn. UNCTAD predicted a further increase if high commodity prices prompted multinational companies to undertake new exploration projects in Africa, which accounts for just 3 per cent of global FDI flows. FDI flows to Latin America and the Caribbean rose for the first time in five years, up 37 per cent to $69bn. Following a dip, central and eastern Europe attracted a record £36bn worth of FDI inflows.