An estimated amount of US$1.4 trillion was realised in FDI inflows globally in 2008. The United Nations Conference on Trade and Development (UNCTAD) estimates that this figure represents a fall of 21 per cent of the amount realised in the previous year.
A report issued by UNCTAD has pointed a far worse outlook for 2009, forecasting FDI inflows to decline further this year, owing to the global financial crisis that has made investors cautious.
“In the face of a global economic recession, tighter credit conditions, falling corporate profits, and gloomy prospects and uncertainties for global economic growth, many companies have announced plans to curtail production, lay off workers, and cut capital expenditures, all of which tend to reduce FDI”, the UNCTAD report stated.
Experts say the impact of the crisis varies widely depending on region and country, with consequently varying impacts on the geographic patterns of FDI flows.
Making a comparison of the financial crisis that hit the world in 1997, the report indicated that the current situation was very different from that of the last financial crisis, which originated in Asian countries and which had a significant negative influence on FDI inflows to some countries such as Indonesia.
What makes the current situation different is that this crisis originated from the developed world, and it is rapidly spreading to developing and transition economies.
Developed countries have already been directly hit, while the effects of the crisis on developing economies have so far been indirect in most cases, with varying degrees of severity. This has affected the patterns of FDI location and FDI flows.
According to UNCTAD, preliminary data for 2008 indicated that for many developed countries, FDI flows fell, mainly as a result of the protracted and deepening problems affecting financial institutions, and also the liquidity crisis in the money and debt markets.
Again, estimates showed a decline of about 33 per cent from flows in 2007 for this group.
Inward FDI may have declined in Finland, Germany, Hungary, Italy, and the United Kingdom when compared with 2006 levels, the data proves.
Decreased earnings of developed country transnational corporations (TNCs) and a decline in syndicated bank loans have particularly limited financing for investment.
The report further states that in developing and transition economies, preliminary estimates suggested that FDI inflows were more resilient, although the worst impacts of the global economic crisis were still to be fully transmitted to such countries.
The growth rate of FDI inflows to developing countries, while lower than in 2007 should still have remained positive for 2008.
“Flows to Africa were expected to have grown further, to more than US$60 billion, despite the slowdown in global economic growth and its negative consequences for the region,” it said.
Experts say flows to East, South, and South East Asia, which were the largest recipients of FDI and accounted for almost half of all flows to developing countries, may have risen in 2008, but by a slower rate than in 2007.
By contrast, FDI flows to Latin America and the Caribbean showed a significant resilience to the world economic slowdown. They were estimated to have increased by 13 per cent in 2008, partly as a result of a strong rise in FDI flows to South America.
However, Central America and the Caribbean, which are traditionally highly dependent on the United States economy, registered a decline, based on the preliminary figures.
According to UNCTAD, of the developing countries and transition economies, the largest, which are Brazil, Russian Federation, India, and China all experienced a rise in FDI in 2008.
“In the short-term, the negative impacts of the financial and economic crises on FDI are expected to remain dominant and to contribute to a continued fall in overall FDI through 2009. Developing countries will not be exempted that is, FDI falls in 2009 will be more widespread”, trade experts argue.
However, some experts are of the view that owing to the various positive factors at work including the bailout packages by the industrial countries, there should be a rebound of the global economy and that should trigger, eventually, a resurgence of international investment flows.
“These factors include investment opportunities based on cheap asset prices and industry restructuring, relatively large amounts of financial resources available in emerging countries and cash-rich oil-exporting countries, quick expansion of new activities such as new energy and environment-related industries, and the relative resilience of international companies”, UNCTAD stated.
Leading analysts say effective public policies obviously would play a major role in the establishment of favourable conditions for a quick recovery of FDI flows.
They point to structural reforms aimed at ensuring more stability in the world financial system, prompt and effective economic stimuli by national governments, renewed commitment to an open attitude towards FDI, the implementation of policies aimed at favouring investment and innovation, specially in the fields of environment, new energy sources, and small-and medium-sized enterprises were key issues in this respect.
The current crisis thus could turn into a major opportunity for creating new impetus for global FDI. However, this can only occur if policy makers resist calls for more protectionism and other policies that restrict FDI.