U.S.A. Economy News: The Global Economic Crisis Alters the Pattern of FDI Flows Posted By : Wolassa L. Kumo

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The Global Economic Crisis Alters the Pattern of FDI FlowsBy: Wolassa L. Kumo

[ Posted On: 2011-01-23 ]
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Dr. Wolassa Kumo
Dr. Wolassa Kumo.

Introduction

Economic theories state that FDI inflows contribute to the economic performance of a host country in a number of ways: First, the FDI inflows represent additional resources which can be used to build additional physical capital and create more employment. Second, by increasing the size of capital stock, FDI increases a country's output and productivity by encouraging more efficient use of existing resources. Finally, the inflows of FDI can improve the local skills and promotes technological knowhow thereby enhancing the overall economic growth and development.

However, empirical evidence in support of these theories is not always straight forward. Macroeconomic and cross-country studies suggest a strong positive correlation between FDI inflows and economic growth, although there is no consensus on the direction of causality. Microeconomic evidence is much more unclear and results vary across firms, sectors and countries implying that under certain conditions, FDI can be an engine of growth. Benefits from FDIs therefore depend on the type of the inflows, and the absorptive capacity of a host country among other things.

In any case, global FDI flows showed consistent and rapid growth between 2004 and 2007. During this period, the global FDI grew by 155%, from $717.7 billion in 2004 to $1,833.3 billion in 2007. Developed countries received most of these FDI flows during this period. In 2007, 68.1 percent or $ 1,248 billion of the FDI went to the developed economies. The United States was the largest recipient of FDI followed by United Kingdom, France, Canada, and the Netherlands while the EU region attracted almost two thirds of the total FDI inflows to the developed countries (UNCTAD, 2008).

However, the 2008-2009 global economic and financial crises radically altered the pattern of global FDI flows with emerging and transition economies becoming the major destinations of FDI flows in 2010 for the first time.

Global FDI Flows in 2010

The global FDI flows declined by 39% to $1,114 billion in 2009 from $1,700 billion in 2008. The FDIs stagnated in 2010 with marginal 1% increase to $ 1,122 billion from the 2009 level (UNCTAD, 2011). The stagnation in global flows was accompanied by a further contraction in FDI flows into developed countries while the flows into developing and transition economies increased representing over 50% of the total global FDI flows in 2010 for the first time.

In 2009 developed economies received 50.8% or $565.9 billion of the total global FDI flows while the developing economies received 42.9% and the transition economies of South-East Europe and the Common Wealth of Independent States receiving the remaining 6.3 % of the 2009 total FDI flows. The Russian Federation alone accounted for 55% of the total FDI inflows to the transition economies.

However, in 2010, FDI flows into developed economies contracted by 7% compared to 2009. The European Union was the worst hit with FDI inflows contracting by 20% in 2010. Among the developed economies, Japan saw the biggest decline in FDI inflows in 2010 with FDI contracting by a whopping 83.4% due to major disinvestments. With 66.3% contraction in FDI, Ireland, whose economy was ravaged by the financial crisis, witnessed the second highest FDI contraction among the developed economies due primary to uncertainties about sovereign debt. The recent EU bailout is expected to assist Ireland's economic recovery. FDI inflows to Germany and France declined marginally. Unlike other major industrialized nations, the United States, the world's largest economy, enjoyed a robust expansion in FDI inflows in 2010. FDI flows into United States increased by 43.4% in 2010. The United States received over 35% of the total FDI flows into the developed world in 2010 followed by France, which received 10.9% of the total FDI flows into the developed countries, as a distant second. The Nobel Laureate President Barack Obama is not doing bad after all in spite of the repeated predictions of doomsday by his political opponents.

On the other hand, FDI flows into developing economies increased by 9.7% in 2010. Developing countries received 46.8% of the total global FDI flows in 2010 while transition economies received 6.3% of the total global flows. The two groups of economies together received 53.1% of the global FDI flows in 2010. For the first time, developing and transition economies overtook advanced economies as major destinations of the foreign direct investment.

The fastest growing and the world's second largest economy, China, received the bulk of the FDI flows into the developing world. China received nearly 20% of the total FDI flows into the developing world and its FDI inflows surpassed $100 billion mark in 2010 for the first time. Hong Kong (China) is the second largest FDI receiver with $62 billion in 2010. In terms of the growth in FDI flows into developing economies in 2010, the best performers however are Malaysia, Indonesia, Singapore, and Hong Kong (China), with annual growth rates of 410%, 163%, 123% and 29% respectively. FDI flows closly track performances in economic growth among other things. In this regard, South, East and South-East Asia will continue to drive global economic recovery and growth for many years to come. However, FDI flows to South Asia declined in 2010 mainly due to decline in FDI flows into India by 31.5%.

In Latin America, Mexico, Peru and Chile were the best performers with FDI growth rates of 52.9%, 44.7% and 43.4% in 2010 respectively while Brazil is the largest receiver of FDI receiving $30.2 billion in 2010.

Globally, the United States remained the top receiver of FDI flows in 2010 followed by China, and Hong Kong (China) in the second and third position respectively. Except the United States advanced economies lost their positions as the three leading destinations of FDI in 2010.

FDI Flows to Africa

During the high growth years anchored by the commodity price boom, i.e. 2001-2007, FDI flows into Africa increased rapidly. FDI flows into Africa reached an all time high of $87.6 billion in 2008 from a mere $14.2 billion in 2002. However, the decline in economic growth caused by global financial crisis and the plunge in commodity prices sharply reversed the trend in 2009. The FDI flows into Africa declined by over 33% in 2009 to $58.6 billion. While the growth in FDI flows into Asia and Latin America recovered in 2010, FDI flows into Africa continue a down ward spiral. It declined further by 14.4% in 2010 to $50.1 billion, the lowest level for four years.

The decline in FDI flows into Africa has been driven by the flows into four major FDI recipients: South Africa, Egypt, Nigeria and Morocco. In 2009 FDI flows into Morocco, South Africa and Egypt declined by 56.6%, 24.6% and 13.9% respectively. As a result, Morocco lost its status as a major receiver of FDI in Africa and Nigeria emerged as second largest receiver of FDI after Egypt in 2009. However, in 2010 FDI flows into Nigeria collapsed by over 60% while those into South Africa plunged by 78%. Only Egypt maintained a marginal increase in FDI to stay as a leading destination in the African continent. However, South Africa remains to be a major destination of portfolio investment in the continent driven primarily by near zero yields in advanced economies.

While UNCTAD did not give any reason for such drastic contractions in FDI flows into South Africa and Nigeria, this is likely to negatively affect economic development and job creation agenda of the respective governments.

However, the 2011 World Bank Prospects for Development report paints a bright future for sub Saharan Africa. With better than expected pace of recovery from global economic crisis and with annual average economic growth expected to be in excess of 5% between 2010 and 2012, several sub Saharan Africa countries are better positioned to attract more FDI inflows in the coming years. The investment climate in Africa is improving, and many countries have improved their macroeconomic policies and debt sustainability; as a result many are increasingly talking of several African countries being on the verge of an economic takeoff (World Bank, 2011).

Historically, FDI flows into Africa have exclusively focused on extractive industries but this has changed since recently. At present FDI inflows have diversified into the service sectors particularly telecommunications and banking sectors. For example, the recent offer of Walmart to acquire South Africa's MassMart is an equivalent of 13 times the pre-tax earnings of the latter and represents a significant injection in FDI into Africa.

"Africa is also becoming an attractive destination for portfolio investment flows. Countries like Ethiopia, Ghana, Nigeria, and Rwanda are identified by several fund managers as possible destinations for Africa-centric investment funds" (World Bank, 2011).

Expectations of increased FDI inflows to Africa are boosted by the South-South cooperation or Africa's emerging economic partnerships particularly with China, India, Brazil, Malaysia and Turkey in recent years. For instance, the mid 2010 acquisition of the Africa business of the Kuwait based telecom company, Zain Telecom for $10.7 billion by an Indian telecom giant Bharti Airtel represents the largest South-South acquisitions ever. Zain operates in 17 African countries.

Given its vast natural resource endowments and population of over a billion, Africa has a great potential to become one of the leading destinations of FDI in the near future. However, the realization of this potential depends on the size and sustainability of economic growth, continuity of economic reforms and political stability. The current events in Cote d'Ivoire, Tunisia, Algeria and a host of other countries have a potential of derailing Africa's dream if not amicably resolved soon.

References

•   UNCTAD (2008). World Investment Report 2008. Transnational Corporations and the Infrastructure Challenge. Overview. United Nations, New York and Geneva, 2008.

•   UNCTAD (2011). UNCTAD Global Investment Trends Monitor No.5 , January 17, 2011.

&8226   World Bank (2011). Sub-Saharan Africa may stand to gain more international capital flows in coming years. Prospects. January 21, 2011.

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About The Author: Dr. Wolassa L. Kumo -- is a development practitioner and researcher. His research interests include risk and uncertainty, productivity and efficiency, finance and investment, currency substitution and development problems of Africa. Currently, he is working as a researcher in a public institution with a primary responsibility in econometric modelling. Previously, he taught Principles of Economics in an academic institution. before and after the --> | View Profile & All Articles By: Wolassa L. Kumo |

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