FDI inflows decline sharply globally

Flows of global foreign direct investments continued to fall, signalling persistent low investor confidence and uncertainty that gripped the world of mega investments since the financial crisis set in.

Global inflows of FDI fell by 39 per cent from $1.7 trillion in 2008 to a little over $1 trillion in 2009, according to estimates from United Nations Conference on Trade and Investment (UNCTAD). Mergers and acquisitions (M&As) fell from a growth rate of 706.5 per cent in 2008 to 240 per cent last year.

“The decline in FDI was widespread across all major groups of economies. After experiencing a severe fall in 2008, FDI flows to developed countries continued their dramatic decline in 2009 (by a further 41 per cent). FDI flows to developing and transition economies, which had risen in 2008, declined in 2009 by 35 per cent and 39 per cent respectively,” reads part of the UNCTAD analysis.

In terms of mode of entry, cross-border M&As were the most affected, with a 66 per cent decrease last year compared to 2008. The number of international greenfields (new projects) also declined markedly, though to a much lesser degree of 23 per cent.

FDI inflows in Africa stood at $56 billion last year, representing a 36 per cent drop from $87.6 billion recorded in 2008. The growth of cross-border M & As stood at 5.7 per cent last year, a 73 per cent drop from 21.2 per cent seen in 2008.

The results fall in line with UNCTAD’s 2008 to 2011 projections made last year which said that among developing countries, Asia and Oceania countries are emerging as favourites in international capital movements.

Africa, in particular was said to be losing its allure as an investment destination to these nations whose growth of M & As dropped by 46 per cent from 68.2 per cent in 2008. The value of FDI inflows for these nations stood at $264 billion last year compared to $388.7 in 2008, representing a 32.1 per cent drop compared to Africa’s 36 per cent.

Analysts have said that the basic must-have set of factors that guide the choice of an investment location are local market size and growth, and access to international/regional markets. The choice of an investment location is then decided by additional incentives.

In an earlier interview, Dr George Kosimbei of Kenyatta University School of Economics said that compared to Africa, these countries have better infrastructure, more robust economic growth, and are better integrated hence offer more opportunities for mergers and acquisitions.

“Asian economies are less risky in terms of exchange rate risk, credit risk and political risk as compared to their African counterparts. All these risks have been minimised, especially the credit and exchange rate risk after the 1996/97 Asian financial crisis,” he adds. Despite the gloom, a modest recovery is expected this year. A recent report by the International Monetary Fund forecasts a 3.1 per cent growth in world gross domestic product this year compared to a shrink of 1.1 per cent last year.

“However, as the recovery in economic growth and profits remains fragile, especially because it has been boosted by the potentially transitory impact of special economic packages implemented by major economies, the recovery in FDI is expected to be modest,” reads the report from UNCTAD, which adds that overall medium-term prospects remain positive.