Transatlantic economy continues to capture bulk of global FDI

Despite concerns over global current account imbalances and volatile energy prices, multinational companies increased their investments abroad last year at a robust pace. According to the recently released estimates from the United Nations, foreign direct investment (FDI) rose from $916 billion in 2005 to $1.2 trillion in 2006, the second highest level on record and just below the all time peak of $1.4 trillion in 2000. Global growth, rising corporate profits, and higher stock prices have led cash-rich firms to seek merge & acquisition (M&A) opportunities overseas. Such deals continue to represent a major portion of FDI flows worldwide. As emerging markets open up their trade and investment regimes, new supply chain and sourcing channels are being created for global companies. FDI soaring to new highs is further evidence that globalization in not just continuing but intensifying.

FDI flows to developed countries rose by 48% reaching $800 billion in 2006 - mostly driven by a flurry of M&A activity. The United States and Europe dominate the rankings of leading recipients of FDI – capturing $177 and $590 billion, respectively. The transatlantic economy accounted for more than half (62%) of global FDI inflows. The United States overtook the United Kingdom to once again become the top FDI recipient worldwide, while the United Kingdom fell to second place receiving $170 billion FDI.

Despite state intervention in the natural resource sector by some African and Latin American governments, foreign investors have not shied away from venturing outside the industrialized world. FDI to developing economies hit a new record last year - about $430 billion (including both developing and transitioning countries). Although Africa achieved unprecedented levels of FDI in 2005 and 2006, these investments have mostly been in the energy and commodity sectors. As a result FDI has been concentrated in certain regions and is uneven across the continent.

FDI jumped in Southeast Europe and the Commonwealth of Independent States (CIS) as well. Russian FDI spiked from $14.6 billion in 2005 to $28.4 billion in 2006. Interestingly, foreign investors are increasingly eager to invest in sectors outside of oil, such as chemicals, services, and real estate in Russia. But, disputes over environmental protection and extraction costs that emerged from the Sakhalin projects continue to undermine investor confidence. If oil prices were to head south, it’s unlikely that the country’s non-oil sectors could sufficiently offset the negative impact to the economy that would follow. New EU-entrants Romania and Bulgaria also experienced buoyant foreign investments, helping to finance current account deficits, fuel growth, and create jobs.

China received $70 billion FDI in 2006, slightly down from $72.4 billion the previous year. The quality of Chinese FDI is also changing as multinationals commit more high-tech-focused investments and exploit the country’s low-cost and increasingly skilled labor. One must account for the “round-tripping” investments, which artificially inflate China’s FDI figures. Nevertheless, with an average annual 9.5% GDP over the past decade and a massive labor pool, China will continue to attract both services and manufacturing FDI, which will in turn increase competitive pressures in U.S. and European markets and have a profound impact on the future of the transatlantic economy.

This entry was posted by Jonathan White on Sunday, February 18th, 2007 at 7:16 pm and is filed under China, Economics, European Union, Russia, United States.

Subscribe to the comments of this post.
You can leave a response, or trackback from your own site.