FOREIGN Direct Investment (FDI) inflows to developed countries declined for the second year in a row, falling to US$460 billion in 2002 from $590 billion in 2001, according to the World Investme
nt Report 2003.
The report was recently released by the United Nations Conference on Trade and Development (Unctad).
It said the United States and the United Kingdom alone accounted for about 54% of the drop in all countries with reduced inflows in 2002.
But the decline was broad-based, involving 16 of 26 countries.
Large drops in inflows of equity due to reduced cross-border mergers and acquisitions and a fall in intra-company loans were behind the reduction in inflows in major host countries.
The report said despite the downturn, however, FDI flows to developed countries in 2002 remained above the average levels of 1996-1999.
Unctad expects FDI inflows to increase in some developed countries this year, but flows to the developed countries as a group are not likely to exceed 2002 levels.
The report said future flows would very much depend on economic recovery – globally and especially in the developed countries – and on the success of efforts to strengthen investors’ confidence.
“Low profits, falling equity prices, concerns about corporate debt and cautious commercial bank lending might all dampen prospects for increased investment,” the report said.
Developed country respondents to Unctad’s survey of investment promotion agencies see prospects for FDI in developed countries as rather bright for 2003-2004, although on balance they are much more cautious in their expectations than their counterparts from developing regions.
The report said optimism significantly increases for the longer term, with almost three fifths of the respondents (58%) expecting an improvement in the period 2004-2005, as compared to 93% in developing countries.
The survey suggests that the US be expected to be the most important source of FDI during the period 2003-2005, followed at some distance by Germany, France, Japan and the UK.
The report said FDI inflows into Central and Eastern Europe last year reached a new high of US$29 billion and was expected to gain this year and next year.
It said prospects for a rise in FDI inflows to Asia and the Pacific this year were slim, but the region would, however, continue to be the largest recipient among developing regions this year.
“The region will, however, continue to be the largest FDI recipient among developing regions in 2003, and its longer-term prospects remain good,” the report said. “The factors that have contributed to the FDI downturn – slow global economic recovery, weak global demand, shaken corporate confidence and adjustments in industries like semi conductors/electronics – are expected to improve in 2003-2004, helping usher in more FDI in the longer term.”
The report said overall, competition for FDI within Asia and with other regions would intensify.