São Paulo – Global flows of foreign direct investment (FDI) reached US$ 1.26 trillion in 2014, down 8% from 2013, according to preliminary data released this Thursday (29) by the United Nations Conference on Trade and Development (Unctad). The figures are from the Global Investment Trends Monitor report.
According to the director of Unctad’s Investment and Enterprise Division, James Zhan, the result is the second-to-worst since the 2008 international financial crisis, and only tops the US$ 1.171 trillion flows in 2009.
In an interview at the UN headquarters in Geneva, Switzerland, Zhan said the performance fell short of expectations. The reasons? A frail world economy, political uncertainty and geopolitical risks. “A solid FDI rise remains at a distance,” he said.
The distance stems from the fact that the global economic weakness can persist, currencies and commodities are volatile and geopolitical risks could increase at any time. “The road to a FDI boom is bumpy,” he asserted.
In turn, according to the report, the rebounding United States economy, the growing demand arising from low oil prices, the proactive Eurozone monetary policy, and the implementation of measures designed to liberalize and fuel investment could all have a positive impact on flows.
The executive explained that most of the investments made last year were not of the ideal type. They went to corporate restructuring, replenishing of existing inventory, maintenance of equity held by multinationals’ branches abroad, and profit reinvestment. This means cash spent, for instance, in the supply and maintenance of existing facilities and the like, rather than in increasing companies’ production.
“The transnational companies are not in expansion mode,” Zhan said. “New investments in production are what must be regarded as truly important to real economic growth, jobs creation and productivity,” he stressed. “This dynamic is still lacking,” he said.
He believes governments give priority to monetary policy to spur the economy, but investment in the productive sector must be encouraged as well, i.e. both avenues must be explored in tandem.
Blocs and countries
Investment flows to developed countries declined to US$ 511 billion, down 14% from 2013. For transition economies in the former URSS, investment dropped by half, due to the conflicts in Ukraine and the sanctions on Russia. Investment in developing countries, in turn, was up 4% to US$ 700 billion, an all-time high.
The sharpest decline of all rich countries was the United States’, as a consequence of a “megadeal” – the repurchase of stock of Britain’s Vodafone by the US’ Verizon worth US$ 130 billion, which the Unctad rates as a “disvestment.” This caused the US to drop from first to third among the leading FDI targets ranking, and China to rise to the top for the first time ever. Historically speaking, according to Zhan, the United States are “by far” the country targeted by the most FDI, and he believes inflows can start growing anew, because the local economy is poised to improve.
The performance of developing countries was strongly influenced by Asia. For the sake of illustration, out of the five leading FDI targets in 2014, four are developing countries and three are Asian (China, Hong Kong and Singapore). Zhan noted that China’s foreign investment laws are becoming less strict, and although it doesn’t grow as much as it did before, the country still sees average annual growth of 7%, which is a “huge” advance. “This creates a strong demand for investment,” he said.
The director pointed out that Asia developing countries received almost the same value last year than almost all of developed nations and twice the amount attracted by Europe. “This proves how Asia is well, even with a lower growth”, he remarked.
The fifth country in the list is Brazil, which received around US$ 62 billion last year, down 4% over 2013. Zhan emphasized that, however, this decline was “very moderate”, and that the amount is the second largest since 2007. The performance was influenced by investments reduction on commodities, that is, in the production of commodities, which, in general, were devalued in 2014. These products’ low price affected the FDI flow in all Latin America.
In the case of Brazil, Zhan emphasized a positive point in last year’s performance, which was the rise in investments in the manufacturing industry and services sector. “Which is a good sign in terms of FDI quality”, he said. Unlike Brazilian analysts, the Unctad’s director believes that the government implemented “strong” industrial policies in the last couple of years, which encouraged industry investments.
He added that, even with a weak economic growth, country’s trend of attracting FDI remains positive. Brazil is, historically, one of the nations that receive the most this type of resources.
The director also talked about the Middle East results, which decreased for the sixth straight year. The FDI flow to the region stood at US$ 44 billion, 4% less than 2013, because of “conflicts, geopolitical risks and instabilities, now combined with the [low] oil prices”. “More interesting, however, is that the public investment increased a lot in the region, especially with Gulf Cooperation Council (GCC) members”. The GCC members are Saudi Arabia, Bahrain, Qatar, United Arab Emirates, Kuwait and Oman.
The director also talked about the Middle East results, which decreased for the sixth straight year. The FDI flow to the region stood at US$ 44 billion, 4% less than 2013, because of “conflicts, geopolitical risks and instabilities, now combined with the [low] oil prices”. “More interesting, however, is that the public investment increased a lot in the region, especially with Gulf Cooperation Council (GCC) members”. The GCC members are Saudi Arabia, Bahrain, Qatar, United Arab Emirates, Kuwait and Oman.
*Translated by Gabriel Pomerancblum and Sérgio Kakitani
