As foreign direct investment (FDI) inflows faltered in 2014, developing Asia shone bright, as inward FDIs to the region reached record levels last year, according to a new report by the United Nations Conference on Trade and Development (UNCTAD).
Following recent lackluster growth in the global economy, international FDI inflows in 2014 declined 16% to US$1.23 trillion, due mostly to the fragility of the global economy, policy uncertainty for investors, and elevated geopolitical risks, according to the World Investment Report 2015.
Last year, the low level of flows to developed countries persisted. Despite a revival in cross-border mergers and acquisitions (M&As), overall FDI flows to this group of economies declined by 28% to $499 billion. They were significantly affected by a single large-scale divestment from the United States.
But developing economies showed a reversed trend to hold on to their lead in global inflows, it added. Last year, inflows to these economies reached their highest level at $681 billion with a 2% rise.
Among the top 10 FDI recipients in the world, five are developing economies, with China the world’s largest recipient.
Rising star
Developing Asia in particular saw FDI inflows grow to historically high levels, up 9%. The region garnered nearly half a trillion dollars in foreign investments 2014, further consolidating its position as the largest recipient in the world.
Looking at the subregions of Asia, FDI inflows to East and Southeast Asia showed an increase of 10% to $381 billion. In recent years, multinational enterprises (MNEs) have become a major force in enhancing regional connectivity in the subregion through cross-border investment in infrastructure.
In South Asia (up 16% to $41 billion), FDI has increased in manufacturing, including in the automotive industry.
As for West Asia, the security situation there has led to a six-year continuous decline of FDI flows (down 4% to $43 billion in 2014).
On investments in regional groupings and initiatives, the Association of Southeast Asian Nations (up 5% to $133 billion) and the Regional Comprehensive Economic Partnership (up 4% to $363 billion) bucked the trend of falling inflows in 2014.
In contrast, the groups of countries negotiating the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership saw their combined share of global FDI inflows decline.
Investments by developing-country MNEs also reached a record level: developing Asia now invests abroad more than any other region, stated the report. Nine of the 20 largest investor-countries were from developing or transition economies. These MNEs continued to acquire developed-country foreign affiliates in the developing world.
By sector, on the other hand, the shift towards services FDI has continued over the past 10 years in response to increasing liberalization in the sector, increasing tradability of services, and the growth of global value chains in which services play an important role.
In 2012, services accounted for 63% of global FDI stock, more than twice the share of manufacturing. The primary sector represented less than 10% of the total.
Cross-border M&As in 2014 rebounded strongly to $399 billion. The number of MNE deals with values larger than $1 billion increased to 223—the highest number since 2008—from 168 in 2013. At the same time, MNEs made divestments equivalent to half of the value of acquisitions.
International production by MNEs is expanding. International production rose in 2014, generating value added of about $7.9 trillion. The sales and assets of MNEs’ foreign affiliates grew faster than their domestic counterparts. Foreign affiliates of MNEs employed about 75 million people.
Although 2014 was not a spectacular year for FDIs, the report is upbeat about recovery in 2015 and beyond. It projects global FDI inflows to grow by 11% to $1.4 trillion in 2015, and rise to $1.5 trillion in 2016, and to $1.7 trillion in 2017.
However, a number of economic and political risks, including ongoing uncertainties in the Eurozone, potential spillovers from conflicts, and persistent vulnerabilities in emerging economies, may disrupt the projected recovery.
Photo: Pictures of Money
