Foreign direct investment
Foreign direct investment involves capital being moved across geographical and political boundaries so as to enable the investor to gain control over the asset acquired. It therefore differs from portfolio investment which while forgingh through borders stops short of giving any control. Multinational enterprises is the term for companies sourcing FDI. Control here can be interpreted as 10% ownership or more on regular shares of an incorporated firm with over 10% voting power for an unincorporated firm or development of a greenfield branch plant that serves as a permanent base of the originating firm.
According to New UNCTAD surveys for the period 2005 to 2008, foreign direct investment or FDI is expected to grow both over short and medium term. This has been the view from FDI experts, transnational corporations (TNCs) and investment promotion agencies (IPAs) in UNCTADs Global Investment Prospects Assessment (GIPA).
The entire mood for the global surveys is high on optimism especially in the context of developing nations. According to Dr. Supachai Panitchpakdi, Secretary-General of UNCTAD, nations should ideally make the most of the investment opportunities while at the same time, place emphasis on the quality of FDI due to the intense competition for investment. Over fifty percent of TNC and experts, along with 81% of IPAs, were in consent for predicting short-term growth in FDI flows, while practically all the rest felt that the levels would remain constant. The section of the view that FDI would decrease in the near future proved insignificant.
Optimism was also high in respect to medium term prospects for FDI. Subscribing to the opinion of increasing FDI through 2007-08 were 57% of experts, 65% of TNCs and 83% of IPAs. Of the remaining respondents, the majority were of the expectation that FDI levels would be maintained and very few felt that a decline was imminent. Caution was advised by respondents in FDI growth prospects for the short and medium term for a variety of reasons. Some of them were protectionism, declining growth in industrialized nations, instable financial situation of certain key economies, global terrorism and the unpredictable nature of prices of petroleum and other raw materials.
There has been indication that the interest of investors seems to be moving away from destinations traditionally regarded as important and towards certain emerging markets. The most promising FDI propects have been linked to Asia and Eastern Europe. Latin Americas recent FDI recovery shows every sign of continuing. For Africa, FDI flows were likely to remain constant though at low levels. As a whole, developed nations could expect FDI recovery to a certain extent but at levels fairly small in the short run. The United States would continue to hold on to its label as being the most attractive destination for FDI, among the developed countries while the predictions were less rosy in the case of the leading European economies.
There were several surprises in store for investment locations regarded as most attractive. More than half the countries in the top 10 rankings by experts and TNCs
belong to the developing world. China leads the way as an attractive destination for 87% of TNCs and 85% of experts. The other countries were the US, India, the Russian Federation and Brazil. There is wide variance in FDI prospects depending upon the industry according to UNCTAD surveys. For the services sector it is a lot more optimistic as compared to manufacturing and primary sectors. Among the industries expected to take the lead in terms of FDI growth are computing/ICT, public utilities, transportation and tourism in the services sector, electrical and electronic products, equipment and metals in the manufacturing sector and mining and petroleum in the primary sector.
On short term basis, IPAs tip the US to be way ahead in importance as a source for global FDI flows, with the United Kingdom, Germany and China following. Despite this, overall rankings prove surprising as apart from China several other developing countries feature in the top 15, like South Africa, India, Brazil, Malaysia and the Republic of Korea. Among them are those which make crucial sources of FDI for their immediate neighbors alone. But on the whole it is acknowledged that developing country TNCs are using outward investment more and more to become global players and in the process indirectly work to the advantage of other developing countries as well. Over half the experts and TNC respondents were of the view that mergers and acquisitions would make up the bulk of FDI in 2005-06. In contrast were the IPAs most of them from developing countries, who were more inclined to consider greenfield investment or new investment projects to be the first priority. Strong expectations were also likely from non-equity investment with examples like strategic alliances and licensing.
There was a general consensus among respondents of production being the corporate activity with the highest chances of relocation. The percentage surveyed by UNCTAD who felt that certain production areas were bound for overseas transfer exceeded 80%. A simultaneous growth in offshore outsourcing services is also expected to continue. Of the functions with the most likelihood of being relocated offshore, next came logistics and support services, ahead of distribution and sales. Growing FDI competition will prompt countries worldwide to act more proactively in promoting investment. IPAs mostly had the intention of continually increasing the number and range of policy measures in the next two years. More specifically IPAs with their limited resources were mostly prone to adopting a more targeted approach to investment promotion.
The conclusions drawn from the global surveys by UNCTAD covering TNCs, international experts and IPAs were broadly consistent in their belief that there was nothing to stop the FDI recovery, not even the few threats capable of hampering the pace. Investment in developing countries would increase in encouraging the recovery. All in all, the entire mood can be summed up as being cautiously optimistic. The surveys that the results have been compiled from were conducted on national IPAs comprising 158 countries with a response rate of 71%. 21% response rate was registered from 325 of the largest TNCs from the developed, developing as well as Central and Eastern European countries. 75 international FDI experts rounded off the figures.
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