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UNCTAD report: FDI is likely to exceed a trillion dollars in 2000; activity is driven by mergers and acquisitions

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2000
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Foreign direct investment (FDI) by transnational corporations may surpass one trillion dollars this year, according to the World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development, published by the United Nations Conference on Trade and Development (UNCTAD). Cross-border mergers and acquisitions are driving this record FDI activity, according to the report’s tenth anniversary edition.

In developed countries, FDI rose to $636 billion in 1999 (from $481 billion in 1998), while FDI to developing countries increased to $208 billion (from $179 billion in 1998), the report states. FDI is the largest source of external financing for many developing countries, which have found it to be more stable—particularly during financial crises—than portfolio investment and bank lending.

Regional picture in 1999

FDI flows to Africa rose to $10 billion in 1999 from $8 billion in 1998. This, the report explains, was in line with the faster growth rate generally experienced by the continent during the decade, as governments worked to create a more business-friendly environment. Investments by transnational corporations in Africa are still only 1.2 percent of global FDI flows and 5 percent of total FDI into all developing countries. About 70 percent of FDI in Africa in 1999 was concentrated in only five countries—Angola, Egypt, Morocco, Nigeria, and South Africa. The real challenge for Africa, according to the report, lies ahead: “integration into the global economy, including integration into the regional or global production networks of transnational corporations. Only then will the continent become a more prominent player in the world market and benefit more from FDI.”

In the developing countries of Asia, investment prospects are good, given the quality of the underlying economic determinants of FDI, the region’s recovery from the financial crisis, and ongoing widespread liberalization and restructuring efforts, the UNCTAD report says. Total FDI flows into developing Asia rose considerably last year to almost $106 billion (from $97 billion in 1998), contrary to an anticipated decline following the 1997—98 financial crisis. China’s prospects of attracting FDI are seen as good, despite last year’s decline of nearly 8 percent to $40.4 billion. This decline reflected slower growth and excess capacity in some manufacturing industries due to overinvestment in the past decade and increased competition from neighboring countries. China is expected to remain an attractive destination for FDI, particularly over the longer term, in the light of its expected accession to the World Trade Organization, the report explains. The decline in FDI to China was more than offset by the FDI boom in the Republic of Korea to $10.3 billion (almost double the $5.2 billion in 1998) and the recovery of flows into Singapore, to $7 billion from $5.5 billion in 1998, and Taiwan Province of China, to $2.9 billion from $222 million in 1998.

Cross-border mergers and acquisitions in south, east, and southeast Asia have become increasingly important, reaching a yearly average of $20 billion during 1997—99. The largest increases have occurred in the five countries most affected by the crisis, whose share of total cross-border mergers and acquisitions in developing Asia jumped to 68 percent in 1998 (from 19 percent in 1996), according to the study.

Foreign investment also increased in central and eastern Europe in 1999, with Poland and the Czech Republic attracting record amounts. According to the report, these two countries accounted for 55 percent of total FDI flows to the region. FDI in Poland, where foreign investors were attracted by the large domestic market, rose to a record $7.5 billion. In the Czech Republic, FDI inflows almost doubled to $5.1 billion, primarily because of a turnaround in privatization policies, following the example of countries, such as Hungary, that had successfully involved foreign firms.

The continued increase of FDI inflows to central and eastern Europe is remarkable, according to the report, despite crises—in Asia, Russia, and Kosovo—that shook confidence in emerging markets in general. Despite the impressive $23 billion level of FDI in flows, last year, the region accounted for less than 3 percent of global FDI flows.

World FDI inflows, 1979-99

(billion U.S. dollars)

Data: UNCTAD, foreign direct investment/transnational corporations database

Latin America and the Caribbean attracted an estimated $90 billion of FDI in 1999 (from $73.8 billion in 1998), with more than 80 percent of the FDI inflows concentrated in the four largest recipients: Brazil ($31.4 billion), Argentina ($23.2 billion), Mexico ($11.2 billion), and Chile ($9.2 billion). According to the report, major privatizations and long-term growth prospects were the chief factors behind the rapid rise in FDI by transnational corporations in many Latin American countries. In some, however, perceptions of instability led to sharp declines in FDI flows: inflows to Colombia were halved, to $1.4 billion; those to Venezuela plunged to $2.6 billion from $4.4 billion; and FDI to Ecuador dropped by about 25 percent to around $600 million.

What it means

Cross-border mergers and acquisitions are having a major influence on globalization, and it is not all good, according to the UNCTAD study. The top 100 nonfinancial transnational corporations in terms of foreign assets are the principal drivers of international production. These firms control over $2 trillion worth of foreign assets and employ more than 6 million people in their foreign affiliates, and they are increasingly using mergers and acquisitions to boost their FDI. Developed and developing countries alike are concerned about the market power of transnational corporations and the possible anticompetitive implications of mergers and acquisitions. The effects of cross-border mergers and acquisitions can be influenced by policies, and for UNCTAD, the most important concern is competition policy. “Competition policy,” the report concludes, “can no longer be pursued effectively through national action alone. The very nature of cross-border mergers and acquisitions—indeed, the emergence of a global market for firms—puts the phenomenon into the international sphere.” Policymakers, the report explains, need to have in place cooperation at the bilateral, regional, and multilateral levels to respond effectively to the anticompetitive practices of firms that affect their countries.

To order UNCTAD’s World Investment Report 2000, please see UNCTAD’s website (http://www.unctad.org/en/pub/pubframe.htm).

Ian S. McDonald

Editor-in-Chief

Sara Kane

Deputy Editor

Sheila Meehan

Senior Editor

Elisa Diehl

Assistant Editor

Sharon Metzger

Senior Editorial Assistant

Lijun Li

Editorial Assistant

Joann Wheeler

Staff Assistant

Philip Torsani

Art Editor/Graphic Artist

Jack Federici

Graphic Artist

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