Cross-border mergers and acquisitions in developed countries fueled a 39 percent leap in global foreign investment in 1998 from 1997, according to a press release of the United Nations Conference on Trade and Development (UNCTAD). World foreign direct investment inflows increased to $644 billion in 1998 from $464 billion in 1997, despite a slowdown in world economic growth to 2 percent in 1998 from 3.4 percent the previous year.
Global foreign direct investment rose in 1998 despite the financial crises that hit many developing countries and Russia, the decline in the value of world trade, instability in Russia and Latin America, commodity price declines, and a slowdown of privatization programs, as well as excess capacity in the automobile, steel, and petroleum-related products industries, according to UNCTAD.
Cross-border mega deals with transaction values of more than $3 billion were the order of the day in 1998, when 32 such deals took place, compared with 15 in 1997 and 8 in 1996, UNCTAD reports. In 1998, nearly 90 percent of large cross-border mergers and acquisitions—which do not necessarily require cash or new funds but can be based on a mutual exchange of stock—took place in developed countries, where this mode of entry is more important than in developing countries.
The total value of majority-owned, international mergers and acquisitions amounted to $411 billion in 1998, almost twice that of 1997 and three times the 1995 level. The surge in merger and acquisition activity is partly due to increased competition brought about by liberalization and international business consolidation. The value of cross-border mergers and acquisitions cannot be calculated as a percentage of foreign direct investment, because they are financed by foreign direct investment as well as by borrowing from capital markets, and the financial transactions related to mergers and acquisitions can be phased over several years, UNCTAD notes.
Foriegn direct investment inflows billion U.S. dollars
The European Union was the largest investor and recipient of foreign direct investment; the United States was the single largest host and home country for foreign direct investment; and in Japan, mergers and acquisitions increased inflows, while outflows declined substantially, primarily because of corporate restructuring.
Inflows into Latin America and the Caribbean were more than $71 billion in 1998, marking a 5 percent increase over 1997, according to another UNCTAD press release. South American countries received 75 percent of total foreign direct investment in the region, and, among those, Brazil recorded an increase of 53 percent in inflows, to $29 billion, according to UNCTAD. (For information on foreign direct investment in Central and Eastern Europe and Russia, see IMF Survey, July 5, page 223, and for developing Asia, see IMF Survey, May 24, page 175.)