FDI flows retreats in the first half of 2012

In the first half of 2012, global FDI fell by eight per cent to an estimated $668 billion, down from $729 billion in first half of 2011, according to UNCTAD’s FDI Global Quarterly Index.
South Asia witnessed a fall by 40 per cent in its FDI inflows as a result of declines across nearly all countries in the subcontinent. Inflows to India, which accounts for the lion’s share of inward FDI to the sub-region, fell from $18 billion to $10 billion, partly as a result of shrinking market-seeking FDI to the country. Strong interest by foreign investors in manufacturing, especially in garments, helped keep FDI inflows to Bangladesh at a relatively high level — about $430 million in the first two quarters.
It was due to increased uncertainty in the global economy, marked by fears of an exacerbation of the sovereign debt crisis in Europe and a slow down of growth in major emerging market economies, it said, adding that in the second quarter of 2012 the value of index, which tracks FDI flows, dropped from 128 to 123.
The $61 billion fall was mainly caused by a decline of $37 billion in inflows to the US and a $23 billion fall in inflows to BRIC — Brazil, Russian Federation, India and China — countries.
The declines were caused by steep falls in both greenfield investment projects (down by 40 per cent) and cross-border Merger and Acquisitions (M&As) transactions (down by 60 per cent), which are also visible in the reduced importance of the equity component of FDI inflows.
The fact that the overall decline remains limited to downfall by eight per cent reflects the stable reinvested earnings component of FDI, indicating that transnational companies' (TNCs) earnings overseas continued to be strong.
Developing countries — without transition economies — for the first time absorbed half of global FDI inflows due to the steep fall in flows to the US and a moderate decline in flows to the EU. Despite a decline in FDI inflows, China became the world's largest recipient in the first half of 2012.
FDI flows showed an uneven pattern among regions. In developing economies, while flows to developing Asia declined, those to Latin America and Africa rose.
In developed countries, the rise in flows to Europe — in spite of a fall in flows to the European Union and other developed countries — was not enough to compensate for the decline in flows to North America. Compared to the full-year forecast of FDI inflows published in July, UNCTAD now projects that FDI flows will, at best, level-off in 2012 at slightly below $1.6 trillion.
The slow and bumpy recovery of the global economy, weak global demand and elevated risks related to regulatory policy changes continue to reinforce the wait-and-see attitude of many TNCs toward investment abroad.
In the first half of 2012, developing and transition economies continued to absorb more than half of global FDI flows. For the first time, developing economies alone accounted for a half of the global total.
"Investment leads economic growth but the current trends of investment flows to developing countries, particularly to Asia, are worrisome and the challenge for channeling FDI into key development sectors such as infrastructure, agriculture and the green economy remains daunting" said secretary-general of UNCTAD Supachai Panitchpakdi.
Despite a slight decline in FDI inflows, China became the largest recipient country in the first half of 2012, followed by the US. However, early indications show that FDI flows to the US might be stronger in the second half of 2012.
The value of cross-border M&As in the third quarter of 2012 were double those of the first half of the year, while some further acquisitions are already taking place or announced in the fourth quarter.
FDI flows fell to the BRICs as a whole and to each of individual country within the group. In the first half of 2012, FDI inflows declined by 11 per cent in developing Asia, despite a strong recovery after the global financial crisis. It reflects a protracted period of weak external demand with consequent strongly negative effects on exports and increasing uncertainty about high-growth emerging countries, the UNCTAD said, adding that as a result of declines in China and Hong Kong (China), total FDI inflows to East Asia fell by about 11 per cent. Half-year inflows to China amounted to $59 billion, a three per cent decline from $61 billion in the first half of last year. China is experiencing structural adjustments in their FDI flows, including the relocation of labour-intensive and low-end market-oriented FDI to neighbouring countries.
Compared to the full-year forecast of FDI inflows published in July, UNCTAD now projects that FDI flows will, at best, level-off in 2012, at slightly below $1.6 trillion. The UNCTAD's longer term projections still show a moderate rise. However, the risk of further macroeconomic shocks in 2013 can impact FDI inflows negatively.