This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 11 - 17, 2016.
Foreign direct investment (FDI) inflows to Asia are expected to decline 15% this year because of the global economic slowdown, reverting to 2014 levels, according to the World Investment Report 2016 published by the United Nations Conference on Trade and Development (Unctad).
“Data on cross-border mergers and acquisitions (M&A), sales and announced greenfield investment projects support the expected decline. For instance, cross-border M&A in the region announced in the first quarter of 2016 were US$5 billion, only 40% [that] of the same period in 2015. In addition, the number of greenfield projects announced last year was 5% lower than in 2014,” says the June 22 report.
Developing economies saw their FDI reach a new high of US$765 billion, 9% higher than in 2014, the report points out. Developing Asia’s FDI inflows surpassed US$500 billion, making it the largest FDI recipient region in the world, while inflows to Africa, Latin America and the Caribbean faltered. Developing countries continue to comprise half of the top 10 host economies for FDI inflows.
In the first four months of this year, FDI inflows to China’s non-financial sectors amounted to US$45 billion, up 5% from the previous corresponding period. The report says there are indications that intra-regional investments are rising — 53% of the announced greenfield projects in developing Asia last year were intra-regional, especially from China, India, South Korea and Singapore.
“Among the more important industries driving intra-regional development are infrastructure and electronics. The rise of investments from Singapore to India exemplifies this trend. FDI inflows to some Asian economies, such as China, India, Myanmar and Vietnam, are likely to see a moderate increase this year,” it says.
The report says FDI inflows to low-income economies in Southeast Asia soared last year, but was offset by the lacklustre performance of higher-income countries. “FDI inflows to the 10 Asean countries as well as Timor Leste increased slightly, by 1%, to US$126 billion in 2015. Inflows to Singapore, the leading recipient country in Asean, dropped by 5% to US$65 billion, and the total amount of announced greenfield investments by multinational enterprises (MNEs) in the country decreased from US$12 billion in 2014 to US$8 billion in 2015.”
Globally, FDI flows are expected to decline by 10% to 15% this year, resume growth in 2017 and surpass US$1.8 trillion in 2018. “The expected decline of FDI flows in 2016 reflects the fragility of the global economy, persistent weakness of aggregate demand, effective policy measures to curb tax inversion deals and a slump in MNE profits. Barring another wave of cross-border M&A deals and corporate reconfigurations, FDI flows are likely to decline in both developed and developing economies,” the report says.
Last year, FDI recovery was strong but lacked productive impact. It jumped 38% to US$1.76 trillion, somewhat at odds with the global macroeconomic environment, which was dominated by slowing growth in emerging markets and a sharp decline in commodity prices. The principal explanation for this seeming inconsistency was a surge in cross-border M&A, especially in developed economies.
“A surge in cross-border M&A to US$721 billion, from US$432 billion in 2014, was the principal factor behind the global rebound. The value of announced greenfield investments remained high at US$766 billion. Part of the growth in FDI was due to corporate reconfigurations. These transactions often involve large movements in the balance of payments, but little change in actual operations,” says the report.
Global investment flows to offshore financial hubs declined but remain significant. The volatility of investment flows to offshore financial hubs, including those to offshore financial centres and special purpose entities, increased last year.
The report notes that companies in the digital economy feature increasingly among the top 100 MNEs, led by the US software giants and Asian equipment manufacturers. The growing impact of the digital economy is becoming evident, driven by innovation, consumers’ hunger for new devices and lifestyles linked to the digital economy, and companies’ rapid uptake of new technologies.
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