Global FDI To Slow After Record In 2007

Global foreign direct investment flows will reach a record $1.47 trillion this year but taper off in 2008 amid a slowdown in merger and acquisitions and increased concerns over political risk, according to a survey released Wednesday.

The report, produced by the Economist Intelligence Unit and Columbia University's Program on International Investment, forecasts that global FDI will fall to $1.41 trillion in 2008 before picking up again through 2011. The rate of year-on-year increase in FDI in the next five years, however, is projected to be in the low single digits, markedly below the gains of 30% or more posted between 2004 and 2006. Underpinning foreign direct investment flows for the long term is the emergence of developing Asia - especially China - as the center of the world economy, economist Jeffrey Sachs, a contributor to the report, said at a Wednesday press conference. The continued strength of China and emerging Asian economies is a "very robust pattern we're going to be living through for a long time," said Sachs, who is director of the Earth Institute at Columbia University. Developing Asian countries are projected to receive $218.2 billion in FDI inflows this year and $224 billion next year - bucking the overall downward trend. China will capture the lion's share of these flows, with $79.5 billion expected for 2007 and $84.1 billion in 2008. The report's authors said the broader slowdown in FDI stems from a shift in the way governments think about FDI. In the last few years, governments had reached a general conclusion that foreign direct investment was "clearly helpful" for economic growth and development, CPII Executive Director Karl Sauvant said at the press conference. But "now, governments are in the process of re-evaluating the costs and benefits of foreign direct investment," said Sauvant, adding that officials are increasingly wary of crossborder transactions involving national security, strategic industries and national champions. Concerns are further heightened when the acquiring company hails from an emerging economy, particularly if the firm is a state-owned enterprise or state investment agency, Sauvant said. "The bottom line is that attitudes toward foreign direct investment are always ambivalent," and the report's authors see greater skepticism regarding crossborder M&A activity in the coming years, Sauvant said.

Investors Grow Cautious On Political Risk In Emerging Markets

FDI inflows to developed countries is projected at $940.2 billion this year before falling to $879 billion in 2008, a 6.5% decrease. The decline in inflows to emerging markets is expected to be less, with FDI dropping from $534.6 billion in 2007 to $527.4 billion next year. Between 2007 and 2011, the U.S. is expected to maintain its position as the world's top FDI recipient with an average of $250.9 billion per year, or 16.75% of the global total. China ranks third in the report's forecast with an average $86.8 billion - 5.79% of the world total - between 2007 and 2011. India ranks far lower at an average of $20.4 billion, below Brazil's $27.5 billion and Mexico's $22.7 billion. The report also highlighted a growing sense of caution among investors on political risk, particularly in emerging markets. The report's authors conducted a survey of 602 global business executives and found that political risk - which includes violence, FDI protectionism and shaky regulatory frameworks - is expected to rise over the next five years. According to the results of the survey, Iraq, Russia and Afghanistan were pegged as the countries with the highest political risk. China and Iran were also named. The survey results did reveal some ambivalence regarding the importance of political systems, however. When asked whether a country being a democracy made a significant impact on emerging market investment decisions, 45% of respondents said no. The survey also showed that 30% of participants said authoritarian regimes in emerging markets may create a more stable and predictable environment for business.