Global FDI declined by 18% in 2012: UNCTAD

(Developing countries received majority of investment in 2012, led by the BRICS nations which saw an increase in flows from US$7 billion in 2000 to US$145 billion in 2012, accounting for 10% of world total. FDI inflows to India declined by 29% to US$26 billion in 2012, however future prospects remain bright.)

According to World Investment Report 2013 published by UNCTAD, the global foreign direct investment (FDI) fell by 18% to US$1.35 trillion in 2012, mainly due to economic fragility and policy uncertainty prevalent in a number of major economies. In contrast to this sharp decline, other key economic indicators such as GDP, international trade and employment all registered positive growth at the global level.

For 2013, the report projects that FDI will remain close to the 2012 level, with an upper range of US$1.45 trillion. With improving macroeconomic conditions and increasing investor confidence in the medium term, transnational corporations (TNCs) may convert their record levels of cash holdings into new investments. FDI flows may then reach the level of US$1.6 trillion in 2014 and US$1.8 trillion in 2015. However, the report warns that significant risks to this growth scenario remain. Factors such as structural weaknesses in the global financial system, the possible deterioration of the macroeconomic environment, and significant policy uncertainty in areas crucial for investor confidence might lead to a further decline in FDI flows.

Compared to the developed economies, the report finds that FDI flows to developing economies proved to be much more resilient, recording their second highest level- even though they declined slightly (by 4%) to US$703 billion in 2012. They accounted for a record 52% of global FDI inflows, exceeding flows to developed economies for the first time ever, by US$142 billion. The global rankings of the largest recipients of FDI also reflect changing patterns of investment flows: 9 of the 20 largest recipients were developing countries. Among regions, flows to developing Asia and Latin America remained at historically high levels, but their growth momentum weakened. Africa saw a year-on-year increase in FDI inflows in 2012. Moreover, outflows from developing economies’ reached US$426 billion, a record 31% of the world total. Asian countries remained the largest source of FDI, accounting for three quarters of the developing-country total. FDI outflows from Africa tripled while flows from developing Asia and from Latin America and the Caribbean remained at the 2011 level.

Developed nations witnessed a decline of 32% in their FDI inflows and fell to US$561 billion. Both Europe and North America saw their inflows fall, as did Australia and New Zealand . The European Union alone accounted for almost two thirds of the global FDI decline. However, inflows to Japan turned positive after two successive years of net divestments. Outflows from developed economies too fell by 23% to US$909 billion. Both Europe and North America saw large declines in their outflows, although Japan bucked the trend, keeping its position as the second largest investor country in the world.

Trends in India ’s FDI

The BRICS countries ( Brazil , the Russian Federation , India , China and South Africa ) have emerged as not only major recipients of FDI but also important outward investors. Their outward FDI rose from US$7 billion in 2000 to US$145 billion in 2012, or 10% of world flows.

However, during 2012, FDI flows to developing Asia decreased by 7% to US$407 billion in 2012. This decline was reflected across all sub-regions, particularly in South Asia , where FDI inflows fell by 24%. India continued to be the dominant recipient of FDI inflows to South Asia in 2012. However, FDI inflows to India declined as well by 29% to US$26 billion in 2012 as high inflation rate increased risks for both domestic and foreign investors, which adversely impacted investor confidence and led to decline in FDI inflows to India . A number of other factors, however, positively influenced FDI prospects in the country. Inflows to services are likely to grow, thanks to ongoing efforts to further open up key economic sectors, such as retailing. Flows to manufacturing are expected to increase as well, as a number of major investing countries, including Japan and South Korea, are establishing country- or industry-specific industrial zones in India

Warm regards,

Dr. S P Sharma

Chief Economist