Global Foreign Direct Investment Trends
By Nasir Hafeez
According to the latest figures of the World Bank, IMF, ADB and other international agencies, there has been an overall phenomenal increase in the inflows of foreign direct investment around the globe since the start of the new millennium. It was at its peak in 2000, plunged by nearly 40 per cent in 2001 and slumped again in 2002-03. According to figures, it was the longest and biggest decline. However, 2004 marked the start of a rapid recovery and now it is in its third year. During this time, global FDI flows have risen by over 20 per cent a year. In fact, now it is estimated that global FDI is sailing through a favorable era, which can be extended, to the rest of the decade. With single-digit growth from 2007 onwards, global FDI inflows will in 2010 match the 2000 peak of US$1.4 trillion in nominal terms.
FDI and emerging markets
The post-2003 bounce back has been driven by emerging markets. FDI inflows to these regions grew by 57 per cent in 2004 and 26 per cent in 2005 to reach a record high of almost US$400 billion or more than 40 per cent of the global total.
According to the Global Competitiveness Report (2006-07), Pakistan scored relatively well on market efficiency (ranked 54th) with “business sophistication” and “innovation” (ranked 60th and 66th respectively which is a good sign for foreign investors.
According to Standard and Poor’s (S&P) the rising trend of FDI in emerging market economies (EME) is expected to continue in 2005. FDI inflows to EMEs increased at a rapid pace in 2004, reaching US$286 billion, which was a 42 per cent increase over 2003. As a result, global FDI flows increased for the first time in three years, reaching US$648 billion. It was 2.5 per cent higher than in 2003.
Future predictions
FDI flows to emerging markets will remain buoyant in 2006-10, averaging over US$400 billion per year, but growth rates will be modest as privatisation tails off and the global economy slows. FDI inflows may be dried up in the country as the process of privatization completes. Across the regions, in the Kingdom of Thailand, Federative Republic of Brazil, and the Republic of Poland, FDI in retail has been an important source of productivity growth, resulting in lower prices and higher consumption.
In 2006, inflows of FDI to emerging markets are expected to increase by only about 3 per cent in US dollar terms whereas inflows into the developed world are projected to rise by some 36 per cent. In part this is because the recovery in flows to emerging markets is largely complete, while that for developed countries is just getting started.
The United States, the world’s largest economy, is expected to continue to be a powerful magnet for foreign capital, attracting almost a quarter of the world’s FDI flows in 2006-10.
The United Kingdom is listed as the top recipient of FDI in 2005 at $164 billion. The top ten recipient countries mostly in the developed world are expected to account for more than two-thirds of global FDI inflows.
These countries include: the United Kingdom; the United States; China; France; Luxembourg; the Netherlands; Hong Kong; Canada; Singapore and Germany.
Phenomena of mergers and acquisitions
It is predicted that most of the increase in the inflows of the global FDI from 2007 onwards will take place in developed countries and cross-border mergers and acquisitions (M&A) will be the driving force in it.
The value of cross-border M&A surged to US$435 billion in the first half of 2006, a 48 per cent increase over the same period in 2005, and was concentrated heavily in the developed world. FDI flows have moved from resources to services as in banking (Barclays/Absa deal) and telecommunications (Vodafone/Vodacom deal).
Role of protectionism or economic nationalism
It has been predicted that due to increasing incidents of protectionism or economic nationalism, there could be a decline in the inflows of FDI and pace of cross-border mergers and acquisitions (M&A) in the days to come.
The rise of protectionism against China by the EU and the USA may hurt the true spirits of M&A. The European Commission and the US Congress have already initiated legal measures to protect their economies from the onslaught of Chinese goods and foreign possessions.
The deteriorating law and order situation, the slowing of the privatization process, lesser reforms mechanism and increasing levels of corruption, widening economic parities and finally high political risk are supposed to be one of the main reasons for the gradual slowing of inflows of FDI in emerging markets.
FDI and FPI in Pakistan
According to official claims, the country is aiming to obtain US$7 billion in foreign direct investment within the current financial year. The government is planning road shows in Middle East and Europe to inform investors of the many opportunities for investment in the country in manufacturing as well as infrastructure projects.
In this regard, the Privatization Commission has already published its priority list for the year 2007 sale-out. The inflow of foreign direct investment (FDI) also went up significantly during the first two months of the current fiscal year. During July-August 2006-07, FDI reached $375.4 million against $230.8 million during the corresponding period last year, showing a rise of 63 per cent.
Pakistan had received record FDI of about $3521 million during 2005-06, including privatisation proceeds. Experts believe that high portfolio investments would improve the country’s image abroad and the higher FDI is proof that the country has potential for foreign investment.
Comparative analysis
Of the FDI inflows to Pakistan in 2004-05 and 2005-06, the communication sector had the largest share with $517 million or 34 per cent. This was followed by financial business – 17.7 per cent, oil, gas and petrochemical – 14.3 per cent, power – 4.8 per cent, trade – 3.4 per cent, chemicals – 3.3 per cent and others – 22.5 per cent.
Recently, the government also established an Investors Relations Desk in the Ministry of Finance to keep foreign investors updated on Pakistan’s economy. As per their statistics, Pakistan exhibited an increase of 37.7 per cent in terms of total investment in the first two months of the current fiscal year against the same period last year.
Global depository receipts
Plans are underway to raise at least one billion dollars through overseas global depository receipts (GDRs) offerings from the financial sector alone. MCB, National Bank of Pakistan, United Bank Limited, Habib Bank and Kot Addu Power project are in line to launch their IPO and GDRs in the days to come.
However, due to several delays, OGDC’s share prices have dropped from Rs165 in June to Rs125 despite new discoveries by the Corporation.
MCB’s GDR floatation of $100 to 150 million by Merill Lynch is already underway and plans for road-shows in Far East, Middle East, Europe and North America are commencing from the next month.
Foreign private investment in Pakistan’s stock market suddenly jumped in September 2006. Almost all investments came from the United States and the United Kingdom.
According to the latest figures of SBP (2006), an investment to the tunes of $42.096 million flew into the Pakistani stocks markets. It was much higher than the portfolio investments made in July and August that total $31.9 million. While the usually active Singapore, the UAE, Saudi Arabia and some European countries remained on sidelines, the US invested $26.730 million and the UK $16.371m in September. Most of the investments went in the oil sector, while telecommunications and cement also attracted some investments.
Analysts believe that if this pace of portfolio investment continues for the whole year, it might cross last year’s investments.
Concluding remarks
FDI is the engine of to-day economic growth. Countries need more FDI and FPI in order to generate job opportunities, and desired economic targets. For Pakistan, it is a question of sustenance because FDI is vital for the reduction of widening of trade and account deficits.
In fact, Pakistan’s current account deficit has swelled to $5.5 billion in the FY06 and it was FDI worth $3.5 billion which included $1.5 billion privatization proceeds and $2 billion green field foreign investment that saw it sailing through the crisis. Hence it is imperative that efforts me made to attract more and more FDI and FPI.
nasir hafeez
September 13, 2010
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