Assessing the impact of the current financial and economic crisis on global FDI flows

The year 2008 will mark the end of a growth cycle in international investment that started in 2004 and saw world foreign direct investment (FDI) flows reach a historic record of $1.8 trillion in 2007. Due to the impact of the ongoing worldwide financial and economic crisis, FDI flows could decline by more than 20 per cent in 2008. A further decrease in FDI flows can be expected in 2009, as the full consequences of the crisis on transnational corporations' (TNCs)' investment expenditures will continue to unfold. The fall in global FDI in 2008-2009 is the result of two major factors affecting domestic as well as international investment. First, the capability of firms to invest has been reduced by a fall in access to financial resources, both internally - due to a decline in corporate profits - and externally - due to lower availability and higher cost of finance. Second, the propensity to invest has been affected negatively by economic prospects, especially in developed countries that are hit by severe recession. The impact of both factors is compounded by the fact that, as of early 2009, a very high level of risk perception is leading companies to extensively curtail their costs and investment programmes in order to become more resilient to any further deterioration of their business environment. All of the three major types of FDI (market-seeking, efficiency-seeking, and resources-seeking) will be impacted by these factors, though with different magnitudes and consequences on location patterns The setback in FDI has particularly affected cross-border mergers and acquisitions (M&As), the value of which was in sharp decline in 2008 as compared to the previous year's historic high. It has also taken the form of a rising wave of divestments and restructurings. International greenfield investments have been less impacted to this point, but could be increasingly affected in 2009 as a large number of projects are presently being cancelled or postponed. However, the impact on FDI is different, depending on region and sector. Developed countries have so far been the most affected, with a decline in FDI inflows in 2008, due mainly to sluggish market prospects. Flows into developing economies continued to grow in 2008, but at a much lower rate than the year before. An outright decline in FDI inflows to those countries is possible in 2009, due to a pull-back both in efficiency and resource-seeking FDI aimed at exporting to advanced economies that are currently depressed, and in market-seeking FDI aimed at servicing local markets with growth prospects that, although still positive, have receded. Among industries, FDI flows to financial services, automotive industries, building materials, intermediate goods and some consumption goods have been the most significantly affected to date. But the consequences of the crisis are now quickly expanding to FDI in other activities, ranging from the primary sector to non-financial services,download.