Tough times return for FDI

August 2015  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

August 2015 Issue

August 2015 Issue

For the foreign direct investment (FDI) industry, 2014 was a mixed bag indeed. A year which began with encouraging hints that the FDI market was poised to recover from a period of stagnation (due to strong investments in 2013), ended modestly in terms of investment on the greenfield projects front.

This, by and large, is the assessment to be found within the pages of the ‘fDi Report 2015: Global Greenfield investment trends’ – an annual analysis of the FDI industry carried out by fDI Intelligence, a specialist unit of the Financial Times.

An FDI industry struggling to rebound is the picture painted, but the report goes even further, presenting a litany of stark and uncompromising figures which demonstrate that the tough times of the past have indeed returned – tough times that look set to remain for the foreseeable future.

The reasons for such a bleak outlook are of course varied and complex.

A.T. Kearney’s 2015 FDI Confidence Index suggests macroeconomic uncertainty as the most important factor, followed by a lower risk tolerance. The Index also reveals that in identifying markets for FDI, investment promoters are continuing to prioritise market size, followed by a variety of regulatory factors which affect the ease of doing business and the overall security environment.

Taken in tandem, the Report and the Index offer a none too promising view as to the prospects for FDI in the short, medium and long term.

Tough times return

With growth in 2014 equating to just a tiny percentage, times do appear grim for the FDI industry: greenfield capital investment increased by only 1 percent (from $642bn in 2013 to $649bn in 2014) and the overall number of FDI projects declined slightly by 1 percent.

“Last year was a very challenging year for FDI”, confirms report contributor Dr Henry Loewendahl, the founder and CEO of FDI consultancy Wavteq Ltd and a senior vice-president of fDi Intelligence. “Early signs of a sustained recovery in 2013 came to an end in 2014; greenfield investment grew by 11 percent in 2013 but only by 1 percent in 2014. FDI remains far below the pre-financial crisis peak.”

At present, would-be FDI initiators are feeling largely uncertain about the global environment.

Much of this decline in FDI, he explains, is due to the economic slowdowns seen in major FDI hosts such as Russia (a 39 percent decline in FDI projects) and Brazil (a 4 percent decline in FDI projects).

Furthermore, Dr Loewendahl’s assertions are backed up by UNCTAD (the United Nations Conference on Trade and Development) figures which highlight an 8 percent decline in FDI flows in 2014 and a 50 percent reduction in FDI flows to transition economies.

“Looking at 2015, the prospects for growth in FDI are low”, states Dr Loewendahl. “Economic growth in the European Union will continue to be lacklustre and China’s growth rate is falling. Also, the huge fall in oil prices will impact negatively on FDI in oil-producing countries.”

Bright spots

Despite the overall gloom, 2014 did provide a measure of encouragement for FDI aficionados, with China, in a development seemingly at odds with Dr Loewendahl’s view, assuming the mantle of the largest greenfield investor in the United States, providing $9bn in capital investment – a trend driven by major investments in real estate, hotels and tourism, and chemicals.

“Growth in China’s economy has been slowing, but this tends to act as in incentive to invest overseas to counter domestic overcapacity”, observes Chris Fraser, director of Asia operations at FDI consultancy Wavteq. “Major drivers for investment have been the search for resources and technology, with Chinese sovereign wealth funds also setting up in key global markets.”

Elsewhere, Africa experienced substantial growth in inward investment, with $87bn of FDI announced in 2014. Egypt also saw its investment environment and economic prospects improve via a healthy number of mega projects – $18bn of investment and a 42 percent increase in the country’s number of FDI projects.

Conclusion: FDI beyond 2015

At present, would-be FDI initiators are feeling largely uncertain about the global environment, with macroeconomic uncertainty regularly cited as the overriding reason for the weak FDI environment witnessed over the past 12 months or so.

Such disparate global economic fundamentals make for a particularly complex FDI scenario for sure, an environment not helped by the legacy of the financial crisis and the rapid increase in geopolitical tensions.

On the future of FDI, Dr Loewendahl says: “Over the next five-year period, FDI is predicted to grow on average by 2.5 percent per year. However, we expect 2015 to prove difficult, forecasting a range of between -5 percent and 1.38 percent growth.”

For now, the FDI industry is under something of a cloud, and it will remain so until global economic conditions improve to an extent that will allow FDI flows to return to representing a flood rather than a trickle.

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Fraser Tennant

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