Global FDI shrinks for third year as US firms repatriate profits

Global FDI shrinks for third year as US firms repatriate profits

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The United Nations Conference on Trade and Development (UNCTAD) reports that global foreign direct investment (FDI) flows fell at double-digit rates in 2018, the third consecutive annual decline, the contraction largely caused by U.S. multinationals repatriating earnings from abroad.

According to UNCTAD’s World Investment Report 2019, global FDI last year slid by 13% to US$1.3 trillion from $1.5 trillion the previous year.

“The contraction was largely precipitated by United States multinational enterprises (MNEs) repatriating earnings from abroad, making use of tax reforms introduced by the country in 2017, designed for that purpose,” the report said.

Hardest hit by the earnings repatriation were developed countries, where flows fell by a quarter to $557 billion—levels last seen in 2004.

“FDI continues to be trapped, confined to post-crisis lows. This does not bode well for the international community’s promise to tackle urgent global challenges, such as abject poverty and the climate crisis,” UNCTAD secretary-general Mukhisa Kituyi said.

“Geopolitics and trade tensions risk continuing to weigh on FDI in 2019 and beyond,” he cautioned.

The tax-driven fall in FDI, which occurred in the first two quarters, was cushioned by increased transaction activity in the second half of 2018. The value of cross-border merger and acquisitions rose by 18%, fueled by U.S. MNEs using liquidity in their foreign affiliates.

Developing country flows managed to hold steady, rising by 2%, which helped push flows to the developing world to more than half (54%) of global flows, from 46% in 2017 and just over a third before the financial crisis.

Half of the top 20 host economies in the world are developing and transition economies.

According to the report, developing Asia continued to be the world’s largest FDI recipient region, absorbing 39% of global inflows in 2018, up from 33% in 2017.

Despite the FDI decline, the United States remained the largest recipient of FDI, followed by China, Hong Kong, and Singapore. In Asia, other major host economies to make it to the list are India, Indonesia, Vietnam, and South Korea.

In terms of outward investors, Japan became the largest followed by China and France. The United States was out of the top 20 list, due to its MNEs’ massive repatriation of investment earnings.

In 2019, FDI is expected to recover in developed economies as the effect of the U.S. tax reforms winds down.

Greenfield project announcements—indicating forward spending plans—also point to a rise, as they were up 41% in 2018 from a low in 2017.

Nevertheless, the weak underlying FDI trend indicates that a rise in FDI may be relatively modest and may be further reined in by other factors, such as geopolitical risk, escalating trade tensions and a global shift towards more protectionist policies, said UNCTAD.

The underlying FDI growth trend has been anemic since 2008. If one-off factors such as tax reforms, mega deals and volatile financial flows are stripped out, FDI over the past decade averaged only 1% growth per year, compared with 8% between 2000 and 2007, and more than 20% before 2000.

“The stagnating trend of the decade is ascribed to a range of factors that include declining rates of return on FDI, the increasingly asset-light forms of investment and a generally less favourable investment policy climate,” said UNCTAD’s investment and enterprise director James Zhan.

“However, the current trend is more of policy driven than economic cycle driven,” he emphasized.

Photo: Christian Wolf

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