Review of World Investment Report 2017
Every year, United Nation Conference on Trade and Development, short for UNCTAD, always publishes World Investment Report (WIP) which includes Analysis of the trend of FDI during the previous year, with emphasis on the development implications, the ranking of largest transactional corporations in the world, in-depth analysis of a selected topic related to FDI, policy analysis and recommendation, and concluded with statistical data on FDI flows and stocks for 196 economies in the world.
UNCTAD is a UN department which works to support developing countries in order to access to benefits of a globalized economy more fairly and effectively by providing in-depth analysis and technical assistance on trade, investment, finance, and technology. UNCTAD work at the national, regional and global level to ensure 2030 Sustainable Development Goals of United Nation.
World Investment Report in 2017 is divided into 4 chapters. The first chapter of the report summaries FDI trend in 2016 and its forecast for 2017. Chapter 2 discusses the trend and prospect in more detail by providing analysis of regional level. Chapter 3 describes recent policy development and issues. In the final chapter, WIP discusses one of the large investment sector in the world – digital economy.
This paper will summarize key points mentioned in WIP17.
At a glance, the global FDI inflow contracted 2% to $1.75 trillion due to weak economic growth and significant policy risks. However, it is expected to recover and rise by 5% to reach $1.8 trillion in 2017 and $1.85 trillion in 2018. UNCTAD’s forecast is based on preliminary 2017 data from cross-border M and announced greenfield projects.
Global economic growth in 2017 is projected to increase by 0.5% to 2.7% in 2017. Thanks to easing in fiscal policy, a rise in business confidence in the United State, cyclical momentum in Europe and Japan.
Inflows to developed countries are likely going to increase. Similar rises in FDI can also found in emerging and developing countries led by China growth and sharp expansion in natural resources and commodity price (especially oil).
2. Factors affecting FDI
According to UNCTAD business survey which aims to understand about investors’ confidence in 2017 concluded that all executives, including from top MNEs, are interested in increasing their investment between 2017 and 2019. Another survey which asks executives to comment on factors affecting their decision, demonstrates that the state of developing Asian economies and other regions economy plays a very important role. At the same time, technological change including the digital economy and global urbanization shows similar strong influences. On the negative side, change in trade agreements, exchange rate volatility, rising interest rates, debt concern in emerging markets, geopolitical uncertainty, terrorism, natural disasters, social instability, cyber threats and data security results in the decision of executives to lower their investment.
3. Most Promising Industries and countries
In developed countries and transition economies, information and communication represent the most promising industry. In Africa, developing Asia and Latin America, on the other hand, agriculture still the dominating industry.
At the global glance, China ranks first in term of most promising country for investment rated by International Promotion Agencies, followed by United States, Germany, United Kingdom, Japan, India, etc. However, from Top MNEs prospective, China ranks second after United State, and other top-ranking countries are developing economies including India, Indonesia, Thailand, Brazil, etc.
4. Top FDI inflows and outflows
Inflows FDI in 2015 and 2016 show only a small difference in most countries, except in Hong Kong, Ireland and the United Kingdom. In Hong Kong, FDI in 2016 decreased significantly from 174 to 108 billion USD. In Ireland, a sharp decrease from 188 billion to 22 billion is visible. However, Increase in the UK represents a very surprising result despite the announcement of Brexit. Inflows to this country increase from 33 billion to 254 billion USD.
On the other side of the game, United States remains its first ranking in term of FDI outward, followed by China, Netherlands, Japan, Canada, Hong Kong, France, etc.
Chinese One Belt One Road policy is going to largely influence on China’s FDI outflow and inflow in central Asia, South Asia and North Africa.
5. Regional trends
WIP divide world economies into Africa, developing Asia, Latin America and the Caribbean, Transition economies, developed economies, and least developing economies.
Africa represents 3.4% of global FDI inflow. In 2016, investing coming to Africa decreased by 3.5% because of weak commodity price and less reinvestment earning due to low profit from MNEs. Investment in Africa is hugely driven by Egypt after the discovery of gas reserves by Netherlands MNEs.
Inflow is expected to increase about 10% in 2017 due to modest oil price rise and the potential increase in non-oil FDI. Also growing inter- and intraregional integration through economic partnership agreements with Europe also represent an optimistic next year inflows.
b. Developing Asia
Developing Asia accounts for 25.3% of total FDI inflow and it shows -15.5% decreases in 2016. In East-Asia, FDI decrease in Hong Kong was a major problem although FDI inflow to China remains stable. In Southeast Asia, Singapore, Indonesia, and Thailand show decline while low-income economies (including Cambodia), represent an increase. Unlike other regions in Asia, South Asia is the only area where an increase in FDI is found. Pakistan, particular, has a growth rate of FDI at 56% due to One Belt One Road Initiative projects. In West Asia, on the other hand, weak oil price and political uncertainty continue to discourage investment
.Outflows from developing countries rose by 7% during the period mainly driven by Chinese MNE.
In 2017, inflow to developing Asia is expected to increase by 15% due to major recipients’ countries such as China, India, and Indonesia reform its incentive to attract investment. In South and South-East countries, mainly, Bangladesh, Nepal and the Philippine is expected to receive more FDI due to production line that require cheap labor are operated in the neighboring country.
c. Latin America and the Caribbean
This region consists of 8.1% of world FDI with a decrease of -14.1% in 2016. This was due to an economic recession, weak commodity price, economics and condition of US to discourage trade. Investments are expected to decrease further by 10% due to macroeconomic condition challenges, and unpredictable policymaking of the US.
d. Transition economies
Accounting for 3.9% of the total, this region performs very well in 2016 attracting 81.1% more investment. Inflow to Kazakhstan and Russian Federation increased significantly in both oil and non-oil industry (including mining exploration).
Import substitute and privatization strategy of Russia is likely to bring the regions more investment inflows.
e. Developed Economies
Sharing the most portion of the pie, 59.1%, th FDI inflow increases by 4.9% in this area during 2016 thanks to megadeal of M&A in the United Kingdom in 2016.
Taking consideration of Brexit, the effect is going to take a few years to realize since its 2016 inflow was announced since 2015 even before Brexit is publically announced. Therefore, it has limited impacts on FDI until the terms of the departure become clearer. While General Motor (GM) and Nissan withdrew their funds from the UK, Toyota announced an increase in investment. However, a lot of MNEs has moved their headquarters away from the UK to other EU member countries.
Fiscal and tax policy in the US causes uncertainty in predicting inflow and outflow of FDI in the developed area.
f. Least Developing Countries
With 2.2% of total inflow, the region encounters a decrease of -12.8% Official Development Assistance (ODA) and remittance are the most important source of development funding rather than FDI. FDI in LDCs is expected to recover in 2017 due to regional integration in ASEAN and large-scale FDI projects in Africa.
One of top 10 largest Greenfield projects announced in 2016 includes one project in Cambodia in industrial building construction by Tianrui Group of China with an estimated capital expenditure of 2 billion USD.
6. Recent Policy Development
In 2016, 124 policies by 58 countries have been informed. Liberalization and promoting FDI shares a big portion of 84, while 22 of policies appear to put more restriction and 18 policies seems to be neutral.
a. Investment facilitation and promotion predominant
l Investment facilitation. Ex: Cambodia launched an online business registration system as a single window for providing all the service related to registering a business and keeping the business registration up-to-date
l New Investment Incentive. Ex: Algeria introduced a new investment law offering tax incentives and infrastructure that is needed for investment projects.
l Policies related to special economic zones. Ex: Bangladesh offered a new package of incentives for investors in special economic zones, exempting developers and investors from value-added tax and import duties on items directly linked with the development and construction of SEZs
l New public-private partnership regimes. Ex: Argentina enacted a PPP law to establish a legal framework and to attract private investment in key areas such as public infrastructure.
l Reform of the domestic system of investment dispute resolution. Ex: Bahrain introduced two specialized courts for commercial and investment disputes, aiming to ensure that disputes will be resolved quickly and fairly.
l Financial services. Ex: The Philippines allows 100% foreign ownership in lending, financing, and investment houses.
l Extractive industries and land ownership. Ex: Myanmar introduced new Condominium law permitting foreigners to own up to 40% of condominium building.
l Increase of foreign ownership ceiling in stock exchange. Ex: Zimbabwe expanded foreign ownership limits, allowing foreign investors to own up to 49% of listed companies.
l Privatization. Ex: Russian Federation partially privatized Alrosa (diamond mining company) and Rosneft (Oil Company)
c. New Restriction
l New Restrictive and regulatory measures in strategic industries. Ex: Australia bans some acquisitions by private foreign investors on certain infrastructure assets from the Commonwealth, a State, a Territory or a local governing body.
l National security. Ex: Canada issued “Guidelines on the National Security Review of Investments” in an effort to provide more clarity to foreign investors.
l Concerns about local producers’ competitiveness. Ex: Indonesia limits 20% on foreign ownership in companies that offer electronic payment service.
l Regulations on land ownership by foreign investor. Poland puts more restrictions for the acquisition of agricultural and forest land and for purchasing shares in Polish companies that have agricultural property.
7. Common Objective of investment laws
Out of 86 investment laws being examined, 78 aims to promote investment, 56 aims to achieve certain economic development, 43 related to investment protection and 40 in social development. Sustainable development and environmental protection only have 13 and 4 respectively.
8. Investment and the Digital Economy
Out of top 100 MNEs in 2015, 19 are ICT MNEs (9 Telecom, 10 Technology MNEs). They played a very important role in FDI.
Besides ICT MNEs, the digital economy also comprises of digital MNEs. These include internet platforms (Facebook, eBay, Groupon, Baidu, Yahoo), digital solutions (Paypal, Worldpay, First Data..), E-commerce (Alibaba, JD.com, Expedia, Amazon..), and digital content (Comcast, Tencent..etc).
In 2015, Among top Technology MNEs and Telecom MNEs, 41% and 66% of assets are owned by foreign investors compared to 65% of others MNEs.
As the world is changing to the digital era, policymakers are faced with a number of challenges.
First, they should attract international investment in the digital economy that relies less on some factors such as low-cost labour, and more on others, such as infrastructure, skills and low-cost energy.
At domestic investment rules and regulations, policy need to assess how new modes of investment and changing investment impacts affect existing rules, and vice versa.