Developed economies’ FDI plummets as restrictions rise

FDI flows to developed countries fell by 27% to $557bn, marking the third consecutive year of decline, while flows to Europe halved to $172bn against a backdrop of restrictions, according to Unctad’s World Investment Report (WIR) released on June 12, 2019.

Unctad’s WIR, which counted 112 new policy measures across 55 countries relating to foreign investment and categorised them as either restrictive or liberalisation measures, found that restrictive regulation was at its highest level in decades.

“Last year, 34% of the measures introduced were in the direction of restrictive to foreign investment or less favourable to foreign investors. Interestingly, the liberalisation and promotion facilitation measures are mainly introduced by developing economies, while the restrictive measures tend to be from developed countries,” Dr James Zhan, lead author of the report, told fDi.

The poor FDI performance of developed economies was largely spurred on by the repatriation of US multinational companies’ (MNCs) accumulated earnings, following the US tax reform implemented at the end of 2017, as Europe experienced its lowest level of FDI since 2004.

Ireland and Switzerland, countries which have historically hosted the financial functions of US MNCs, were particularly affected with FDI flows falling, respectively, by $65bn to -$66bn, and by $126bn to -$87bn. Despite significant tax reform related outflows, Ireland recorded a record 221 greenfield FDI projects in 2018, according to greenfield investment monitor fDi Markets.

Amid Brexit uncertainty, FDI flows to the UK dropped by 36% to $64bn, but Brexit’s long-term effects on FDI are unclear. Despite the fall in total FDI inflows, reinvested earnings rose by 73% to $33bn.

M&A motor

On a positive note, Australia recorded a new high after a 43% surge in FDI flows to $60bn, partially due to $19bn of net M&A sales relating to financial and insurance activities. In the Netherlands FDI was up 20%, as the repatriation impact was offset by the completion of a few megadeals.

Although insufficient to offset falling total FDI flows, crossborder M&A activity of US MNCs revived to a new high, as acquisitions of European assets by US MNCs more than doubled to $172bn, while those acquired by European MNCs more than quadrupled to $119bn.

FDI in the US receded by 9% to $252bn, largely due to falling intracompany loans, while net M&A sales of US assets to foreign investors slumped by a third to $199bn, largely due to the absence of megadeals in line with rising restrictions.

Despite a mixed performance across developed countries and an expectation of a recovery in 2019, the US tax reform, rising protectionist sentiment and increasing restrictions on foreign investment have stifled FDI across the developed world.