UNCTAD: Higher Foreign Investment Growth Expected in 2015

9 July 2015

Global foreign direct investment (FDI) flows are set to see a rebound this year and the two following, a new UN report has said, after a general decline of investment globally in 2014.

Last year, these inflows fell by 16 percent, the UN Conference on Trade and Development (UNCTAD) said in its annual World Investment Report, with all FDI flows to developed countries declining by 28 percent, or US$499 billion. Meanwhile, inward flows to developing economies reached a new high of US$681 billion, a two percent rise, according to the report.

The new report, released late last month, estimates that FDI will now grow by 11 percent in 2015, or by US$1.4 trillion. Additional increases in 2016 and 2017 – to US$1.5 trillion and US$1.7 trillion, respectively – are also projected. This recovery option is, however, susceptible to risks such as the continued uncertainties in the Eurozone, economic spillovers of conflicts, and the vulnerabilities of emerging economies.

UNCTAD also noted the continued global shift towards services FDI, as these become more tradable and more liberalised. Another factor, the agency said, is the growth in global value chains, or GVCs. Services’ share in global FDI stock is over twice that of manufacturing, the report said.

Global trade, investment

In a nod to the various trade and investment negotiations currently underway among different country groupings, the report took a specific look at the latest investment trends for members of these regional integration initiatives.

“The groups of countries negotiating the Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP) saw their combined share of global FDI inflows decline,” the report said, referring to an EU-US agreement and 12-country Pacific Rim deal, respectively.

Both of the two initiatives are currently under negotiation, with TPP reportedly nearing the finish line. The TTIP is a comparatively newer negotiation, having kicked off just two years ago, and is not expected to be completed until 2016 at the earliest. (For more on these two negotiations, see related articles, this edition)

Meanwhile, the report noted that another regional grouping – the 10-country Association of Southeast Asian Nations, or ASEAN – has seen an increase in FDI inflows by five percent, to US$133 billion. That group is working toward establishing an economic community by the end of this year.

Those countries involved in another Pacific-focused trade negotiation, the Regional Comprehensive Economic Partnership (RCEP), also saw increases by four percent, to US$363 billion.

These regional group trends were largely the result of broader global trends, as well as geopolitical and economic performance factors. The agency predicts that as these integration efforts advance, FDI in these groups will increase both intra- and extra-regionally, though for different reasons.

Investment regime

One of the issues that has captured the public spotlight during both these “mega-regional” trade negotiations and others is the planned inclusion of investor-state dispute settlement mechanisms (ISDS), and the resulting debate over whether such provisions could affect a member country’s right to regulate domestically in the public interest.

The UNCTAD report address the issue of international investment governance, arguing for a reform of the international investment agreement (IIA) regime.

“There is a pressing need for systematic reform of the global IIA regime,” the UNCTAD report said. “The question is not about whether or not to reform, but about the what, how, and extent of such reform.”

Among the various policy options put forward by the UN agency include safeguarding the right to regulate; reforming ISDS; promoting and facilitating investment; ensuring responsible investment; and improving the “systemic consistency” of the current IIA regime.

Specifically regarding ISDS reform, the report suggests options such as reforming current ad hoc arbitration for this mechanism, as well as replacing existing ISDS arbitration systems.

Furthermore, the document says, countries who aim to replace the ISDS system could do so by setting up “a standing international investment court,” or instead by focusing on state-to-state resolution of disputes.

Regarding the regime’s overall coherence, these new mega-regional initiatives could potentially serve as a way to consolidate various existing bilateral investment treaties (BITs), the report said in its IIA suggestions, warning about the current “spaghetti bowl” in intertwined agreements and the resulting overlaps and inconsistencies.

“Although to date parallelism has been the prevalent approach, current regional and megaregional IIA negotiations (e.g. negotiations for the EU–United States Transatlantic Trade and Investment Partnership (TTIP) or for the Trans-Pacific Partnership (TPP)) present an opportunity to consolidate the existing network of BITs,” the report says.

Should these groups and others choose to replace existing BITs with these forthcoming agreements, it could “streamline” the current IIA regime significantly, the UNCTAD report said.

Sustainable development

This year’s report comes shortly before the Third International Conference on Financing for Development (FfD3) conference in Addis Ababa, Ethiopia. This high-level UN meeting, set for 13-16 July, is aiming to reach an intergovernmentally negotiated and agreed outcome on development financing. A new draft outcome document for the conference was released on 7 July.

In that context, the UNCTAD report highlights the potential role FDI can play in financing for development, as well as the need for improving mobilisation of domestic resources in order to fund progress in meeting the planned Sustainable Development Goals (SDGs), also under negotiation under another UN process.

The report notes the role taxation plays as a source of development financing, warning that “tax avoidance practices are responsible for a significant leakage of development financing resources.”

“An estimated US$100 billion annual tax revenue loss for developing countries is related to inward investment stocks directly linked to offshore investment hubs,” the report said.

The UNCTAD document also called for ensuring that international tax and investment policies “are mutually reinforcing,” citing the role these can play in establishing an enabling environment for investment, as well as meeting development financing targets.

ICTSD reporting.

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