UNCTAD: Global FDI rises in 2015, slows in Africa
The UN Conference on Trade and Development (UNCTAD) recently released the 2016 edition of its World Investment Report, entitled “Investor Nationality: Policy Challenges”. The document shows global flows of foreign direct investment (FDI) rose by 38 percent in 2015, reaching US$1.76 trillion, its highest level since the 2008 financial crisis.
“A 38 percent jump in flows, to US$1.76 trillion, gives hope that global FDI is at long last returning to a growth path. But we are not yet out of the woods," said Mukhisa Kituyi, UNCTAD’s Secretary General, at the launch of the report.
This rise in FDI can mainly be attributed to a surge in cross border mergers and acquisitions, which increased from US$400 billion to US$700 billion in 2015, according to UNCTAD. Yet, ignoring these large-scale corporate reconfigurations, a more modest increase of 15 percent in global FDI flows is still observed.
FDI flows to developed economies jumped by 84 percent, with strong growth in flows to Europe and the United States. Developing economies also saw an increase in FDI, which reached US$765 billion, nine percent higher than in 2014. While the majority of this FDI was concentrated in Asia, the report notes that FDI flows to Africa, the Caribbean, and Latin America faltered.
Investment in Africa falters
With regard to Africa, FDI flows to the continent fell to US$54 billion in 2015, a decrease of seven percent since the previous year. This decline was especially apparent in Sub-Saharan Africa, and in particular Central Africa and West Africa. This was primarily due to low commodity prices, which continue to depress investment in natural resource based economies. The economies of the Democratic Republic of Congo, Zambia, and Mozambique were especially impacted, with FDI flows to Zambia declining by 48 percent.
Conversely, flows to least developed countries (LDCs) jumped by one third to US$35 billion. The main factor behind this record high is the surge in investment to Angola, which reported a 352 percent increase and became the largest FDI recipient among LDCs, largely due to an increase in loans by parent companies abroad. This increase in investment was not, however, afforded to the majority of other resource dependent LDCs in the region.
Despite generally bleak economic conditions on the continent, growing urban consumer markets, improved infrastructure, and favourable trade agreements attracted significant FDI inflows in a number of African economies. The German pharmaceutical company Merck, for example, opened its first office in Nigeria as part of a broader African expansion, and French chocolatier Cémoi established its first chocolate processing factory in Côte d’Ivoire.
The United Kingdom and the United States remain the largest investors on the African continent. However, it is worth noting that China overtook South Africa as the largest developing country investor on the continent, and surpassed the United States as the largest investor in the LDCs.
Despite last year’s high level of investment worldwide, global FDI flows are expected to decrease by 10 to 15 percent in 2016. This is primarily due to “the fragility of the global economy, persistent weakness of aggregate demand, sluggish growth in some commodity exporting countries, effective policy measures to curb tax inversion deals and a slump in MNE profits,” according to the report.
In contrast, FDI inflows to Africa are expected to return to a path of growth and increase to US$55-60 billion in 2016, according to UNCTAD’s report. This rise has already become apparent in announced greenfield projects – understood as direct investments in building physical facilities from the ground up in a foreign country – in the first quarter of the year. Greenfield project announcements by Volkswagen and BMW in South Africa, Honda in Nigeria, Toyota in Kenya, and Nissan in Egypt indicate MNEs are showing a greater interest in the African auto industry in particular.
Regarding LDCs, continued reliance on natural resources is expected to lead to a decrease in FDI flows for 2016. In spite of this, Bangladesh, Ethiopia, and Myanmar are likely to experience an increase in FDI. Ethiopia has recently attracted various export-oriented investors from Asia looking for new manufacturing investment locations.
Policy trends and challenges
The UN institution’s report calls for greater attention to a number of policy challenges, including the need to scale-up investment facilitation efforts in order to ensure the achievement of the Sustainable Development Goals (SDGs). At the moment, many countries have frameworks in place for investment promotion (i.e marketing their country as an investment destination), but fall short in regards to implementing investment facilitation measures aimed at decreasing barriers to investment.
UNCTAD also underlines that the increasing complexity of investor nationality and ownership poses another major policy challenge. As the nationality of investors in and owners of foreign affiliates becomes increasingly blurred, the application of rules and regulations on foreign ownership becomes increasingly challenging as well.
The report also notes that 80 percent of countries restrict majority foreign ownership in at least one industry in an attempt to bolster the benefits of domestic ownership. However, “in an era of complex multinational ownership structures, the rationale and effectiveness of this policy instrument needs a comprehensive re-assessment,” notes Ban Ki-moon, the UN’s Secretary-General, in the preface of the report.
In an effort to remain competitive in Africa’s capital market, countries like Kenya and Tanzania have already abolished such restrictions, allowing 100 percent foreign ownership of a given company in order to attract greater levels of investment.
Concluding the key messages of the report, Mukhisa Kituyi emphasises that, on the whole, “it is important to find a balance between liberalization and regulation in pursuing the ultimate objective of promoting investment for sustainable development.”