According to the UNCTAD (United Nations Conference on Trade and Development) World Investment Report 2019, global FDI flows declined 13% in 2018 to USD1.3tn, the third consecutive year of decline.
The report attributes the decline as ‘mainly due to large repatriations of accumulated foreign earnings by United States multinational enterprises (MNEs) in the first two quarters of 2018, following tax reforms introduced at the end of 2017, and insufficient compensation from upward trends in the second half of the year.’ However, it goes on to note that ‘Even disregarding the fluctuations caused by the tax reform and the increase in crossborder M&As, the underlying FDI trend – which discounts the volatility caused by one-off transactions and swings in intra-firm financial flows – was still negative. Average annual growth in the underlying trend, which was above 10 per cent until a decade ago, has since stagnated at less than 1 per cent.’
On a somewhat more positive note UNCTAD expects global investment to recover 10% in 2019 to USD1.5tn, although this remains below the average of the last 10 years. The report cites geopolitical risks, trade tensions and protectionism as weighing on the recovery. Other longer-term trends at play include policy factors such as foreign ownership restrictions, national security considerations and structural changes such as the adoption of digital technologies driving a shift to intangibles and asset-light forms on international production.
Despite the trade tensions China’s overall FDI flows have held up well so far: incoming FDI flows rose 4% yoy to USD139bn in 2018, ~10% of global flows. Notably, the relaxation of foreign ownership limits in the automotive, power, ship and aircraft sectors since July 2018 helped to boost FDI flows into the manufacturing sector. Moreover, in 2019 China passed a new Foreign Investment Law and relaxed investment limits in parts of the service industry and data from China’s Ministry of Commerce show FDI up 6.8% yoy for the first 5 months of the year reaching CNH369bn (~USD53.6bn).