Foreign direct investment flows soar in 2000, but are likely to decline sharply in this year

• Pages: 314-315

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Global inflows of foreign direct investment (FDI) soared by 18 percent in 2000 to reach a record $1,300 billion. They are, however, expected to decline sharply by 40 percent to $760 billion in 2001, according to the World Investment Report 2001 and related material, published on September 18 by the UN Conference on Trade and Development (UNCTAD).

The main impetus behind both the growth in 2000 and the projected drop in 2001 is to be found in crossborder mergers and acquisitions (M&As). These rose by almost 50 percent last year to $1,100 billion but are now declining in line with the overall slowdown of global economic growth.

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The report observes that the rapid expansion of FDI makes it "the main force in international economic integration."

A total of some 63,000 transnational corporations, with over 800,000 foreign affiliates, drive FDI and increasingly shape trade patterns, accounting for about two-thirds of world trade.At the same time, FDI is unevenly distributed, the report emphasizes. The 30 largest host countries account for some 95 percent of total world FDI inflows and 90 percent of stocks, while 30 home countries-mainly industrial economies-generate around 99 percent of outward FDI flows and stocks.

Projected decline in 2001

The anticipated 40 percent decline in world FDI flows in 2001 would be the first drop in FDI since 1991 and the largest over the past three decades, according to an UNCTAD press release accompanying the report. The level of flows in 2001, however, would still be higher than that in 1998 and also higher than the 1996-2000 average (see table, this page).

The projected drop in 2001 is the result of a recent decline in cross-border M&As, with a significant decline in "megadeals" of more than $1 billion, which had characterized M&As in 1999 and 2000. The UNCTAD press release notes that the latest estimates were prepared before the September 11 terrorist attacks on the United States and have no relation to those events.

Given the importance of cross-border M&As between developed countries, FDI flows are expected to decrease significantly in developed countries, falling by 49 percent-from $1,005 billion in 2000 to an estimated $510 billion in 2001. In developing countries, according to UNCTAD, the decline is estimated to be 6 percent, from $240 billion to $225 billion. As a result of the decline...