Direct Foreign Investment (DFI) in the world is on the increase

Rafael Pampillón. Professor. IE Business School

31 October 2007

Foreign direct investment is breaking all the records, to the extent that it has already passed levels recorded in 2000.

According to the annual study carried out by UNCTAD (United Nations Conference on Trade and Development) on investment trends, the incoming flows of DFI in the world (Direct Foreign Investment) in 2006 were up by more than 30% on 2005, reaching the figure of $1306 billion (thousand million). The World Investment Report 2007 indicates that the growth of DFI in 2006 was the highest level recorded since the year 2000 and the growth occurred in three groups of economies: developed countries, developing countries and economies in transition from Eastern Europe, including the Commonwealth of Independent States (CIS). According to the report, the DFI stock in the world totalled $12 billion (million million).

The increase in the incoming flows of DFI in the world and in international production revealed the sound nature of the economy in many parts of the world. In developing countries and in economies in transition, almost every region and sub-region enjoyed significant growth in DFI flows in 2006 (the exceptions being Oceania, South America and Southern Africa, where the flows fell). Among developing countries, China, Hong Kong (China) and Singapore received the highest volume of incoming DFI flows and, among the economies in transition, the Federation of Russia received the highest flows.

In Latin America, incoming DFI flows increased by 11%. Unfortunately, however, these higher incoming flows are mainly the result of the so-called tax havens. As for the outgoing DFI flows in Latin America, in absolute terms, Brazil, Mexico and Chile have led an investment process in the rest of the world, doubling their DFI abroad. This process includes investment in extractive sectors, natural resource-based manufacturing industry, and telecommunications. The report, which was published yesterday, places particular emphasis on the trend of certain countries in Latin America in which the state has intervened significantly. Commonplace government intervention in the extractive sector now includes areas such as telecommunications and electricity in Bolivia and Venezuela. Greater state intervention in some countries had a negative effect on DFI flows in said countries.

Worldwide, multinational enterprises in developed countries, with 84% of outgoing flows in the world in 2006, maintained their position as the main sources of DFI. Almost half of the outgoing DFI flows in the world came from EU countries, in particular France, Spain and the United Kingdom, in that order. Although governments continued to adopt measures to enable DFI in 2006, in some industries, especially industries considered to be of ´strategic´ importance (e.g. the extraction of minerals and oil), new restrictions were applied to foreign ownership or measures were taken to ensure greater state participation in the said sectors.

For 2007 and following years the report forecasts a continued upward trend of DFI, albeit at a slower rate than in 2006. This forecast of growth of DFI is confirmed by the figures for the first half of 2007. The DFI outlook may, however, be negatively affected by current uncertainties on financial markets and credit restrictions, as well as by measures and movements that hinder DFI in certain countries. For Latin America, the forecast suggests moderate growth for incoming DFI flows in 2007 as a result of the increase in raw material prices and the healthy outlook for profits for multinational enterprises in Latin America.

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