World foreign direct investment flows to drop this year: UN report

World flows of foreign direct investment are likely to decline 40 per cent this year, to $760 billion, according to projections released today by the United Nations Conference on Trade and Development (UNCTAD).

Should the drop happen, it would represent the first decline since 1991 and the largest over the past three decades, UNCTAD said in a statement. However, the level of flows in 2001 is still expected to be higher than that in 1998 and also higher than the 1996-2000 average. The projections are included in UNCTAD's World Investment Report 2001, launched today in Geneva.

This year's projected dip is the result of a recent decline in cross-border mergers and acquisitions, which account for the bulk of foreign direct investment. The significant increases in such flows in 1999 and 2000, by about 50 per cent and 18 per cent respectively, were caused by megadeals of mergers and acquisitions, as represented, for example, by the $200 billion acquisition of Mannesmann (Germany) by VodafoneAirTouch (United Kingdom) in 2000.

The decline in mergers and acquisitions - both cross-border and domestic - is related to the slowdown in the world economy. The prices of shares, for example, which in 2000 were used to finance some 56 per cent of cross-border mergers and acquisitions, fell significantly, when measured in terms of the exchange of stocks. A lull in the consolidation processes in certain industries through mergers and acquisitions (e.g. telecommunications, automobiles) also plays a role.

Foreign direct investment flows are expected to decrease significantly in developed countries, from $1.005 trillion in 2000 to an estimated $510 billion in 2001, or by 49 per cent. In the case of developing countries, the decline is estimated to be 6 per cent, from $240 billion to $225 billion. Decreases in foreign direct investment inflows are expected in both Latin America and developing Asia. As a result, the share of developing countries in world inflows may rise to 30 per cent, higher than the share attained in 1998. Inflows in Central and Eastern Europe are expected to remain stable in 2001, at $27 billion.