Hitting business in the developed world hardest, foreign direct investment (FDI) dropped by over 20 per cent last year and is projected to fall further in 2009, according to a new United Nations report which warned policy-makers to resist calls for more protectionism to aid recovery.
The UN Conference on Trade and Development (UNCTAD) publication estimated that flows of investment made by corporations outside of their own country have fallen by an average of 21 per cent worldwide to an estimated $1.4 trillion.
Unlike the 1997 financial crisis which originated in Asian nations, the current turmoil began in the developed world, with FDI inflows contracting in Europe in particular, with reductions of almost 174 per cent to Finland, 120 per cent to Ireland and 94 per cent to Italy.
However, UNCTAD notes that the present crisis is rapidly spreading to developing and transition economies.
The agency points to the credit crunch afflicting corporations, both internally, due to a decline in profits, and externally, due to lower availability and higher cost of finance, as well as a general reluctance to risk investing overseas in a time of global recession as the major causes for the downturn in FDI.
In the short-term, the negative impacts of the financial and economic crises on international investment flows are expected to continue and contribute to an additional drop in overall FDI through 2009, which will also roll back gains made by developing countries.
However, the report, entitled “Assessing the impact of the current financial and economic crisis on global FDI flows,” is hopeful that various positive factors are at work that will trigger a resurgence in FDI.
It cites as reasons for optimism the investment opportunities based on cheap asset prices and industry restructuring, relatively large amounts of financial resources available in emerging countries and cash-rich oil-exporting countries, quick expansion of new activities such as new energy and environment-related industries, and the relative resilience of international companies.
UNCTAD underscores that any upward swing in FDI depends on a series of uncertain factors such as the speed of economic and financial recovery, the efficiency of public policy in addressing the causes of the present crisis, the return of investor confidence and the ability to prevent protectionist tendencies.
“The effectiveness of government policy responses at both the national and international levels in addressing the financial crisis and its economic aftermath will play a crucial role for creating favourable conditions for a new pick-up in FDI,” the report notes.
“The challenge is to restore the credibility and stability of the international financial system, to provide stimulus to economic growth in order to prevent the risk of a spiralling depression, to renew a pragmatic commitment to an open economy, potentially put at risk by rising protectionist tensions, and to encourage investment and innovation.”