Foreign Direct Investments – recent trends
Global Foreign Direct Investment (FDI) inflows fell by16% in 2014 to US$ 1.23 trillion. The decline in FDI flows contrasted to macroeconomic variables such as GDP, trade, gross fixed capital formation and employment, which all grew.
The global FDI decline masks regional variations. While developed countries and economies in transition saw significant decreases, inflows to developing economies remained at historically high levels. FDI flows to the latter now account for 55% of the global total. Developing Asia drove the increase, while flows to Latin America declined and those to Africa remained flat.
FDI flows to Asia grew by 9% to US$ 465 billion in 2014 with the Philippines’ inflow around US$ 3 billion or less than 1%. I have written about the reasons for this various times already; the next government starting fresh in 2016 will have to look at this dismal percentage in more detail and design new strategies that will attract FDI, especially in areas where inclusive growth and employment can be created, such as manufacturing, agriculture and tourism.
Countries’ investment policy measures continue to be predominantly directed towards investment liberalization, promotion and facilitation. Measures geared towards investment in sectors important for sustainable development are still relatively rare. In 2014, according to UNCTAD’s count, 37 countries and economies adopted 63 policy measures affecting foreign investment. Of these measures, 47 related to the liberalization, promotion and facilitation of investment while 9 introduced new restrictions or regulations on investment. The share of liberalization and promotion increased significantly.
With the addition of 31 international investment agreements (IIAs), the IIA regime has grown to 3,271 treaties by the end of 2014. 2014 also saw the conclusion of 84 double taxation treaties; these treaties govern fiscal treatment of cross-border investment operations between host and home states.
Although the outlook for FDI remains uncertain, an upturn in global FDI flows is anticipated in 2015 and beyond. However, the FDI growth scenario could be upended by a multitude of economic and political risks, including ongoing uncertainties in the Eurozone, potential spillovers from geopolitical tensions, migrant flows, and persistent vulnerabilities in emerging economies.
According to UNCTAD’s survey, carried out in collaboration with McKinsey & Company, of over 1,000 top managers in companies based in 89 countries, the managers outlined the following factors influencing future global FDI activities:
Macroeconomic Factors
- State of the US economy
- State of the economies in the BRICs and other emerging economies
- Quantitative-easing programs
- Commodity prices
- State of the EU economy
- Global financial regulations
- Changes in corporate tax laws
- Austerity policies
- Concerns of sovereign-debt defaults
Corporate and external factors:
- Offshore outsourcing of service functions
- Offshore outsourcing of manufacturing functions
- Concerns over energy security
- Concerns over food security
- Reshoring of manufacturing functions
- Natural disasters (including pandemics).
The Philippine government better has a close look at some of the factors, such as income tax reform (positive to attract investors), toying around with less fiscal incentives for investors (negative), providing energy security at competitive prices and creating the environment for investments in manufacturing and services.
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