The World Investment Report (WIR) of UNCTAD finds the prospects for global foreign direct investment (FDI) gloomy during this year — it is expected to drop below $1.2 trillion from $1.7 trillion in 2008. A modest recovery is forecast in 2010 when the aggregate inflows are expected to be around $1.4 trillion. FDI flows are likely to gain momentum only during 2011 and touch $1.8 trillion. Since capital flows correlate with economic activity, the WIR’s estimates of cross-country capital flows are broadly in line with the growth forecasts of international organisations. Recovery, expected to start later this year, will initially be feeble and gain traction only towards the end of 2010. Developed countries as a bloc are expected to fare worse than the fast-developing emerging economies, especially China and India. The WIR says that FDI to the developing countries has held out better, while the flows to the developed countries have slipped. In the last quarter of 2007, the developed countries received 80 per cent of the world’s FDI, but their share fell to less than two-thirds of the total by the first quarter of this year. FDI inflows to developed countries were lower by 29 per cent in 2008, compared to 2007. Despite this, the U.S. remained the world’s largest recipient followed by France, China, the United Kingdom, and the Russian Federation.

The FDI outflows from developed countries fell less sharply in 2008. The U.S. retained its top place as the largest exporter of capital. In the case of developing countries, they continued to grow although the trend was uneven across regions. Transnational companies from China embarked on a significant outward expansion while capital outflows from West Asia were relatively muted. The WIR attributes the decline in global FDIs to growing divestment by transnational companies world wide. Taking the form of repatriated investments, reverse inter-company loans and so on , they exceeded the gross FDI inflows in several countries. Cross-border mergers and acquisitions (M&As) which have traditionally contributed to the FDI growth fell sharply in 2008 as the financial markets collapsed during the second half of the year. Private equity firms had a relatively lean year. Only sovereign wealth funds bucked the trend and recorded a rise in FDI in 2008. Despite the financial turmoil and massive government interventions, there has no been no significant trend towards investment protectionism. As the crisis recedes, the exit of government from ailing industries could provide a significant opportunity for mergers and acquisitions and the concomitant FDI flows.