Foreign Direct Investment in the Years 2000-2011 - Essay Example

?INTRODUCTION Foreign direct investment (FDI) is the amount of investment made by the investors in the foreign business ventures and enterprises. In reference to a particular country, foreign direct investment (FDI) is the amount of money invested in different projects of the country by the foreign investors (Asiedu, 2002). It is treated as in important source of income for different countries. Global foreign direct investment (FDI) is the amount investment made by different Transnational Corporations (TNCs) in different countries of the world. There are generally two different types of investments which are: Inward foreign direct investment (FDI), and Outward foreign direct investment (FDI) This resulting sum of these two types of foreign direct investment is known as ‘net foreign direct investment (FDI) flow’, which can be either negative or positive (Wheeler, & Mody, 1992). Foreign Direct Investment (FDI) is perceived as one of the important measures of increasing economic globalization. As because of increasing globalization and international trade, transnational corporations (TNCs) are able to invest in different overseas projects and shift their operations to different regions of the world (Globerman, & Shapiro, 2003). It is important to understand and analyze the concept of the foreign direct investment as it is directly related with the globalization in the today’s world (Noorbakhsh, Paloni, & Youssef, 2001). Because of increasing globalization and international trade, more and more foreign investors are investing their money in different projects overseas. It is important to notice that overall foreign direct investment (FDI) increased to around $ 33 billion in the year 2008 as compared to $ 5 billion in the year 2000 (UNCTAD, 2010). However, there was sharp decline in global foreign direct investment (FDI) in the year 2009 to around $ 28 billion. This was because of the global economic recession. Overall economic recession and downturn forced the transnational corporations (TNCs) to cut down their overall investments and expenditures which in turn negatively influenced the global foreign direct investment (FDI). Most of these foreign direct investments (FDI) are directed towards the developing countries and least developed countries. The multinational corporations (MNCs) and transnational corporations (TNCs) are looking forward to exploit the abundance of low priced resources of these developing and under developed countries and thus shift more operations in these countries. Therefore, foreign investment flows from the developed countries towards least developed countries (Chakrabarti, 2001). The third world and developing countries are enriched with the resource of foreign direct investment (FDI). In the year 2010, overall global foreign direct investment (FDI) almost remained constant and reflected only a growth of around 0.7 percent. However, in the same year the foreign direct investment (FDI) to the developing countries increased by around 10 percent. Foreign direct investment (FDI) is important in order to maintain consistent growth and development all over the world (Blonigen, 2005). This facilitates the process of transferring the resources and funds from more developed countries to developing countries. Investors from developed countries are able to take advantage of relatively cheaper and low cost labour and other resources in the third world countries; while at the same time the third world countries are able to gain from the foreign investment which helps them in improving the overall economic condition (Neuhaus, 2005). For this very reason, many third world and developing countries have come up with different methods and strategies for attracting more foreign direct investment (FDI). For example, trade free zones, special tariffs, and easy regulations for foreign investors. Owing to the high importance of the topic and the strong relation of the topic with the globalization and overall global economic condition, in this report an attempt has been made to analyze and evaluate the different foreign direct investment (FDI) trends in the years 2000 to 2011 all over the world. This in turn will allow forecasting the future movements and trends of this global indicator of growth and development. CURRENT SCENARIO OF FDI Global foreign direct investment recorded an increase in the year 2010 from last year as it reached an estimated amount of $1,244 billion showing an increment of a figure of $1,185 billion (Global Times, 2011). However the FDI has been decreasing since the last quarter of 2007 showing that the foreign direct investments have reduced since the financial crisis that hit the global economy. However it can be noted that in the first quarter of 2009 and in the second quarter of 2010, the FDI showed improvements and therefore it can be identified from the trend of last five years that the global FDI Index would improve as the world economy recovers from the impacts of recession and as the world economy improves. The following graph indicates that the FDI Index has been showing a negative trend since last quarter of 2007 as the world economy was hit by financial crisis which had drastically reduced the FDI (Mamata, 2010) however there are some indications that the FDI would improve in future as it has shown little improvements. (Source: UNCTAD, 2011) The average FDI inflows in the period of 2005 to 2007 had an average value of 1,472 billion USD and the actual value of FDI in 2007 was 1,971 but since then the FDI inflows have decreased by the end of 2009 but in 2010 the Global FDI inflows have shown improvements though a small one of almost 5%. There has been a decrease of 37% in FDI inflows from 2007 to 2010. The following graph reflects FDI inflows from 2007 to 2010 as well as average FDI inflows of 2005 to 2007. (Source: UNCTAD, 2011) OVERVIEW OF FDIs SINCE 1980 (Source: UNCTAD, 2011) There has been a positive trend in the FDI inflows since 1980 however there was a significant change in 1994 as the FDI inflows started increasing considerably till the mid of 2001. At that time, the total FDI inflows had a reach a figure of 1,400 billion USD which was the highest in the history since 1980 however after reaching this peak figure of almost 1,400 billion USD the FDI inflows started decreasing till 2003. From the mid of 2003, the FDI inflows again started showing improvements and in the last quarter of 2007 before the financial crisis it broke all previous records and reached a figure of more than 1,800 billion USD. However since that time, the FDI inflows have decreased because of global financial crisis. NET FDI SINCE 2000 Generally, Foreign Direct Investment is of two types Inward Foreign Direct Investment Outward Foreign Direct Investment Net FDI is the figure which is calculated by subtracting Outward FDI with Inward FDI as a negative FDI inflow reflects that the Outward FDI is higher than the Inward FDI for a specific period however a positive FDI inflow represent that the Inward FDI is higher than the Outward FDI for a specific period (Hill, & Jongwanich, 2009). The net FDI of the world have been fluctuating since 1999 as in 1999 the net FDI had a value of 1 billion USD however it increased to 171 billion USD in 2000 showing a tremendous increase in a year as the outward FDI in 2000 was less than Inward FDI therefore reflecting a positive figure. The net FDI continued showing a positive figure till 2002 but then in 2003 Outward FDI was higher than inward FDI showing a negative figure of 1 Billion USD in 2003 and then it further changed to a figure of negative 188 Billion USD in 2004. In 2005 and 2006, the net FDI showed positive figures but then after the financial crisis the outward FDI crossed Inward FDI and net FDI remained negative from 2007 till 2010 expect in 2009 as the net FDI recorded a figure of 15 Billion USD. (Source: UNCTAD, 2011) COMPARISON OF FDI TO DEVELOPED COUNTRIES AND UNDER DEVELOPED COUNTRIES The major portion of FDI has been towards developed economies in comparison to developing countries as the following graph shows that the major portion of FDI is for developed economies rather than developing economies. Also there has been a growing FDI in transition economies as well since 2007. However it is important to note that the portion of developed economies have decreased since 2009 in comparison to the overall FDI. (Source: UNCTAD, 2011) FDIS BY REGIONS Africa The overall FDI inflows have improved in Africa in comparison to the average of 2005 to 2007. However, the FDI inflows have reduced each year from 2008 onwards. Latin America and the Caribbean Latin America and the Caribbean region showed significant growth in FDI in the year 2008 when compared against average of 2005 to 2007. However the FDI reduced drastically in 2009 but then it again improved. South, East and South-East Asia South, East and South-East Asia has been the most attractive region for foreign direct investment however FDI inflows have increased generally from the average of 2005 to 2007. Though the FDI inflows reduced in 2009 but then it again increased in 2010 thus indicating a positive future for countries in this region. West Asia The scenario of West Asia has been very much similar to the scenario of Africa as the 2008 FDI is more than average FDI of 2005 to 2007. Also the FDI inflows have shown reductions since 2008. Transition Economies The year 2008 was good for Transition Economies as it had received more FDIs than average of 2005 to 2007 though the FDI had decreased since 2008. (Source: UNCTAD, 2011) ATTRACTIVE LOCATIONS FOR FDI China is the most attractive country for making investment because of several factors which are discussed below that makes a country attractive for investment. China is followed by United States of America as the second most attractive country to make investment followed by India and Brazil. Other countries that are attractive for FDI include: France, Germany, Australia, United Kingdom, Indonesia, Vietnam, Canada, Russia, Poland and Mexico. (Source: United Nations 2009) FACTORS AFFECTING THE ATTRACTIVENESS OF COUNTRIES FOR FDI There are several factors that make a country attractive for investment purpose. Some of the factors that are most important include growth market and potential of the market, cheap labour, stable and business friendly environment (The Economist, 2007), access to international market, presence of suppliers and partners, availability of skilled labours etc. It is because of these factors, China is considered as the most attractive country for FDI. (Source: United Nations 2009) DISTINGUISHING FDI BETWEEN INDUSTRIES In order to explore and understand the trend of global foreign direct investment (FDI), it is beneficial to identify and investigate the trend of global foreign direct investment (FDI) in different industries and sectors. The three main sectors which attract foreign direct investment are: 1. Primary sector 2. Manufacturing sector 3. Service sector Recent economic recession and foreign direct investment (FDI) crisis, directly affected the investment plans of different Transnational Corporations (TNCs) in different sectors and industries. These sectors and industries reflected different level of impact of the crisis associated with foreign direct investment (FDI). Industries and businesses dependent on a proper business cycle had been exposed to more risks and were more affected by the decline of foreign direct investment (FDI) because of the economic recession, for example chemicals industry, automobile industry, etc. On the other hand, service industry had been able to change according to the changing scenarios because of being more flexible. It is important to notice, that primary and services sectors were less affected by the economic crisis as compared to the manufacturing sector (The World Bank, 2011). The manufacturing sector reported worst impact of the economic and foreign direct investment crisis because of being sensitive to the business cycle. As compared to this, the industries which are relatively less sensitive to the business cycle and have somewhat stable demand were able to bear the economic crisis because of being in the stage of constant growth, like telecommunications, food and beverages, and the overall service sector. However, primary sector reported contrasting trend. On one hand, there were instant and abrupt decreases in the foreign investment in this sector in the short run because of the decreasing prices and demand. But at the same time there are positive midterm trends reflecting quick recovery. (Source: United Nations 2009) However, at the same time it is important to notice that manufacturing sector was able to bounce back and showed considerable recovering trends in the next year. On the other hand overall service sector was not able to show positive recovering trends in the next year. In the year 2010, the value of foreign direct investment (FDI) in the manufacturing sector reported a growth of around 23 percent and reached to the level of $ 544 billion. The manufacturing sector was badly affected by the economic crisis, but this forced different manufacturing organizations to restructure them and hence were able to show recovering trends. Primary sector reported decreasing foreign direct investment (FDI) in the year 2010, despite of the increasing demand of several energy resource and raw materials. However, the sector was able to report an increasing investment as compared to the pre crisis time. The share of the primary sector in the foreign direct investment (FDI) in the year 2010 increased to 22 percent as compared to 14 percent in the pre economic crisis time. At the same the foreign direct investment (FDI) in the service sector reported a considerable decline in the year 2010. The sector was not able to show any recovering sign as compared to both pre and post crisis time. All industries in this sector including finance, transport, business services, communications, etc. showed a considerable declining trend. There was relatively less decline in the industry of business service because of the fact that many organizations outsource different business processes in an attempt to reduce the internal cost of operations. One of the worse declines was reported by the financial sector, which was responsible for the overall economic and foreign direct investment. (Source: United Nations 2009) FUTURE FORECASTING The trend of foreign direct investment from 2011 to 2013 would further improve as the following graph indicates. According to United Nations Conference on Trade and Development the trend of foreign direct investment would be positive in the years to come and one of the main reasons for this growth would be that the world economy would recover from recession. Even though it has been forecasted that the trend would go upwards however, United Nations Conference on Trade and Development has also estimated that if the world economy does not improve or grow at expected the rate then it could drastically affect the global foreign direct investment globally. Currently the global FDI is at a figure of $1,244 billion however it has been estimated to grow up to almost 2,000 billion USD meaning a growth rate of 60% in three years showing an annual growth rate of 20%. By the end of 2013, it has been estimated that the global FDI would reach very close to 2,000 billion USD which is an optimistic approach. However, if things do not go as planned and the world economy does not recover the way it has been predicted to do so, then UNCTD estimates this figure of FDI would be close to 1,300 billion USD so with pessimistic scenario, there would be growth rate of only 5% in three years meaning less than 2% annual growth. UNCTD also has forecasted economies of the world that would be receiving the most foreign direct investment and according to their research China would be the top recipient receiving foreign direct investment. One of the main reasons for China being the most attractive country for foreign investment is the same factors which are mentioned in the report earlier that have made China as the existing most attractive country for FDIs. These factors are also helpful for investors to get better returns on their investment and ease them in making the most of the opportunities that prevail in the international market. The other country besides China is the United States of America followed by India, Brazil and Russia. It is important to note that the top five countries in the list which are expected to receive most foreign direct investment in next three years are the same countries that received the most foreign direct investment in the year 2010-2011. However, in 2010 and 2011, UK was listed as the sixth country receiving most FDI, but by the end of 2013 it has been estimated that UK would be listed as the thirteenth country receiving most FDI. References Asiedu, E 2002, ‘On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?’, World Development, Elsevier, vol. 30, no. 1, pp. 107-119. Blonigen, B 2005, ‘A Review of the Empirical Literature on FDI Determinants’, Atlantic Economic Journal, vol. 33, no. 4, pp. 383-403 Chakrabarti, A 2001, ‘The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions’, Kyklos, Wiley Blackwell, vol. 54, no. 1, pp. 89-113. Global Times 2011, UN body says global foreign direct investment inflows remain stagnant in 2010. Available at [Accessed 8 December 2011] Globerman, S, & Shapiro, D 2003, ‘Governance Infrastructure and US Foreign Direct Investment’, Journal of International Business studies, vol. 34, pp. 19-40. 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