Unctad director looks for upside to FDI decline

Q: Unctad has reported that global FDI flows dropped by 41% in the first half of 2018. What is behind that? Is the decline worse than you thought it would be?

A: It was worse than we thought but not surprising. The current decline is more policy-driven. A major part is due to US tax reforms. This has triggered a number of US multinationals to repatriate their earnings. And [because of] that we have seen this decline. We have already identified some countries, mainly in Europe, which can also be involved in repatriation from the Caribbean region. But we do not take that into account as FDI, we take that off as transient investment. So the actual repatriation is much larger.

So that’s one thing. The other thing we see with these reforms is that FDI flows into countries such as Ireland and Switzerland have also suffered in the loss of billions of
dollars in returns. However, for some smaller economies, reinvested earnings can be used for expansion of projects or investment in new projects in host countries. This is not surprising because in February 2018 we did an analysis into the impact of tax reforms in the US on the global FDI stock in particular, because US inward and outward investment combined account for more than 40% of global FDI stock. Out of this stock of close to $6000bn, about $2000bn really takes the form of reinvested earnings. Of course, this [shows] the success of the US tax reforms, but they haven’t been a success for other countries.

You will also see that inflows into the US have declined by more than 70%, which was also unexpected. We thought that the US tax reform would also encourage foreign investment in the US, but this did not happen in the first half of 2018. The tax reforms haven’t given out the details of how to encourage foreign investment in the US, so the multinationals are still waiting. The renegotiation of Nafta, adjusting the trade relationship with Europe, redefining the economic and trade relationship with Japan and South Korea: all of these created uncertainty during the first quarter of 2018. 

The third factor is that the US government has tightened its screening procedures when it comes to the types of investment that it thinks might be sensitive to national security.

These are the things that have led the US to go from being number one to third [globally as an FDI recipient country]. However, FDI will recover soon and the US will be the largest recipient in the world again. 

There are of course other things that affect inflows: the policy-related issues that I mentioned, trade uncertainties, and there are also economic risks – we don’t know when there could be a global economic crisis. Personally I think it’s only a matter of time. The global debt level is already very high – twice as much as it was before the global financial crisis of 2008. 

Q: What about Chinese outward investment?

A: This has experienced a period of rapid high-level growth. It reached a level comparable to its inward investment in 2016. In 2017, the Chinese government put in place measures to avoid investments it does not think are beneficial to the domestic economy – investment in recreation, real estate and capital flight, for example. It has the regulation to ensure that [such projects are] real outward investment, therefore in terms of numbers its outward investment declined significantly in 2017.

This is also evident in M&A. Because of that there has been a decline and a sell-off by Chinese companies regarding what they have bought. Having seen that, Chinese outward investment will move from rapid growth to steady growth with quality outward investment. For 2018 we don’t have the data yet. [It may] increase, but the increase will not be drastic and we know that any recovery will be modest because of 2017’s policy-driven decline. 

That is why I say that overall global trends in investment are more affected by policies than by economic cycles. All of these drastic declines – 41% in the first half of 2018 on top of a 23% decline in 2017 – were policy-related. This is in contrast with the economic growth that accelerated in 2017.