Businesses Cut Back on Overseas Investments
January 22 2018 - 12:29PM
Dow Jones News
By Paul Hannon
Businesses around the world cut back on their overseas
investments for the second straight year in 2017, a surprise
development that suggests the globalization of economic activity
may be slowing.
Figures released by the United Nations Monday recorded a 16%
drop in foreign direct investment to $1.52 trillion, largely
reflecting a sharp fall in the acquisitions of U.S. and U.K. firms
by foreign businesses. In a report published last year, the U.N.
had expected to see a rise of 10%.
The decline included a 32% drop to a 14-year low of $571 billion
in what are known as "greenfield" projects--where businesses build
and equip new factories or other facilities. That drop was
particularly sharp in developing economies.
Other forms of FDI include mergers and acquisitions, and profits
that are reinvested in the country in which they are earned, rather
than taken back to headquarters.
The decline in FDI flows came as a surprise because most other
indicators have pointed to an increase in economic activity in
2017. The U.N. Conference on Trade and Development said it expects
to see a rebound this year, given a continuation of those favorable
economic trends. But it also warned that further setbacks are
possible.
"The possibility that protectionist rhetoric translates into
trade restrictive actions...may have an impact on FDI flows,"
Unctad said.
The U.N. also said a recent overhaul of U.S. company taxation
will have an impact on the volume and destination of FDI flows this
year.
"Tax reforms in the United States are likely to significantly
affect investment decisions by United States MNEs (multinational
enterprises), with consequences for global investment patterns,"
Unctad said.
FDI rose steadily from the 1980s until the onset of the global
financial crisis as companies spread their activities and
associated jobs across an increasing number of countries, creating
what are known as "global value chains."
Many economists believe that has aided global economic growth by
helping locate production where it is most efficient and increasing
competition while also helping spread new technologies and
know-how. But critics say the benefits haven't been shared equally,
with low-skilled workers in developed economies seeing their
incomes stagnate even as large numbers of people in developing
economies have seen their wages rise.
A backlash against globalization by some voters in developed
economies has led to greater uncertainty about the future
regulatory treatment of cross-border investment flows, but as yet
little action to discourage such activity. It is unclear whether
the declines in 2016 and 2017 are a response to that threat, or
reflect other dynamics. FDI flows fell in the wake of the financial
crisis, but returned to precrisis levels in 2015.
UNCTAD's latest figures show that investment in Asia and Latin
America rose slightly. There were also increases in a number of
European countries, including Germany and France.
Investment in the U.K. fell by 90%, although Unctad said that
reflected the absence of the very large acquisitions by foreign
firms that had produced an "anomalous peak" in 2016. The 32% drop
in investment in the U.S. to $311 billion from $457 billion in 2016
was mainly down to a fall in acquisitions by firms based in
offshore financial centers. Despite that decline, the U.S. remained
the favored destination for foreign investors, with China a distant
second at $144 billion, a record high for the world's
second-largest economy.
Foreign investment in Africa was flat, but fell by 17% in Russia
and other countries that were part of the Soviet Union.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
January 22, 2018 12:14 ET (17:14 GMT)
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