Foreign direct investment (FDI) outflows from the United States reached $252 billion in 2004 – up from $141 billion in 2003 to hit an all-time record. While this to some extent reflected the weakness of the dollar, it also confirmed continuing strong interest among US companies in acquiring corporate assets abroad.
FDI inflows to Ireland fell from $26.9 billion in 2003 to $14.1 billion, in 2004.
Of the largest 25 cross-border mergers and acquisitions in 2004, five had a US-based company as the acquirer. A recovery of M&A activity in 2004, meanwhile, has carried on into 2005. On present trends, both inward and outward FDI in OECD countries could increase by 10-15 per cent in 2005, OECD estimates suggest.
Cumulative FDI flows in OECD countries 1995-2004
Inward FDI into Germany and France, the two largest economies of the European continent, fell sharply in 2004. In France inward investment almost halved, falling from $43 billion to $24 billion. In the case of Germany, foreign investors actually withdrew about USD 39 billion from the country, reversing the inflow of $27 billion recorded in 2003. (Inward FDI figures include transactions, which can involve both inflows and withdrawals, between foreign-invested enterprises and their foreign mother companies. The downturn in 2004 largely reflected repayments to recipients outside Europe of inter-company loans and other transaction between related enterprises.)
|With outflows of $252 billion in 2004 the US provided more than a third of total OECD direct investment outflows|
The United Kingdom bucked the trend in 2004 as one of the few European countries to see a sharp pick-up in inward FDI to $78 billion (more than double the levels of 2003). One reason for this was that, unlike for most of continental Europe, an apparent pick-up in large scale mergers and acquisitions – including cross-border M&As – affected inward as well as outward flows. The two largest individual M&A transactions, inward and outward, were both in the financial sector. They had publicly announced values of around $15 billion (inward) and $9 billion (outward) respectively. In addition to a few large transactions, outward investment from the United Kingdom was held up by internationally very high amounts of reinvested earnings. This reflects the large outward investment positions that UK companies have built up, inter alia vis-à-vis North America and the Commonwealth. In 2004, UK-owned companies accumulated reinvested earnings in their foreign subsidiaries of around $26 billion.
Data for many of the smaller European countries must be interpreted with caution, as their year to-year fluctuations tend to be dominated by capital transactions between related enterprises and the activities of SPEs. One case in point is the apparent collapse of direct investment to and from the Netherlands in 2004, which largely reflects massive changes in inter-company loans between corporate entities in the United States and Netherlands. Another example is the concurrent drop in outward and inward FDI in Denmark. More detailed information reveals that this due to the elimination of positions held via SPEs, in the absence of which flows in and out of the country would be close to zero. The decline in inward and outward FDI in Luxembourg in 2004 should be considered as a return to (or toward) more normal levels. It follows several years of inflated figures due to restructurings of international holding companies located in Luxembourg.
For the OECD area as a whole, according to figures newly published by the OECD in an article on “Trends and recent developments in Foreign Direct Investment”, FDI inflows continued on a downward trend, falling to USD 407 billion in 2004 from USD 459 billion in 2003. Outflows, on the other hand, rose from USD 593 billion in 2003 to USD 668 billion in 2004.
Against this background, net FDI outflows from OECD countries to the rest of the world reached record high levels in 2004: the OECD area was a net contributor of $ 261 billion worth of direct investment – most of which went to developing countries. In 2003, OECD countries invested a net USD 134 billion outside the OECD area.
China continued to receive a large share of the direct investment in developing countries, with inward FDI into mainland China rising to a record USD 55 billion in 2004 from $47 billion in 2003. Asian financial centres Hong Kong (China) and Singapore, with a total of $50 billion in inward investment in 2004, also remain important destinations for FDI inflows.
However, other economies have made progress as well:
South America seems to be climbing out of the trough that followed the Argentine crisis, with inflows in 2004 into Argentina ($4 billion in 2004), Brazil ($18 billion) and Chile (USD 8 billion) all around twice the levels recorded in 2003.
India is making steady progress in establishing itself as an attractive destination for FDI. Inward direct investment has trended upwards since the late 1990s to reach $4.3 billion in 2003 and $5.3 billion in 2004. As Indian FDI statistics are less inclusive than most, this figure is moreover a low-end estimate.
Inflows into Russia were already stronger in 2003 and gained further in 2004. As in earlier years, much investment went to the hydrocarbons and retailing sectors, but there is also a growing tendency for foreign producers of consumer goods to establish production sites in Russia.
While developing countries continue to be major recipients of FDI, several are gaining importance as outward investors as well. In Latin America, large companies in Mexico and Brazil appear to be in a process of firstly engaging in regional integration through investment and then moving to develop truly international corporate networks. Chinese enterprises have increasingly undertaken “strategic” investment abroad, inter alia to gain access to raw materials. While these trends are interesting in qualitative terms, however, the sums involved are still small by international comparison.