Table 2. Cumulative FDI flows in OECD countries 1997-2006
(USD billion)
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| Source: OECD |
Foreign direct investment (FDI) into OECD countries in 2006 reached its highest level since 2000 and the near-term outlook for FDI remains strong, buoyed by high corporate profits, low interest rates and robust macroeconomic growth. A new OECD report, Trends and Recent Developments in Foreign Direct Investment, forecasts FDI in its 30 member countries to increase by a further 20% in 2007.
Inward FDI rose 22% to $910 billion in 2006, up from $747 billion in 2005 and $491 billion in 2004, according to the latest estimates from the OECD.
The United States was by far the world’s largest recipient of FDI in 2006, attracting $184 billion from OECD countries. This is the largest amount of direct investment in the US economy since 2001, in part due to a decline in the exchange rate value of the US dollar. Most of this FDI went into takeovers of existing firms, while greenfield investment accounted for just $14 billion.
FDI in 2006 was lifted by a small number of very large cross-border mergers and acquisitions (M&As). The biggest five such transactions, valued at close to $120 billion, involved takeovers in the UK service sector ($54 billion), Canadian mining ($34 billion) and the Luxembourg steel industry ($32 billion).
France, Greece, Iceland, Poland, Slovak Republic, Switzerland and Turkey also recorded their highest-ever FDI inflows in 2006. These records to some extent reflect cross-border takeovers, but to a greater extent represent additional investment by foreign companies that were there already.
The United States was also the leading foreign investor in OECD countries, with $249 billion, followed by France with $115 billion. About one-third of this investment abroad by French firms was accounted for by five big M&As, including Alcatel’s acquisition of US-based Lucent and AXA’s takeover of Swiss insurer Winterthur.
The main net recipients of FDI in the OECD area over the last decade have been Mexico, Poland, United States, Czech Republic, Australia and Turkey Korea.
The United States and Australia stand out in this group, which consists mainly of countries with below-average incomes, and with a recent history of rapid economic development, market opening and privatisation. The United States’ prominence as a destination for FDI may be partly linked with the country’s traditionally large current account deficits, but it also reflects the country’s persistently high levels of economic growth and traditional openness to foreign acquisitions.
Ireland had a recovery in inflows in 2006 after big repatriations of profits by foreign multinationals in 2004 and 2005. However, the inflows of $12.8 billion were counterbalanced by outflows of $22.1 billion - mainly related to commercial property investment.
Outside the OECD area, one of the most important trends is the emergence of a number of major international investors domiciled in developing countries. For instance, in 2006 India’s Tata Steel bought the Anglo-Dutch Corus to create the world’s fifth-biggest steel firm while Brazil’s CVRD became the world’s second-largest mining company by acquiring Inco of Canada.
Looking ahead, the report notes the potential impact on FDI of growing public concerns about the impact of globalisation. Business allegations of cross-border investment being dissuaded by hostile attitudes in the host country have also become more frequent. On balance, however, it finds that the negative political undercurrents have not yet translated into a slowdown of direct investment flows.
(In addition to greenfield investment and mergers and acquisitions, FDI includes reinvested earnings, cross-border loans and capital transactions between related firms. Exchange rate fluctuations had some impact on FDI accounting in 2006, as global flows are measured in US dollars the international value of which was low this year.)
