Global Economy
China overtook US in 2014 inward investment; Ireland slips on dodgy tax data
By Michael Hennigan, Finfacts founder and editor
Feb 2, 2015 - 8:54 AM

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China overtook the US in 2014 as the top destination for foreign direct investment (FDI), for the first time since 2003. Meanwhile Ireland slipped but the data is distorted by tax avoidance.

Last year, foreign firms invested $128bn in China, and $86bn in the US, according to the United Nations Conference of Trade and Development (UNCTAD). The growth in China's foreign investment benefitted the services sector as manufacturing slowed.

Global FDI flows declined by 8% in 2014 to an estimated US$1.26tn, down from a revised US$1.36tn in 2013 (data in the latest Trends Monitor exclude Caribbean offshore financial centres and FDI flows passing through special purpose entities (SPE) in Austria, Hungary, Luxembourg and the Netherlands).

The UN agency said that flows were heavily influenced by economic uncertainty and geopolitical risks including regional conflicts, and by the US$130bn mega-buy-back of shares by Verizon (United States) from Vodafone (United Kingdom) which significantly reduced the equity component of FDI inflows to the United States.

FDI flows in developing economies remained resilient in 2014, reaching more than US$700bn, the highest level ever recorded, and accounting for 56% of global FDI flows. The increase was mainly driven by developing Asia − the world's largest recipient region − while Latin America saw its flows decline.

FDI inflows to the European Union (EU) rose by 13% to an estimated US$267bn. Among the largest economies, the United Kingdom saw its inflows rise to an estimated US$61bn, helped by rising reinvested earnings and cross-border M&As. According to UNCTAD estimates, FDI flows to Sweden and Portugal rose significantly, though from very low levels in 2013. Inflows to the Netherlands and Luxembourg increased to US$42bn and US$36bn, respectively. In contrast, inflows to Germany and France were in negative territory, to -US$2.1bn and to -US$6.9bn, respectively. In Germany FDI flows declined due to changes in the flows of intra-company loans, while in France in addition to the repayment of loans to parent companies, a single large divestment took place (Nestlé (Switzerland) sold its 8% share in L'Oreal for US$9bn) .

Lower intra-company loans by EU investors diminished FDI flows to Ireland to just US$10bn from $36bn in 2013..

UNCTAD said cross-border mergers and acquisitions (M&As) rose by 19%, driven mainly by restructuring deals. Announced greenfield investment projects rose by 3% in 2014.

A solid FDI rise remains distant. "A subdued global economic outlook, volatility in currency and commodity markets and elevated geopolitical risks will negatively influence FDI flows. On the other hand, the strengthening of economic growth in the United States, the demand-boosting effects of lower oil prices and proactive monetary policy in the Eurozone, coupled with increased liberalization and promotion measures, will favourably affect FDI flows."

The data are preliminary and the annual flagship World Investment Report will be published next July.

In 2013 China alone received more FDI inflows than all EU countries together

Ireland not among top 67 destinations for Chinese outbound FDI in 2014

Irish outward data exceeds inward flows but this results from mainly American companies becoming Irish for tax avoidance purposes - they have about 600,000 staff.

"I've mentioned to US investors that US companies have more capital invested in Ireland than they do in Brazil, Russia, India and China put together," said Richie Boucher, chief executive of Bank of Ireland in a speech in 2013.

Boucher had fallen for a fairytale promoted by the American Chamber of Commerce in Ireland and reinvested earnings, which relates to cash balances that are technically held in the accounts of American banks in Ireland to avoid a tax liability in the US, are treated as investment inflows.

Changes in cash balances do not reflect FDI project activity.

Ireland's confusing FDI data in age of spin

FDI in Ireland: Grant Thornton publishes promotional brochure not balanced report

UNCTAD report [pdf]

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