Where multinationals are investing


By Sabine Vollmer

Multinational companies, private-equity funds, and other large international investors tightened their purse strings and turned a cold shoulder on developed markets last year. Developing markets, particularly in East and Southeast Asia, fared much better, receiving 55% of global foreign direct investments, according to research by the United Nations Conference on Trade and Development (UNCTAD), business consultant McKinsey, and the Financial Times.

The preference was even more pronounced with new developments. Two-thirds of greenfield investments last year went to developing markets, with Vietnam, Malaysia, India, Mozambique, Morocco, and Egypt seeing double- and even triple-digit increases from the previous year, according to UNCTAD’s 2015 World Investment Report and the Financial Times’ 2015 fDi Report.

Total foreign direct investment worldwide dropped 16%, to $1.23 trillion from $1.47 trillion, in 2013, UNCTAD reported. Developed economies received only $499 billion, down 28% from 2013.

Results of a global survey that UNCTAD and McKinsey conducted, involving more than 1,000 top managers at multinationals, suggested that a recovery is in sight this year and the next two years. Chief executives from Africa, the Middle East, and developing Asia were the most optimistic.

Based on the survey, global foreign direct investment is projected to increase to $1.4 trillion in 2015, $1.5 trillion in 2016, and $1.7 trillion in 2017. “However, a number of economic and political risks, including ongoing uncertainties in the euro zone, potential spillovers from conflicts, and persistent vulnerabilities in emerging economies may disrupt the projected recovery,” the UNCTAD report stated.

Key factors boosting multinationals’ future foreign direct investments included improving economic conditions in the US and the BRICS countries (Brazil, Russia, India, China, and South Africa), as well as companies’ plans to increase offshore outsourcing of manufacturing and services.

Developing Asia. Despite slowing economic growth in parts of the region, foreign direct investments flowing into developing Asia rose 16% from 2012 to 2014. The $465 billion that the region received in 2014 was a historic high and the highest inflow into a region last year.

Several Asian economies experienced double-digit increases in foreign direct investment in 2014, including Hong Kong (39%), India (21%), and Indonesia (21%). China saw a 4% increase in foreign direct investments and was the top recipient in 2014.

Investors in the region focused on infrastructure projects in Southeast Asia, automotive manufacturing in India, and the services sector in China.

Investors in Hong Kong, China, Japan, Malaysia, and Singapore were responsible for much of the inflows into the region. Investments from US sources, particularly going to China, decreased.

North America and Europe. Large divestments by multinational companies and the flow of intracompany loans caused significant fluctuations in developed markets in North America and Europe in 2014 and 2013.

Vodafone’s $130 billion divestment of US-based Verizon last year cost the US the top spot among recipients of foreign direct investment. Inflows into the US dropped 60% to $92 billion in 2014, from $231 billion the previous year. Canada fell three ranks among the top 10 recipients—inflows fell 24% to $54 billion in 2014, from $71 billion the previous year.

Large intracompany loans accounted for the UK’s rise from ninth in 2013 to fourth in 2014 and Switzerland’s rise from 187th in 2013 to 15th in 2014. Total inflows of foreign direct investments to the UK increased 50% to $72 billion in 2014, up from $48 billion the previous year. In 2013, investors took $23 billion more out of Switzerland than they put into it. The following year, they put $22 billion more in than they took out.

Commonwealth of Independent States. A host of risk factors, including regional conflict, falling oil prices, and international sanctions caused the flow of foreign direct investments to this region to drop by about half (51.7% less) to $48 billion in 2014.

Inflows to the Russian Federation, which had grown five-fold to $69 billion in the decade preceding 2013, dropped almost 70% to $21 billion in 2014. Ukraine experienced the biggest drop (91% less than in 2013) after Russian investors withdrew in 2014.

Foreign direct investments flowing into Southeast Europe remained stable at $4.7 billion in 2014. Investors focused on manufacturing in this part of the region, which has competitive production costs and access to EU countries.

Latin America and Caribbean. After four years of increases, foreign direct investment flows into the region dropped 14.5% to $159 billion in 2014, from $186 billion in 2013. The decrease was the result of a decrease in cross-border mergers and acquisitions in Central America and falling commodity prices.

Foreign direct investments decreased to Brazil (2% less than in 2014), the region’s largest recipient, and other economies in the region, including Venezuela (88% less), Argentina (41% less), and Peru (18% less).

North American and European investors are traditionally the most important source for foreign direct investment flowing into Latin America and the Caribbean.

Africa. The region received about the same in foreign direct investments ($54 billion in 2014) in each of the three years tracked, but investment opportunities and risks differed from country to country.

Investments flowing into Egypt, Morocco, Tanzania, Ethiopia, and Central Africa rose in 2014, mainly to extract oil and gas and develop Ethiopia’s budding textile industry and Morocco’s services hub. These fast-growing economies were particularly attractive to investors from emerging economies, including multinational companies from China and India.

The Ebola outbreak in West Africa decreased investment inflows to Liberia and Sierra Leone, and regional conflict affected inflows to Libya. Lower commodity prices prompted Nigeria to look beyond oil, and investment inflows dropped 16% from 2013 to 2014.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.

Top 10 recipients

Investor preferences cost the US its position as the top destination for foreign direct investment, which in 2014 was claimed by China. India gained six places to move into the top 10. The UK was the only developed market in the top 10 that received more foreign direct investments in 2014 than in the previous year.

1. China ($129 billion)
2. Hong Kong ($103 billion)
3. US ($92 billion)
4. UK ($72 billion)
5. Singapore ($68 billion)
6. Brazil ($62 billion)
7. Canada ($54 billion)
8. Australia ($52 billion)
9. India ($34 billion)
10. Netherlands ($30 billion)

Source: United Nations Conference on Trade and Development, McKinsey, and Financial Times.