The scramble for FDI

Global foreign direct investment (FDI) flow rose by 38 per cent to $1.76 trillion in 2015, the highest level since the global economic and financial crisis of 2008-2009. However, it still was some 10 per cent short of the 2007 peak. A surge in cross-border mergers and acquisitions (M&As) to $721 billion from $432 billion in 2014, was the principal factor behind the global rebound. Discounting these large-scale corporate reconfigurations implies a more moderate increase of about 15 per cent in global FDI flows. FDI flows are likely to decline in both developed and developing economies, barring another wave of cross-border M&A deals and corporate reconfigurations. Over the medium term, global FDI flows are projected to resume growth in 2017 and to surpass $1.8 trillion in 2018.
A large-scale increase in FDI flows to Asia contrasted with a more modest performance in other developing regions. Overall FDI flows to developing and transition economies registered a modest rise (6.0 per cent). This increase, however, belies a much more complex picture, as a large increase in FDI to some Asian economies offset significant declines in nearly every developing region and in transition economies. Investment flows fell in Africa (down 7.0 per cent to $54 billion), Latin America and the Caribbean (down 2 per cent to $168 billion) and in transition economies (down 38 per cent to $35 billion). These trends notwithstanding, half of the top 10 largest recipients of FDI were from developing economies.

FDI IN DEVELOPING ASIA: Developing Asia, with its FDI inflows surpassing half a trillion dollars, is the largest FDI recipient region in the world. The 16 per cent growth was pulled by the strong performance of East and South Asian economies. Flows remained flat in South East Asia while declining further in West Asia. Hong Kong (China) saw its FDI inflows jump by 53 per cent to $175 billion, partly due to corporate reconfiguration. FDI to India and Turkey increased by more than a quarter in 2015, while flows to China reached $136 billion - a 6.0 per cent increase. After the unusually high jump in values recorded in 2015, FDI inflows are expected to revert to their previous level of 2014. Despite the decline of outflows from developing Asia by 17 per cent to $332 billion, they remain the third highest recorded in the region. In 2015, the four largest recipients - namely Hong Kong (China), China, Singapore and India - received more than three quarters of total inflows to developing Asia.
FDI IN SOUTH ASIA: Thanks to rising FDI in labour-intensive manufacturing, inflows to Bangladesh has jumped by 44 per cent to $2.2 billion, a historically high level. India became the fourth largest recipient of FDI in developing Asia and the tenth largest in the world, with inflows reaching $44 billion. New liberalisation steps enacted since the inauguration of the new government have contributed to attracting FDI from all quarters. In 2015, the top sources of equity investment (equivalent to 88 per cent of FDI in 2015) were Singapore, Mauritius, the United States, the Netherlands, Japan, Germany, the United Kingdom, China, Hong Kong (China) and the United Arab Emirates. Singapore and Mauritius alone accounted for nearly three-fifths of total foreign equity investment in India, including rising connections with MNE (multinational enterprise) affiliates located in the former and round-tripping FDI through the latter. At the same time, India is maintaining FDI inflows from developed country sources, especially Europe and the United States.
Hindered by the current global and regional economic slowdown, FDI inflows to Asia are expected to decline in 2016 by about 15 per cent, reverting to their 2014 position. FDI flows to some Asian economies such as China, India, Myanmar and Viet Nam are likely to see a moderate increase in inflows in 2016.
FDI IN BANGLADESH: Five manufactures exporters reported 18 per cent growth in FDI flows, thanks to record flows to Bangladesh (up 44 per cent to over $2.2 billion). FDI in the textile and garments industries remains strong in Bangladesh, as does FDI in power generation. Reinvested earnings in the country continued to rise, exceeding the value of the equity component. Bangladesh became the largest FDI host in this subgroup of exporters, as flows into Cambodia fell slightly (down 1.0 per cent to $1.7 billion).
Key factors influencing future FDI flows
The world economy continues to face major headwinds, which are unlikely to ease in the near term. Global GDP is expected to expand by only 2.4 per cent, the same relatively low rate as in 2015. A tumultuous start of 2016 in global commodity and financial markets added to the continuing drop in oil prices and increased economic risks in many parts of the world. The momentum of growth slowed down significantly in some large developed economies towards the end of 2015. In developing economies, sluggish aggregate demand, low commodity prices, mounting fiscal and current account imbalances and policy tightening have further dampened the growth prospects of many commodity-exporting economies. Elevated geopolitical risks, regional tensions and weather-related shocks could further amplify the expected downturn.
However, FDI is positively correlated with government terms and regulations, diplomatic/bureaucratic relationship, technology and infrastructure, EPZ establishment and abundance of natural resources of a country. Most of these points are illustrated with focal research in different research projects. As FDI has several positive effects on developing economics, Bangladesh should promote FDI in both manufacturing and service sectors. During the surge of global FDI, this is the best time for Bangladesh to mould its trunk.  
This article is compiled from World Investment Report 2016, published by UNCTAD.
The writer is an independent researcher.
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