WORLD FDI FLOWS TO DROP THIS YEAR
by unctad 18.09.01
unctad.org
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It should be noted that the estimate of a drop in FDI flows in 2001 was made before last week’s tragic events in the US. It is in no way related to these events. The following estimate is based on information for 51 host countries as of 3 September 2001 and on data that cover the first two quarters or first several months of this year. It should also be emphasized that estimated FDI flows in 2001 are expected to be higher than in 1998. The decline is to a large extent a correction in light of particularly active cross-border M&A activities during 1999 and 2000. Cross-border M&As account for a substantial share of FDI flows, especially among developed countries.
World FDI flows are likely to decline 40% this year, to $760 billion,1 according to projections released today by the United Nations Conference on Trade and Development (UNCTAD). Should this happen, it would represent the first drop since 1991 and the largest over the past three decades.2 However, the level of flows in 2001 is still expected to be higher than that in 1998 (see table 1) and also higher than the 1996-2000 average.
This year’s projected dip is the result of a recent decline in cross-border mergers and acquisitions (M&As), which account for the bulk of FDI. The significant increases in FDI flows in 1999 and 2000 – by about 50% and 18%, respectively – were in fact caused by megadeals (deals worth over $1 billion) of M&As, as represented, for example, by the $200 billion acquisition of Mannesmann (Germany) by VodafoneAirTouch (United Kingdom) in 2000.
The decline in M&As – both cross-border and domestic – is related to the slowdown in the world economy. The prices of shares, for example, which in 2000 were used to finance some 56% of cross-border M&As, fell significantly, when measured in terms of the exchange of stocks. A lull in the consolidation processes in certain industries through M&As (e.g. telecommunications, automobiles) also plays a role....
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