The ten hottest spots for foreign direct investments

Developed economies regained some momentum in attracting foreign direct investments (FDIs) in 2013, especially the US and Germany, but investors continued to focus on developing countries, research by the United Nations Conference on Trade and Development (UNCTAD) suggests.

Following a sharp decline in 2012, FDIs worldwide rose nearly 10% to $1.452 trillion last year, according to UNCTAD’s World Investment Report 2014.

Developed economies claimed $566 billion, up from $517 billion in 2012, but their share of worldwide investments was still only 39%. In 2007, a year of record-high FDI flows, developed economies claimed a 68% share.

Developing economies received $778 billion in 2013, up about 7% from 2012. Their share was nearly 54% of worldwide investments. In 2007, developing economies claimed 27% of worldwide FDIs.

“At some point, developed countries will inevitably pick up shares again,” said Richard Bolwijn, head of business facilitation in UNCTAD’s division on investment and enterprise. But he expected developing economies with rapid growth to continue to claim a majority of worldwide investments in the next few years.

The potential for investment flows to be erratic, with a few large projects or political instability skewing results, is also high over the next few years, Bolwijn said. “There’s a lot of uncertainty in the global investment climate.”

Investment trends have shifted in the past decade. Even before the start of the financial crisis in 2008, investors were turning their attention to developing economies. In the past seven years, investment flows plummeted to developing economies, first to the US and then Europe, while inflows to developing economies, especially Asia and Latin America, rose and became more stable.

In 2013, Asia was the region that captured the largest share of FDIs. According to Bolwijn, other noteworthy trends included:

• Poor developing countries, the majority of which are in Africa, are in the early stages of establishing consumer classes. As a result, investors are no longer exclusively focused on extractive industries but are branching out into manufacturing and services.
• Technologies known as fracking, which have made shale gas reserves accessible, are boosting investment inflows to the US.
• Russian investors continue to pour money into neighbouring countries that used to be part of the Soviet Union or the European Eastern bloc, mainly to build up oil and gas extraction.
• Private-equity investors, which in 2007 supported nearly one-third of cross-border mergers and acquisitions, continued to hold back. Their unspent funds rose 14% in 2013, to $1.07 trillion. Traditionally, private-equity investors focused on developed economies, especially Europe.

Regional breakdown

North America. In 2013, FDIs increased about 17% to $188 billion to the US and 44% to $62 billion to Canada. Overall, FDIs to North America were up 23% from 2012 but were still lower than before the global financial crisis started in 2007.

The increase reflects large cross-border deals that investors, especially Asian, made in North America, such as the $19 billion acquisition of Canadian oil and gas company Nexen by Chinese investors; the $21.6 billion acquisition of US wireless network operator Sprint Nextel by Japanese investors; and the $4.8 billion acquisition of pork producer Smithfield, one of the largest-ever Chinese takeovers of a US company.   

Greenfield investments in North America declined by 1.4% to $58 billion last year. Ontario, Texas, and California claimed the three largest shares, or a total of about 33% of all North American greenfield investments in 2013.

While North America increased its share of global FDIs in 2013, the region’s $250 billion (17% share) was less than the $341 billion (18% share) it claimed in 2007, a year of record high FDIs worldwide.

Europe. FDIs flowing into the 28 EU member countries picked up 14% last year, following a sharp decline during the euro crisis from $490 billion in 2011 to $216 billion in 2012. But the $246 billion in investments going to the EU in 2013 accounted for less than 30% of what the region received at the 2007 peak.

Inflows about doubled to Germany and rebounded to Spain and Italy. FDIs to France and the UK dropped in 2013.

Large swings in intra-company loans contributed to the increase in FDIs the EU received last year.

Greenfield investments going to Europe declined 12.1% to $137 billion last year. The UK, Spain, and Russia captured the largest shares, accounting for about 36% of all European greenfield investments.

Africa. Increased flows into southern and eastern Africa helped boost FDIs to the continent by 4% to $57 billion in 2013. South Africa, Mozambique, Ethiopia, and Kenya particularly benefited.

FDIs to Africa continued their rise after dropping to $48 billion in 2011, following a peak of $60.2 billion in 2009 and $55 billion in 2010. The resurgence is supported by cross-border investments, led by South African, Kenyan, and Nigerian companies.

Historically, many African nations relied heavily on extractive industries. In 2013, the sector still received 26% of all FDIs in Africa, but the funded projects made up only 8% of all FDI projects in Africa. The majority of the investments African economies received last year went into infrastructure projects and consumer-oriented industries such as IT, tourism, finance, and retail.

Developing Asia. For the second year in a row, developing Asia was the region that claimed the largest share (nearly 30%) of all FDIs – historically a claim belonging to Europe. The $426 billion going to developing Asia last year was up about 3% from 2012 and about 1% less than in 2011.

China, Hong Kong, South Korea, and Singapore received large portions of the inflows. The investments were largely driven by cross-border mergers and acquisitions.

Greenfield investments to developing Asia declined by less than 1% from $147 billion in 2012. China claimed the lion’s share, but inflows were down slightly from 2012. Capital investments to India dropped by nearly half in 2013. Other countries in the region, such as Vietnam and Myanmar, saw greenfield investment inflows surge last year.

Latin America. Inflows of FDI to the region picked up 14% in 2013, to $292 billion. Mexico, which was classified as a Latin American country in the research, and Panama especially benefited; excluding offshore financial centres, inflows to Central America increased 64%. Large infrastructure projects, including the expansion of the Panama Canal, and a Belgian brewer’s $18 billion deal to purchase the remaining shares of Mexico’s largest brewery drove the increase in inflows to Central America.

South America, which had seen three years of strong growth, received 6% less FDIs last year. South American countries whose investment inflows dropped the most included Chile and Argentina. Brazil claimed the largest share ($64 billion) of the FDIs going to Latin America last year.

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