Foreign direct investment (FDI) is measured in terms of yearly inflows and outflows. As defined by the World Bank, inflow refers to the value of an investment made in the reporting country by a non-resident. Conversely, outflow signifies the value of an investment made by residents of the reporting country to an external economy.
The degree to which FDI inflow is allocated to particular regions and countries is determined by, but not limited to, the level of GDP, reserves of natural resources, infrastructure, cost of labor and degree of openness determined by policies of the recipient country. In the case of developing countries these factors are all the more essential towards maximizing the amount of FDI inflow that is received.
Although 2012 saw FDI inflows decrease in all three major economic groups (developed, emerging and transition economies), the degree to which they decreased varied. The greatest decline in FDI inflow occurred in developed economies with a staggering 32% dive to $561 billion, thus causing the overall decline of FDI globally in 2012. Despite this potential setback, emerging economies only witnessed a slight decline in comparison. In fact, emerging economies’ FDI inflow decreased by only 4% giving them the majority of FDI inflow in 2012. More on this subject can be found in KITE Invest’s article FDI in 2012.
The emerging economies group consists of three regions, Asia, Africa and Latin America. Asia contains three sub-regions, East and South-East Asia, South Asia and West Asia; Latin America includes the sub-region of the Caribbean.
Within this economic group FDI inflow declined in all regions and sub-regions except for one. Africa was the only region in the world to experience a year-on-year increase of FDI, with a 5% increase thus reaching a total of $50 billion. The cause for Africa’s FDI inflow increase was due to the fact that there has been a growing interest in the region from private equity funds in four popular industries: business services, extraction of primary resources, infrastructure and communications.
As noted Africa was the only region to experience positive growth in terms of FDI inflow in 2012, all other regions in the emerging economies group experienced a decline in FDI inflow. The region with the smallest percentage decline in FDI inflow was Latin America and the Caribbean, recording a drop from $249 to $244 billion or a 2% reduction. Despite this decline foreign investors remain a strategic component, particularly to the primary sector of natural resources in South American countries, where FDI accounts for up to 75% of investments.
In the Asia region, FDI inflow declined by 6.7%; however, despite this decline the region still accounted for 58% of all FDI inflow to developing countries, due to the robust economies of China, India, Saudi Arabia and Turkey. Overall, while Asia and all sub-regions witnessed a decline in 2012, the amount of FDI inflow remained at historically high levels.
The sub-region of West Asia recorded the smallest drop at 4%; however, unlike the other sub-regions this decline notes the fourth consecutive year of negative growth. We identify above the main determinants of FDI inflows, yet there are other reasons that can also factor in, as seen in the case of West Asia. The residual political uncertainty and unfavorable perception has led to a reluctance by foreign investors, irrespective of the region’s major sectors – primary and manufacturing.
FDI inflows in East and South-East Asia fell by 5% to $326 billion in 2012, marking the first decline in the region since 2009. The reason for the drop in FDI inflow in the region is largely connected to the presence of the substantial economies in this region, notably China, Malaysia and South Korea, and the influence of the lackluster global economy and the overall dwindling of private equity activity in relation to these countries.
South Asia saw the most severe plunge in 2012, with a 24% drop in FDI inflow. The decline is attributed to lower levels of private equity M&As and greenfield investments within the entire region, but especially in the major economies of India and Pakistan. Furthermore, the region’s most important sector, manufacturing and export of ready-made garments were weakened by expansions of this industry in West Asia.
KITE Invest concludes that FDI inflows to the emerging economies are greatly influenced by not only the global economy, but also by the economies within the region, as well as, the host country itself. To this point, predictions of FDI inflow in 2013 and 2014 will mirror that of the forecasted global economy and thus, will revert back to a slow steady upwards climb.