In the face of global economic recession, many corporate initiated to reduce foreign direct investment because of tighter credit conditions and falling corporate profits. According estimate by UNCTAD, world FDI flows are expected to have declined in 2008 by 21 percent. However, what we should know about is that the influence of crisis on FDI varies to a great degree depending on region and country.
Characteristic of the current financial crisis that it began in the developed countries and spread to developing and transition economies have made developed economies hit directly by crisis and developing countries affected indirectly. Specifically speaking, in developed countries which were the most affected by crisis, FDI flows have fallen, leading to a decline estimated at about 33 percent for this group as whole because of various reasons like decreased earnings of developed- country FNCs, a decline of syndicated bank loans and a decrease in cross-border M&As owing to a decline in leveraged buyout. In developing and transition economies, the growth rate of FDI inflows decreased than in 2007, but still should reach 4 percent. In other words, flows to developing countries are expected to show resilience in spite of the world economic slowdown.
In order to forecast the future of global economies and propensity to invest, we should consider negative or positive driving forces of the flow of FDI. There are so many negative forces to FDI. First of all, reduced access to finance such as tighter credit conditions and lower corporate profits has negatively affected TNCs to invest. The gloomy prospects also have affected the propensity to invest among corporate. Specifically, looming sharp economic recession worldwide and a heighted appreciation of risk has reduced the amount of investment from TNCs. Another factor is risk aversion. A large percent of companies may postpone the plans of overseas investment due to high level of perceived risks and uncertainties.
While there are negative driving forces making corporate invest reluctantly, there are also positive driving forces for TNCs to remain committed to FDI. First, large emerging economies, such as Brazil, China, India and Russian Federation, have remained attractive to FDI. Their countries kept high economic growth rate compared to the advanced economies in 2008. Several companies, such as PepsiCo and Italian automaker Fiat Group and OJSC Sollers announced to expand the amount of investment in China and Russian Federation. Second, this financial crises and economic recessions give chances to companies to purchase assets at cheap prices and take advantage of large-scale consolidation. It could be a great opportunity for aggressive, cash-rich TNCs and countries to acquire undervalued assets that could boost the amount of investment. Third, the fact that companies are still absorbed in increasing their level of internationalization could affect positively for the propensity to invest. World Investment Prospects Survey, 2008-2022 reported by UNCTAD shows that large TNCs still seem to be eager to pursue internationalization strategies and thus increase FDI expenditures in the medium to long term. Fourth, Emerging economies and countries would become a growing investor of FDI through the internationalization strategies carried out by their TNCs or SWFs. At last, quickly growing industries, such as life sciences, agro-food industries, industry of transport equipment, business services, and personal services and so on, could help to recover present situations of FDI.
No one can be sure that these positive factors will offset the downwards of world economies. In short term (2009), many indicators suggested that the offsetting factors will have much less impact than the downward forces. Therefore, companies are expected to execute divestment than to catch opportunities to invest in the initial face of downsizing world economies. However, in the short to medium term (2010-2012), we could forecasts the world wide FDI inflows with three different scenarios based on the balance between the negative drivers and positive driver for FDI.
V scenario which is the most optimistic and infeasible is that downward FDI inflows would upturn in the second half of 2009; assuming end of the recession as early as in beginning 2009, quick return of investors’ confidence, no protectionist setback, and fresh wave of cross border M&As. U scenario which is the most possible depicts the inflows of FDI to begin to move up only in 2010, because of underlying assumption that global recession would last until the first semester of 2010, that the global value of cross-border M&As would stagnate due to the low price of stocks, and that the propensity to internationalization of companies is still at work. At last, L scenarios explains that FDI flows do not pick up before 2012 by assuming a longer and worse than expected economic depression results, and the accumulation of negative factors.
This report offers government policy responses at both the national and international which have executed around the world. In national level, each country has carried out several emergency measures, like for example large-scale bailout plans and rescue packages for the financial sectors, large public investment programmes aimed at infrastructure investment, and fiscal or monetary stimulus measures. At the international level, economic cooperation among developed countries, or regional countries could be mentioned such as meetings of G20 and Asian 9 countries. These trials will play a crucial role for creating favorable conditions for a new upward situation in FDI, even though some policies might affect flows of investment negatively. UNCTAD itself advocated that we should use these difficulties to enhance the stability of the financial system and stimulate economic itself. Not only countries but also organizations like corporate and banks should cooperate to overcome this world crisis.
