The UN Conference on Trade and Development (UNCTAD) has just issued its Global Investment Trends Monitor that looks at outward-bound foreign direct investment (FDI). Here’s the lead: The share of developing and transition-country FDI in global outflows increased to 28 percent in 2010, up from 15 percent in 2007, the year prior to the global financial crisis. These are historic levels, both in absolute terms and as a share of the global total of outbound FDI.
Another important snippet from UNCTAD is that a full 70 percent of developing and transition-country outward investment is destined toward other developing and transition countries—this is also known as “South-South” investment. The Monitor attributes this trend to the stronger recovery and economic condition is those destinations. While the numbers are new, perhaps the trend is unsurprising to those who follow these issues closely—as it has become increasingly apparent as most of the world has moved out of financial and economic crisis.
Also unsurprising may be a note of caution by James Zhan, the director of the investment division at UNCTAD. He points out that there are still risks to full-fledged recovery, including “unpredictable global governance” amid financial reforms, sovereign debt crises, rising energy prices, inflation risks, and currency volatility.
Allow me to circle this back to MIGA’s work in two ways.
First, increased South-South investment is an important goal that broadens the global economic base and allows for important knowledge and resource transfers. For these reasons, it is one of MIGA’s strategic priorities. Twenty-nine percent of investments that MIGA insured in fiscal years 2009 to the first half 2011 were South-South. This is a good showing, but most of these investments tended to be smaller than many others that MIGA insures—so from the agency’s perspective we note some room for larger-scale South-South investments.
The second point I’d like to make is that, apart from the economic risks noted by Zhan above, MIGA surveys of multinational executives have found that their top worry when operating in developing countries in the short run is political risk. The revolutions and unrest in the Middle East and North Africa have recently brought the topic of political risk into very sharp relief. Indeed, while MIGA surveys in the past two years have found that investors are primarily worried about adverse government intervention (for example, changes in regulations, breach of contract, non-honoring of sovereign guarantees, currency restrictions, and expropriation) rather than overt political violence, it will be interesting to see whether these perceptions may change in this year’s upcoming survey.
All this to say that, despite the good news on outbound FDI trends, there are significant economic and political risks on the horizon. These need to be managed and potentially mitigated to maintain the positive momentum we see in UNCTAD’s data.
The Monitor is quite short and readable, and has some interesting regional breakdowns. Find it here.