Treasury Today Country Profiles in association with Citi

Europe and North America bear brunt of slump in global FDI flows

EU and USA trade war mapped out with money on the countries

US tax reforms and trade wars have led to a hefty fall in global foreign direct investment flows, posing fresh challenges for corporates as they look to make the most of investment funds.

Over the last few decades, foreign direct investment (FDI) has become an increasingly important means by which corporates can maximise returns on their investments. By securing controlling interests in foreign assets, firms can, potentially, rapidly acquire new products and technologies, sell their existing products to new markets, and reduce production costs.

Governments too have been very keen on FDI, seeing it as an effective means of creating jobs and improving economic growth. That corporate-government consensus has resulted in FDI flows globally soaring from around US$11bn in 1970 to well over a trillion dollars now. These flows, comprising as they do cross-border M&A activity, intra-company loans and investments in start-up projects, have long been regarded as a bellweather of globalisation generally and, more specifically, an indicator of growth in corporate supply chains and trading relationships.

New data from UNCTAD, however, shows that FDI worldwide is on the decline, with the recent US tax reforms in particular resulting in a dampening global investment activity. According to data, FDI globally slumped dropped 41% in the first six months of 2018 to US$470bn, the lowest since 2005 year-on-year.

According to the United Nations trade and development agency, UNCTAD, the US tax reforms have encouraged big firms there to bring home earnings from abroad – principally from Western European countries. Trade disputes, notably the US-China tariffs dispute, are proving to be another drag on FDI flows.

James Zhan, Director of Investment and Enterprise at UNCTAD, says the big fall in FDI flows is being “driven more by policy than the economic cycle”. He points out that the agency had warned in early January that there was about US$2trn of stock in the form of cash or in the form of reinvested earnings of retained earnings outside the US that could be repatriated in some form following any wholesale tax reform: “And indeed, it’s happening. We have seen that outward FDI from the US was from US$147bn last year to a negative US$247bn this year.”

Drilling down from the headline figures from UNCTAD’s Investment Trends Monitor, however, reveals interesting regional variations. The fall in flow has mainly impacted the richer nations, with Europe declining by a hefty 93% and North America by 63%. In Europe the most notable declines over the first half were recorded by Ireland, down US$81bn; and Switzerland, down US$77bn.

At the same time, developing economies saw FDI flows decline by only 4% over the first half of 2018 to US$310bn compared with the same period in 2017. This includes developing Asia, where flows declined by 4% to US$220bn, mainly due to a 16% decline in investment in East Asia. China bucked the wider trend most though – it was the largest recipient of foreign direct investment in the first half of 2018, attracting more than US$70bn.

Elsewhere, Latin America and the Caribbean saw a 6% drop in investment, as uncertainty over upcoming elections in some of the major economies were offset by higher commodity prices. In West Africa, UNCTAD data indicates a 17% fall in investment in the first half of the year, from US$5.2bn to US$4.3bn.

UNCTAD’s Zhan says the data suggests a “gloomy” outlook for the global economy overall, adding that FDI is important because it gives countries access to external capital, technology, market access and tax contributions.

Investing corporate cash at the best of times can be complex and demanding, involving as it does striking a balance between security, liquidity and yield while keeping abreast of the varying regulations across the target countries. The latest data from UNCTAD and indications we are entering a waning phase of globalisation suggests that for treasurers engaged in FDI, the managing of investment funds has become just that bit more challenging.