BIZCHINA> Review & Analysis
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BIZCHINA> Review & Analysis
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Emerging markets will attract more FDI inflows
(China Daily)
Updated: 2009-10-19 08:52 FDI to emerging markets Flows to emerging markets initially proved resilient to the impact of the global crisis. Inflows into the developed world declined by one-third in 2008, whereas flows to emerging markets increased by 11 percent. FDI flows to emerging markets will decline considerably in 2009, albeit by less than FDI flows to the developed world. In 2009, for the first time ever, emerging markets are likely to attract more FDI than developed countries. The forecast is obviously subject to considerable uncertainty. For example, a few large cross-border deals in the final quarter of 2009 could tip the balance back in favor of developed countries. But even should the emerging market share in global FDI inflows fall short of 50 percent, the share in 2009 will almost certainly be the highest on record. Practice and theory The overall decline in global FDI flows is thus being accompanied by a distinct shift in the pattern of FDI. Economic theory tells us that capital should flow from capital-abundant rich countries to capital-scarce poor countries. In practice, that has not been the case, since developed countries have consistently attracted the bulk of global FDI flows. High risk in many emerging markets, the benefits of advanced institutions and infrastructure, and a superior overall business environment in developed countries have tended to outweigh the attractions of greater market dynamism and lower costs in emerging markets. This time, practice might be catching up to theory. FDI has tended to rise during recessions, as slumps in M&As have hit the developed world disproportionately. Some 80 percent of cross-border M&A sales are still in developed states. However, other factors are also pushing up the share of emerging markets in global FDI inflows. FDI flows to emerging markets have held up better because their overall economic performance has been much better than that of the developed world, which has experienced its worst recession since the Second World War. Much of the superior performance of emerging markets is, of course, due to the continued fast growth of China and India. However, even if China and India are taken out of the equation, most emerging markets will have outperformed the developed world in 2009. Emerging markets have thus to some extent "decoupled" from the developed economies. Globalization and increasing competitive pressure on companies have increased the cost in lost opportunities of not investing in emerging markets. Outlook for 2010 Although the global economy is still weak, conditions are now improving in many countries. Global growth resumed in the second half of this year, creating momentum that will carry into 2010.
As a result, although global FDI inflows are likely to grow in 2010, the recovery will be modest. The growth rates of FDI into the developed world and emerging markets are expected to be similar, so that their shares in global FDI are unlikely to change significantly from 2009. Companies' plans for the next five years, as reflected in the recent Economist Intelligence Unit survey, "Survive and Prosper," imply that emerging markets will attract considerable FDI and probably more than developed countries. Just under 60 percent of companies expect to derive more than 20 percent of their total revenue in emerging markets in five years' time - almost double the present proportion of 31 percent. This would suggest that the shift in the distribution of global FDI flows in 2009 is a longer-term development and not just a transitory phenomenon. The article is part of the Columbia FDI Perspectives series, published by the Vale Columbia Center on Sustainable International Investment. The views expressed here are his own. (For more biz stories, please visit Industries)
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