Facilitated by large scale cross-border mergers and acquisitions, global foreign direct investment (FDI) has been on the rise since the 1970s. And since the early 1990s, the value of global FDI flows has rapidly increased.

The Logic Behind FDI Flows

In today’s fast changing business environment, with its technical advances, global market possibilities, and greater consumer sophistication, companies are increasingly competing internationally through FDI. Designed to gain access to lucrative markets, technology and talent, this strategy is a driving force behind globalization, and is likely to become a more integral part of corporate expansion plans.

FDI tends to be long-term investment in foreign companies or subsidiaries, and results in controlling stakes or shares. It is affected by interrelated complex economic, political and social factors and generally cannot be withdrawn quickly.

Mergers and Acquisitions Are Preferred

Mergers and acquisitions, which offer advantages over greenfield FDI as a mode of foreign entry, present corporations with the fastest means to achieve market dominance or strong positions in new markets. They allow firms to realize synergies by pooling resources and skills, promote greater efficiencies, spread risk, and quickly obtain tangible and intangible assets in various countries.

Additionally, mergers and acquisitions enable firms with complementary capabilities to share both the costs associated with innovation and access to new technologies, all that lead to a higher level of global competitiveness.

These deepening relationships, which often involve global production facilities and complex supply management chains throughout the world, have been further facilitated by the relaxation and removal of FDI restrictions in a growing number of countries. Furthermore, trade liberalization, regional integration efforts, and the proliferation in new methods of financing have contributed to the success of mergers and acquisitions.

The 16 largest acquisitions recorded in the first eight months of 2001 involved four U.K., three German, two American, and two Australian companies, plus one French, one Swiss, one Bermuda, one Japanese, and one Italian company.

Portfolio Investment Is More Volatile

Portfolio investment, which tends to be short-term investment, is very sensitive to economic or political volatility, is driven by market forces, and seeks the greatest returns. Consequently, its flows often surge, then dip, based on perceptions, rational or not. The Mexican peso, Asian and Russian crises of the 1990s highlight the volatility of “hot money” or portfolio investment.

September 11 Has Little Impact on FDI

Surveys conducted by the United Nations in late 2001 reveal that few companies expect to change their FDI plans in light of the September 11th terrorist attacks in the United States.

These findings are consistent with A.T. Kearney survey results that indicate two-thirds of corporate executives from the world’s 1,000 largest firms said they still intend to invest abroad at almost the same level as previously planned.

The FDI/Globalization False Start

Between 1870 and 1913, approximately half of all British investment flowed outside the country, making Britain the biggest exporter of capital by far. But then, the tragic events caused by the two world wars interrupted the world’s first period of globalization. It did not resume until after 1974, when several wealthy countries removed controls on capital movement and gave up fixed exchange rates.

Over the last decade, capital flows have increased significantly, but are nowhere close to the percentage experienced by the British 89 years ago.

The U.S. Is the Greatest FDI Beneficiary

According to the OECD, from 1990 through 1999, the United States — the greatest beneficiary of the explosion in international investment among OECD countries — received almost three times more cumulative direct investment inflows than the U.K, the number two recipient. In third place was France, followed by the Netherlands, Sweden, Belgium/Luxembourg, Germany, Canada, Spain, Mexico, Australia, Italy, and Switzerland.

During this period, the United States led by a large margin in direct investment cumulative outflows. Following were the U.K., Germany, France, the Netherlands, Japan, Canada, Switzerland, Belgium/Luxembourg, Sweden, Spain, Italy, and Finland. According to the U.S. Federal Reserve, during the 1980s, 12% of total capital flows went to Asia. Over the course of the 1990s, this share jumped to 43% of total flows.

Global FDI Flows in 2001 Dipped

FDI flows to both developing and developed countries declined in 2001. In fact, flows to developed countries declined by nearly half, from over $1 trillion in 2000 to $500 billion in 2001. The number of cross-border mergers and acquisitions also dipped, from 7,900 deals in 2000 to fewer than 6,000 deals in 2001.

The considerable drop in FDI flows to the United States was partly due to the general economic slowdown and a drop in foreign acquisitions of U.S. firms. While investment shrunk in Japan in 2001, Japanese investment grew abroad. Investment flows to Asia by Japanese firms partly involved the relocation of Japanese production facilities abroad.

FDI flows to China gained greater momentum in 2001, part of a trend that is likely to continue well into the future. According to the United Nations, China beat out the United States as South Korea’s largest FDI destination in 2001, and Taiwan eliminated its $50 million ceiling on investments in mainland China. This is sure to result in more Taiwanese investment in China, although Taiwan continues to ban investment by its semiconductor industry.

Flows to Latin America and the Caribbean dwindled in 2001 as a result of a drop in mergers and acquisitions. Spain, which has become a major investor in Latin America, decreased flows to the region significantly. While flows to Brazil and Argentina dipped, flows to Mexico increased.

Although the overall 2001 FDI drop is unlikely to be recouped in 2002, FDI is anticipated to rise as world economic growth picks up. This assumes other important factors will remain the same, such as the quality of infrastructure, the availability of technology and skills in host countries, the United Nations says.

The Top Projected FDI Destinations

According to the United Nations Conference on Trade and Development, the United States is forecast to be the most favored FDI destination by transnational corporations among all developed countries through 2005.

During this period, Germany, the U.K. and France are projected to be the most favored FDI destinations in Western Europe, Brazil in Latin America, Poland in Eastern Europe, South Africa in Africa, and China in Asia. Investment in China in the first four months of 2002 was estimated to be 20% higher than the same period last year. This is attributed in part by China’s December 2001 accession to the World Trade Organization.

Industries Attracting Most FDI

According to United Nations data, industries targeted by cross-border mergers and acquisitions differ by country and region. For example, the most targeted industries in the European Union by foreign companies are chemicals, food, beverages and tobacco. The most targeted industries in the United States are electrical, electronic equipment and chemicals.

In Latin America and the Caribbean, merger and acquisition activity tends to focus on public utilities, finance, petroleum products, transport, storage, and communications. In Asia, the primary targeted sector is finance; in Central and Eastern Europe, it is finance, beverages and tobacco.

Cautious Investing Pays Off

Expanding globally through FDI can significantly increase foreign marketshare and profits, and by pooling resources, it can increase your level of competitiveness. As a result, the number of mergers and acquisitions are likely to rapidly increase. But, because the risks can be very steep, they need to be identified and studied in great depth.

This article appeared in June 2002. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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