Foreign direct investment flows should take two years to regain momentum after a sharp drop in 2009, a UN thinktank said last week as it warned of the risk of economic nationalism during the recovery.
Transnational companies expect a slow recovery in their investment expenditure abroad to begin next year and accelerate in 2011, the UN Conference on Trade and Development said in its annual survey of 241 multinationals.
The World Investment Survey 2009 found that about half of them even expected their foreign direct investment (FDI) expenditure in 2011 to rise above 2008 levels, when inflows worldwide reached an estimated $1.4 trillion -- about a fifth less than the 2007 peak.
However, manufacturing industries, hard hit in recent months, are likely to lag behind in the recovery, and the corporate world also fears a bout of investment protectionism.
"The prospects for FDI in the primary sector -- mining, agriculture -- and services would remain bright for the next few years while prospects for manufacturing would be less optimistic," said UNCTAD investment division director James Zhan.
Zhan said that feared protectionism -- barriers to foreign investment in local companies or takeovers -- had not materialized so far. "Few new laws and regulations could be characterised as restrictive to FDI, instead the crisis has triggered a new effort to promote and facilitate FDI and enhance the clarity and stability of the investment framework," he explained.
But he acknowledged that the concerns were not unfounded, especially for a more subtle form of "smart protectionism" in economic stimulus packages.
"Furthermore, a new wave of economic nationalism could occur in the aftermath of the crisis when the exit of public investment from the bailout of flagship industries might lead to protectionism of 'national champions' from foreign takeovers," Zhan said.
Global foreign direct investment inflows fell by 54% in the first quarter of 2009, compared to the same period last year, according to UNCTAD data released in May. That figure is expected to reflect the pattern for the whole year, mainly affecting investment in developing nations and transition economies.
One component, cross border corporate mergers and acquisitions, is expected to suffer an even sharper decline of about two-thirds globally this year compared to 2008, said Zhan. "The picture is gloomy this year in contrast with the longer term, in 2010 and 2011," he added.
Fifty eight percent of the companies surveyed were reducing their investments this year. But the survey also found that companies were intent on pursuing an international approach to production, employment and investment as well as sales.
The brightest outlook came from transnational companies based in the developing world, especially Asia, and in the U.S., followed by Europe and Japan.
Prospective investment destinations were largely unchanged over the pattern seen in recent years, with a focus on Asia.