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HSBC - Inward investment trends

by Nick Stephens, Senior Manager Inward Investment, HSBC

Cross-border expansion by companies (foreign direct investment or FDI) has been one of the most decisive factors in the growth of the globalised economy over the last 50 years. Developed and emerging economies alike have benefited greatly from the capital investment, job creation, purchases from local suppliers and tax revenues that inward investment brings.

FDI is also one of the strongest visible outcomes of innovation in a company. Every firm that internationalises has to have some competitive advantage to be successful in new, overseas markets. It may be technological product innovation, but many of the companies that I have dealt with have channelled innovative thinking into unique selling propositions around customer service, business processes and product excellence.

Levels of FDI broadly follow global and regional economic cycles so that there are periodic troughs of inward investment activity as well as peaks. But the timing and the extent of them can?t always be foreseen. In 2000, for instance, global FDI reached a record high only to tumble in 2001 with flows down more than 50% due to the economic slowdown in the US and other parts of the world.

Looking back can often help you look ahead, so it is worth examining recent levels and types of activity. Quoted below (unless otherwise stated) are interim estimates by UNCTAD of the most recent FDI international flow figures for 2007. But beware: not only are these interim estimates largely based on the first three quarters of the year, but FDI flows can be skewed by very large crossborder transactions.

In recent years we have seen a boom in global crossborder investment flows to US$1.5 trillion in 2007. By far the largest proportion still goes to developed countries and in 2007 that share grew for the fourth consecutive year to US$1 trillion. Of these the United States maintained its position as the largest single recipient of FDI in the world with flows up 10% to US$193 billion ? 13% of global flows. The European Union as a whole attracted US$610 billion, 40% of total FDI flows, an increase on 2006 of nearly 15%. It is also worth noting that Russian Federation inflows were up 70%, while those to Turkey dipped slightly.

South, East and South East Asia as a whole continued to attract increasing flows in 2007, reaching a record US$224 billion or 15% of the world total. Malaysia, Singapore and Hong Kong all had significantly increased flows. Japan?s modest inflows also showed some signs of recovery, but UNCTAD?s preliminary estimates indicate a reduction in FDI flows into India and mainland China after record flows in recent years.

Latin America had strongly increased flows with those into Brazil, Chile and Mexico doubling. However, inflows into Argentina were down 40%. And to complete the picture, FDI flows overall into Africa ? where Egypt, Morocco and South Africa were the main recipients ? remained static at US$35 billion.

In terms of overall FDI performance the UK still remains dominant in Europe and is second only to the US in having the greatest inflows and outflows of FDI. UNCTAD estimates that the UK had inflows of US$171 billion in 2007, an increase of nearly 23%. For the financial year ended March 2008 UK Trade & Investment reported continuing strong growth of inward investment with a total of 1,573 projects from 48 countries, a 10% increase. Forty-two per cent of projects were new investments; 28% were expansions; and 30% were M&As. A considerable number of these were in the high-value category now targeted by UKTI, and R&D was particularly strong. This once again emphasises the UK?s innovation credentials. The United States continues to be the main source of investment projects into the UK with 30% of the total. There were significant increases in projects from Germany and Japan, our second and thirdlargest investor countries. And projects from India and China continued to grow.

Among the industry sectors that are currently dominating global FDI are energy, automotive, ICT, electronics, telecoms, pharmaceuticals and financial services. Mining and mineral extraction have also grown in importance. But we are still seeing a decline in primary and manufacturing investment and a rise in the proportion of servicebased investment. Services now represent twothirds of total global FDI flows.

The UK focus is on sectors where it has clear competitive advantages: ICT, life sciences, financial and business services, creative industries, environmental technologies and advanced engineering. Trying to predict in terms of FDI which sectors will rise and fall over the next five years is not an exact science. But plainly the single most influential factor is the growth of economies and consumers in the developing world, with the effects of China and India?s explosive growth already being felt. We have already seen commodity prices soar ? everything from iron ore and cement to rice and gold. At the same time the global demand for energy increases every year while pressure on supplies of carbon fuels continues.

Against this background FDI observers believe the obvious sectors will expand ? all energy and mineralrelated production processes, construction, materials, chemicals, and agribusiness. The need for efficient communication will mean that ICT and telecoms will continue to rank highly. But it is the growing and insatiable demand from hundreds of millions of new consumers that for the first time have disposable incomes that will boost the financial services, automotive, life sciences and healthcare, consumer goods and creative industries sectors.

As to the rising star nations of FDI in the next few years, China and India will continue to be both huge sources and recipients of FDI. And staying in Asia Pacific, Vietnam and Cambodia are already on the rise as recipients of outsourced operations from China. Indonesia is another emerging nation to watch. Canada and Mexico and the slowly waking giant of Brazil are flexing their FDI muscles, whilst the Gulf States, Turkey, and the transition economies in central Europe are interesting prospects as FDI players.

Finally, has the current FDI bubble burst? UNCTAD along with the OECD forecasts significant FDI falls in 2008. The US is experiencing economic difficulties deepened by the effects of the financial credit turmoil. We have already seen in late 2007 and the first half of 2008 the slowing of outward investment from the US and a significant fall in cross-border M&A activity. As a result FDI into Europe and particularly the UK could be severely affected. Even the inflationary wobble in China may blunt FDI inflows and outflows.

Yet as we know, when companies are experiencing pressures in their home market there is a greater incentive for them to look overseas for new opportunities and so there may be a degree of self-levelling. So while the short-term picture is less positive, the medium to longer-term picture is one where growing business enterprises and rising consumer demand across an even more globalised economy will continue to be drivers of strong and sustainable foreign direct investment.

Nick Stephens
Senior Manager Inward Investment
HSBC Bank plc, Level 32, 8 Canada Square,
London, E14 5HQ
Tel: +44 (0)20 7991 3707
Fax: +44 (0)20 7992 4896

Added the 17 September 2008 in category Innovation UK Vol4-1

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