World - Dwindling Flows

The World Investment Report 2008, a publication of UNCTAD, has highlighted certain deleterious, if predictable, consequences of the U.S. financial crisis for capital flows, especially foreign direct investment. Aggregate flows across the globe are likely to fall steeply during 2008: UNCTAD expects a 10 per cent drop. However, given the magnitude of the crisis with serious institutional and regulatory failures surfacing by the day, the report might seem optimistic. Notwiths tanding the financial crisis, 2007 was good for FDI flows for nearly all countries. Capping a four-year run of continuous growth, global FDI flows rose by 30 per cent to reach $1,833 billion, well above the previous all-time high registered in 2000. Developing countries received a record $500 billion, with China and Hong Kong (China) remaining the top two destinations in this group. India’s outward FDI flows have not been confined to developing countries but extended to the West as well. Developed countries received $1,248 billion. The United States retained its top position followed by the United Kingdom, France, and Canada. The European Union was the largest host region accounting for almost two-thirds of FDI inflows into developed countries. The increase in FDI was largely due to relatively high growth and strong corporate performance.
The current financial sector crisis in the U.S. is the main but not the only reason for the anticipated decline in global FDI flows. The global economy is slowing down and the World Bank has forecast weaker growth in the developed world compared with developing countries. UNCTAD believes that capital flows into India and other countries would remain at a reasonable level but the figure will be sharply lower for the developed world as a whole. In the recent past, cross-border mergers and acquisitions have been the prime movers of FDIs, accounting for 89 per cent of the total flows. Evidently, there would be fewer mergers and acquisitions in a slowing global economy. There has been a pronounced risk aversion not just in the financial markets. Besides, the huge liquidity in the financial markets that helped finance mega deals has dried up. The virtual disappearance of the big ticket investment banking firms such as Lehman Brothers might be another factor. It is also noteworthy that the assets of the failed financial firms are sold at bargain-basement prices. Some of these factors suggest a significant reduction in all types of flows. In India, the recent attempts to further liberalise borrowing from abroad for infrastructure projects might not amount to much.