International investment perspectives.

27 Pages·2002·0.124 MB·English

by  OECD

DIRECTORATE FOR FINANCIAL, FISCAL AND ENTERPRISE AFFAIRS
TRENDS AND RECENT DEVELOPMENTS IN FOREIGN DIRECT INVESTMENT*
Article forthcoming in the OECD International Investment Perspectives, September 2002.
I. Recent trends
A sharp decline in FDI within Between 2000 and 2001, foreign direct investment (FDI)
the OECD area… flows into and out of OECD countries recorded their largest drop in
recent decades. Total inflows in the OECD area fell from US dollars
(USD) 1.27 trillion to USD 566 billion, or a decline of around 56 per
cent (Table 1). While firm data are not fully available for non-
OECD countries, early indications suggest that their share of global
FDI increased slightly in 2001, owing to a less sharp decline in
inflows. On current estimates, the total 2001 outflows from OECD
countries amounted to USD 593 billion, with the OECD area acting
as a net exporter of USD 27 billion worth of FDI in 2001 as
compared with USD 12 billion in 2000. (For a methodological
description of the OECD foreign direct investment statistics, see
Box 1.)
…affected countries The sharp decline in activity affected countries differently.
differently… The largest drops in inflows were seen in Germany and Belgium-
Luxembourg (in both cases to the tune of about 80 per cent). This
reflected historically large transactions in 2000 in connection with a
few major cross-border corporate ownership changes. The
traditionally largest players in direct investment -- United States and
United Kingdom -- both saw declines in their FDI inflows that were
broadly in line with OECD averages. FDI flows into Japan had
picked up from a comparatively low level in 1999, but in 2001 they
fell back somewhat. Among the large OECD economies, France and

* This article was prepared by Hans Christiansen and Ayse Bertrand of the Capital Movements,
International Investment and Services Division. Special thanks are due to Mr. Arnaud Humblot of
Dealogic for his extensive assistance with M&A statistics. Thanks also to Mr. Thomas
Hatzichronoglou of the OECD Directorate for Science, Technology and Industry for his input to the
article.
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Italy bucked the trend and attracted increasing foreign direct
investment inflows in 2001.
…and reduced the United While FDI outflows showed (not surprisingly) the same
States’ role as a net importer general trend as inflows, some country differences nevertheless bear
of FDI. mentioning. In particular, an earlier tendency for corporate cross-
border consolidation to affect individual countries’ FDI inflows and
outflows in unison appears to have been weakened in 2001.
Outflows from the United States, while lower than in 2000,
nevertheless held up comparatively well and accounted for more than
21 per cent of OECD countries’ total outward FDI in 2001.
Germany’s outflows of direct investment also did not drop much in
2001, returning the country to its pre-2000 role as a net exporter of
FDI. Countries like the United Kingdom and Sweden, on the other
hand, saw their outward FDI reduced by almost 85 per cent.
a) Making sense of the trends
The drop occurred from When assessing the causes of the drop in international
historically high levels… investment in 2001 it is essential to keep in mind the previous year’s
levels of FDI. The total amount of FDI in 2000 stood at an all-time
historical high, at almost six times the levels recorded only five years
earlier (Figure 1, Panel A). The decline between 2000 and 2001
essentially eliminated two thirds of the increase by reducing FDI
flows to twice the level they had reached in the mid-1990s. In other
words, the developments in 2001, rather than a seminal decline in
international investment flows, appear to have marked a correction
toward more sustainable levels, following what could arguably have
been an “investment bubble” in 1999 and 2000.
…owing to a flurry of Most of the hike in FDI in 1999 and 2000 affected the
corporate takeovers in 1999 largest OECD economies. It largely took the form of a growing
and 2000. number of mergers and acquisitions (M&As) in connection with a
wave of global restructuring and repositioning among multinational
enterprises. Stepped-up privatisation efforts by authorities also
played a role, especially in the case of non-OECD countries.
Moreover, specific data for M&A (discussed in more detail below)
indicates that the increase in activity related to both the number of
transactions and the average price paid for a given corporate
acquisition (Figure 1, Panel B).
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Table 1. Direct investment flows, OECD countries, 1998-2001
(billion US dollars)
Inflows Outflows
1998 1999 2000 p 2001 e 1998 1999 2000 p 2001 e
Australia 6.1 5.7 11.9 5.1 3.4 3.0 5.1 11.4
Austria 4.5 3.0 8.8 5.9 2.7 3.3 5.7 3.0
Belgium-Luxembourg 22.7 38.7 243.3 51.0 28.5 34.0 241.2 67.3
Canada 22.6 25.2 63.3 27.6 34.6 18.4 44.0 37.0
Czech Republic 3.7 6.3 5.0 4.9 0.1 0.1 0.0 0.1
Denmark 7.7 6.8 14.5 4.1 4.5 7.0 6.6 6.1
Finland 12.1 4.6 8.8 3.6 18.6 6.6 24.0 7.3
France 31.0 47.1 42.9 52.6 48.6 120.6 175.5 82.8
Germany 24.6 54.8 195.2 31.8 88.8 109.4 49.8 43.3
Greece .. 0.6 1.1 1.6 n.a. 0.5 2.1 0.6
Hungary 2.0 2.0 1.6 2.4 0.5 0.3 0.6 0.3
Iceland 0.1 0.1 0.2 0.2 0.1 0.1 0.4 0.3
Ireland 8.9 19.0 24.1 9.8 3.9 5.4 4.0 5.4
Italy 4.3 6.9 13.4 14.9 16.1 6.7 12.3 21.5
Japan 10.2 21.1 29.0 17.9 39.9 65.3 49.8 32.5
Korea 5.2 10.7 10.1 3.2 3.4 2.1 3.5 2.6
Mexico 11.9 12.5 14.7 24.7 .. .. .. 3.7
Netherlands 37.9 31.9 54.3 55.6 38.8 41.5 72.0 44.4
New-Zealand 1.8 0.9 1.3 3.2 0.4 1.1 0.6 0.7
Norway 4.0 7.5 6.0 2.2 2.5 5.5 8.3 -1.0
Poland 6.4 7.3 9.3 6.8 0.3 0.0 0.0 0.1
Portugal 3.1 1.2 6.4 3.3 3.8 3.2 7.7 5.1
Slovak Republic 0.5 0.4 2.1 0.6 0.1 -0.4 0.0 0.1
Spain 11.8 15.8 37.5 21.8 18.9 42.1 54.7 27.8
Sweden 19.6 60.9 23.4 12.9 24.4 21.9 40.6 6.4
Switzerland 8.9 11.7 16.3 10.0 18.8 33.3 42.7 16.3
Turkey 1.0 0.8 1.7 3.3 0.4 0.7 1.0 0.6
United Kingdom 70.6 82.9 119.7 53.8 121.8 205.8 255.1 39.5
United States 179.0 289.5 307.7 130.8 142.6 188.9 178.3 127.8
TOTAL OECD 522.6 775.6 1274.0 565.8 666.7 926.6 1285.6 593.1
Note: Data are converted using the yearly average exchange rates.
Greece: 1999-2001, source is IMF.
Korea and Netherlands: 2001, source is IMF.
Hungary: 1998, source is IMF.
Slovak Republic: Data include only equity capital. 2001 data cover Jan-Sep 2001.
Source: OECD International Direct Investment Database.
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Figure 1. Behind the changes in FDI
Panel A. FDI inflows into OECD countries
1400
1200
1000
D 800
S
U FDI inflows
n
o Of which: United States
Billi 600
400
200
0
1995 1996 1997 1998 1999 2000 2001
Source: OECD International Investment Statistics
Panel B. Global cross-border M&As: bids and bid sizes
180 12000
160
10000
140
120 8000
100 Average bid size
6000
Number of bids
80
60 4000
40
2000
20
0 0
1995 1996 1997 1998 1999 2000 2001
Source: OECD International Investment Statistics
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Panel C. US stock indices
300
250
0
0
1
= 200 Telecom
5 Total
9
9
1
x 150
e
d
n
I
100
50
1995 1996 1997 1998 1999 2000 2001
Source: Thompson Financial
Panel D. Total privatisation proceeds in OECD countries
120
100
80
D
S
U
n 60
o
Billi
40
20
0
1995 1996 1997 1998 1999 2000 2001
Source: OECD International Investment Statistics
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Box 1: Foreign Direct Investment Statistics
Definitions and coverage
Direct investment: is a category of international investment made by a resident entity in one economy (direct
investor) with the objective of establishing a lasting interest in an enterprise resident in an economy other than
that of the investor (direct investment enterprise). ”Lasting interest” implies the existence of a long-term
relationship between the direct investor and the enterprise and a significant degree of influence by the direct
investor on the management of the direct investment enterprise. Direct investment involves both the initial
transaction between the two entities and all subsequent capital transactions between them and among affiliated
enterprises, both incorporated and unincorporated.
Direct investment enterprise is an incorporated enterprise in which a foreign investor owns 10 per cent or more
of the ordinary shares or voting power for an incorporated enterprise or an unincorporated enterprise in which a
foreign investor has equivalent ownership. Ownership of 10 per cent of the ordinary shares or voting stock is the
guideline for determining the existence of a direct investment relationship. An “effective voice in the
management”, as evidenced by an ownership of at least 10 per cent, implies that the direct investor is able to
influence, or participate in, the management of an enterprise; absolute control by the foreign investor is not
required. Direct investment enterprises are defined as entities that are either directly or indirectly owned by the
direct investor and comprise:
− subsidiaries (an enterprise in which a non-resident investor owns more than 50 per cent);
− associates (an enterprise in which a non-resident investor owns between 10 and 50 per cent) and;
− branches (unincorporated enterprises wholly or jointly owned by a non-resident investor).
Voting stocks are equity/shares that give voting rights to the holder. These can either be “listed voting stocks”
(that is, equity/shares that are listed on an official stock exchange), or “unlisted voting stock” (that is,
equity/shares that are not listed on a official stock exchange.
Methodology
Other methodological guidelines for compiling FDI statistics are indicated in the OECD Benchmark
Definition of Foreign Direct Investment, 3rd edition and the IMF Balance of Payments Manual, 5th edition.
Comparability
The comparability of FDI statistics across the OECD countries has improved notably although
complementary efforts are planned to achieve further international consistency. A recent study by IMF and
OECD, Report on the Survey of Implementation of Methodological Standards for Direct Investment, attempts to
analyse the comparability of FDI statistics of OECD countries.
Source
OECD International Investment Statistics Yearbook provides detailed flow and stock statistics for
inward and outward FDI based on the reports of the OECD countries. Further details can be obtained from the
website www.oecd.org. The statistics used in the present article were complemented by IMF balance of
payments statistics where OECD statistics were incomplete.
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The stock market Except for the unlikely case where the latter solely
overvaluation of the past was indicates an increasing average size of takeover targets, part of the
a factor... growth in FDI must hence be attributed to valuation changes -- i.e. to
the very high equity prices of the late 1990s (Figure 1, Panel C). A
second channel through which this has apparently affected
international investment is the fact that it provided a boost to
corporate sector liquidity by alleviating funding constraints on the
part of listed enterprises. A further change to a similar effect was the
development of deeper and more liquid markets for equity and
corporate bonds within the euro-zone.
…as was a surge in utilities It would, however, be too simplistic to attribute the boom
privatisation. in FDI in the late 1990s solely to an equity price bubble. The causal
relationships appear to have been more complex. For instance, a
surge in privatisations in the mid- to late 1990s (Figure 1, Panel D)
brought large amounts of new utilities stocks to the market, not least
as regards the telecom sector. These shares soon became the object
of optimistic pricing, and were traded across borders by investors. It
would appear that it was the confluence of high prices, ebullient
expectations and the presence of an active international investor
community that acted as a spur to the mini-boom in FDI among the
main OECD economies in 1999 and 2000. Conversely, the decline
since then is influenced by equity price deflation, by the more sedate
outlook for corporate profitability during the present cyclical
slowdown and, particularly in the case of the United States, by a
gradual loss of confidence in corporate financial reporting.
b) Mergers and acquisitions
M&A data for the first half of An indication of FDI flows in the first half of 2002 can be
2002… derived from M&A data for this period. M&A is a particularly
meaningful indicator of FDI into OECD member countries, insofar
as virtually all cross-border direct investment in these economies (at
least in value terms) takes the form of ownership changes in existing
enterprises1. As for enterprises located in OECD countries’
investment in non-Member countries, an increasing share of these
capital transactions over the last ten years has taken the form of
participation in privatisations, whereby FDI here too has become
increasingly attuned with M&A flows. (For an overview of the M&A
data definitions applied in this section, see Box 2.)
…indicate that the decline has M&A inflows into OECD countries between January and
continued, albeit at a reduced early June 2002 amounted to just under USD 200 billion, following
rate. USD 636 billion in the whole of 2001 (Table 2). If the first months
of 2002 are taken as representative, this indicates that M&A (and, by
extension, FDI) inflows for the year as a whole were in the vicinity
of USD 450 to 500 billion, or a further decline of as much as 25 per
cent. Outflows in the first five months of the year were USD 185
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billion (Table 3), which, on a whole-year basis, would seem to
indicate an average decline of about 20 per cent. If borne out by the
facts, this will reduce the 2002 FDI flows into and out of OECD
countries to their lowest level since 1997. The hazards of using such
extrapolations should, however, be kept in mind. FDI flows in the
second half of 2002 could be influenced on the upside by a general
pickup in economic activity in most OECD countries, and on the
downside by the renewed bouts of weakness in equity prices that
occurred during the early summer.
The decline in inflows into the A few interesting observations may be drawn from a sharp
United States appears change in country composition that took place up to the first half of
particularly pronounced. 2002. Most notably, the US share of total OECD inflows declined
from 30 per cent in 2001 to only 17 per cent in the first months of
2002. In fact, if the first half of 2002 is again taken as representative
for the year as a whole, more than half the decline in total flows
between 2001 and 2002 is attributable to the drop in M&A into the
US economy. Conversely, the relative importance of the continental
European economies appears to have grown with France and
Germany receiving more than 20 per cent of all M&A inflows in the
first half of 2002 -- up from 14 per cent in the whole of 2001. A
whole range of smaller OECD countries likewise saw their share of
overall M&A flows rise.
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Table 2. Cross-border mergers and acquisitions, Inflows by country
(billion US dollars)
Jan-12 Jun
1998 1999 2000 2001 2002
OECD 617.4 879.6 1272.4 636.3 199.4
Australia 12.8 29.2 19.2 17.6 5.6
Austria 4.4 0.2 2.7 10.3 0.1
Belgium-Luxembourg 65.4 37.9 12.5 18.9 16.0
Canada 18.3 31.2 139.3 50.9 14.4
Czech Republic 2.9 3.4 2.9 2.0 4.4
Denmark 9.6 6.5 14.1 1.5 1.3
Finland 22.7 4.9 5.0 4.3 2.7
France 38.5 29.3 50.8 27.5 14.8
Germany 20.1 63.8 293.2 60.8 25.4
Greece 3.8 7.1 1.4 1.3 0.0
Hungary 1.2 1.1 3.9 0.6 1.0
Iceland 0.0 0.1 0.0 0.0 0.0
Ireland 0.7 6.9 5.5 6.5 0.5
Italy 27.9 42.7 20.1 17.0 4.1
Japan 19.3 22.9 19.9 17.8 3.3
Korea 7.3 19.6 9.7 11.4 0.6
Mexico 3.5 1.2 25.4 16.3 3.9
Netherlands 28.4 45.8 40.0 16.1 11.0
New Zealand 2.6 4.8 4.4 3.3 0.3
Norway 1.5 6.2 10.2 5.3 0.4
Poland 2.8 7.3 10.4 3.5 0.5
Portugal 5.4 2.9 9.8 0.8 0.7
Slovakia 0.0 0.1 1.8 1.3 3.4
Spain 17.0 13.0 24.9 9.7 9.6
Sweden 14.0 58.7 29.0 12.8 3.9
Switzerland 16.4 19.0 28.4 17.4 5.9
Turkey 0.3 0.1 3.6 0.7 0.1
United Kingdom 80.5 147.6 214.8 112.7 30.9
United States 189.8 265.9 269.5 188.0 34.3
Selected other countries
Israel 3.6 4.8 3.5 4.6 0.4
Hong Kong, China 3.7 9.5 15.1 13.8 0.4
China 4.5 10.2 45.2 5.4 1.5
Singapore 0.8 5.9 2.2 6.3 0.4
Brazil 31.1 11.1 34.4 9.6 2.9
Argentina 12.7 25.1 11.5 5.5 0.1
Chile 2.7 8.3 4.6 5.1 1.6
Source: Dealogic
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Table 3. Cross-border mergers and acquisitions, Outflows by country
(billion US dollars)
Jan-12 Jun
1998 1999 2000 2001 2002
OECD 545.9 803.2 1115.8 573.3 185.2
Australia 6.8 10.8 7.0 37.0 5.5
Austria 1.4 2.2 3.6 1.3 0.9
Belgium-Luxembourg 6.1 11.7 19.1 21.7 4.1
Canada 40.2 16.4 42.0 30.0 4.9
Czech Republic 0.0 0.0 0.0 0.0 0.1
Denmark 2.5 5.8 6.6 4.3 0.9
Finland 10.4 4.0 13.0 9.1 3.8
France 39.8 124.6 151.6 66.9 24.4
Germany 77.2 112.8 80.6 70.5 26.6
Greece 1.3 0.6 4.0 0.2 0.3
Hungary 0.1 0.0 0.4 0.0 0.0
Iceland 0.0 0.0 0.1 0.0 0.1
Ireland 3.6 3.6 4.8 1.8 0.4
Italy 13.1 14.7 19.7 21.8 3.1
Japan 8.1 21.6 22.7 21.8 1.9
Korea 0.1 0.1 1.6 0.1 0.0
Mexico 0.4 4.1 4.6 0.7 0.8
Netherlands 38.6 48.5 71.1 31.9 13.2
New Zealand 0.1 1.0 1.2 0.6 0.0
Norway 1.2 1.5 7.9 2.5 4.4
Poland 0.0 0.0 0.0 0.0 0.0
Portugal 4.7 2.4 5.4 1.7 0.9
Slovakia 0.0 0.0 0.0 0.0 0.0
Spain 17.0 34.7 60.3 8.5 5.2
Sweden 30.4 12.4 22.9 11.5 3.2
Switzerland 27.7 15.1 41.7 21.2 0.9
Turkey 0.1 0.6 0.0 0.0 0.0
United Kingdom 106.3 196.7 372.6 84.6 32.5
United States 108.8 157.2 151.2 123.4 47.1
Selected other countries:
South Africa 3.4 6.5 4.3 2.1 0.85
Bermuda 11.8 38.0 10.4 16.4 1.3
China 2.0 0.7 1.4 1.4 0.5
Hong Kong, China 7.0 13.6 48.9 4.9 1.9
Singapore 0.6 5.0 14.5 16.2 0.9
Source: Dealogic
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