Some would say that the World Investment Report 2019, is the harbinger of bad news. It is easy to see why; according to the report global foreign direct investment (FDI) fell from $1.5 trillion to $1.3 trillion between the years of 2017 to 2018. That’s a fall of 13 percent which signals that the accelerated investment needed to meet the Sustainable Development Goals (SDGs) is just not apparent. This further translates into reduced investment in combating climate change, rising tensions over trade wars and debt vulnerabilities of nations.
The World Investment Report is a thorough analysis conducted by United Nations Conference on Trade and Development (UNCTAD) focusing on the trends in foreign direct investment (FDI) worldwide, at the regional and country levels and emerging measures to improve its contribution to development. The conference released its 2019 World Investment Report this week, showing that global FDI not only hit its lowest since the global financial crisis, but has also been on the decline for three consecutive years. The report has an analysis of the trends in FDI during the previous year, with special emphasis on the development implications, ranking of the largest transnational corporations in the world, policy analysis and recommendations and an in-depth analysis of a selected topic related to FDI.
The Secretary-General of UNCTAD, Dr. Mukhisa Kituyi, seemed to have given the plot away at the very beginning of the report. Dr. Kituyi says, “The new industrial policies that have been adopted in recent years, almost all rely to a significant degree on attracting investment. At the same time, we are observing a declining trend in cross-border productive investment. The market for internationally mobile investment in industrial capacity is thus becoming increasingly difficult and competitive. The demand for investment is as strong as ever, the supply is dwindling and the marketplace is less friendly than before.” But he isn’t all gloom and doom, the report recognizes the importance of Special Economic Zones (SEZs) as key policy instruments for the attraction of investment for industrial development.
The article summarizes the World Investment Report 2019 and gives an insight on how Bangladesh is faring in the global arena.
GLOBAL TRENDS AND PROSPECTS
Global trend in FDI has continued their downward movement to rest at $1.3 trillion in 2018. If you are looking to blame someone, then look no further than the tax reforms in USA introduced at the end of 2017. To be clearer, the decline was mainly due to large-scale repatriations of foreign earnings by United States multinational corporations (MNCs). President Trump signed the “Tax Cuts and Jobs Act” into law on Dec. 22., 2017, bringing sweeping changes to the tax code. For the wealthy, banks and other corporations, the tax reform package can be considered a lopsided victory given its significant and permanent tax cuts to corporate profits, investment income, estate tax, and more.
Furthermore, the law enacts repatriation of overseas profits at a rate of 15.5% for cash and equivalents and 8% for reinvested earnings. Goldman Sachs estimates that U.S. companies hold $3.1 trillion of overseas profits. The law introduces a territorial tax system, under which only domestic earnings are subject to tax. Foreign-derived intangible income (FDII) refers to income from the export of intangibles which are held domestically, which will be taxed at a 13.125% effective rate, rising to 16.406% after 2025. The European Union has accused the U.S. of subsidizing exports through this preferential rate, a violation of World Trade Organization rules.
Perhaps the most surprising of all this is the drop in FDI to developed countries. FDI flows to developed economies reached their lowest point since 2004, declining by 27 per cent. FDI Inflows to Europe was less than $200 billion, half of 2017 figure; FDI flows to Ireland and Switzerland fell to -$66 billion and -$87 billion, respectively. FDI flows to the United Kingdom also declined, by 36 per cent to $64 billion, as new equity investments halved. FDI into the United States declined as well, by 9 per cent to $252 billion – the average of the last 10 years. Australia’s FDI inflows reached $60 billion – a record level – as foreign affiliates reinvested a record $25 billion of their profits in the country.
FDI flows to developing economies remained stable, rising by 2 per cent to $706 billion. As a result of the increase and the unusual fall in developed countries, the share of developing economies in global FDI increased to 54 per cent, a record. The United States remained the largest recipient of FDI, followed by China, Hong Kong (China) and Singapore.
But what of FDI outflow from developed countries? Overall, outward FDI from developed countries fell by 40 per cent to $558 billion. As a result, their share in global outward FDI dropped to 55 per cent – the lowest ever recorded. Nevertheless, outward investment by European MNCs rose 11 per cent to $418 billion. France became the third largest investor home country, with FDI outflows of more than $100 billion in 2018. Outward investment by MNCs from developing economies dove by 10 per cent to $417 billion.
Rebounds Are Likely
But don’t feel too sorry for the developed nations, since a rebound in FDI inflows is likely in 2019 as the effects of the US tax reform wears down. Greenfield project announcements also point at an increase, as they were up 41 per cent in 2018 from their low 2017 levels. A greenfield investment is a type of FDI where a parent company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.
In developing economies, the value of announced projects in manufacturing rose by 68 per cent to $271 billion. Most of the increase in greenfield investments took place in Asia, but announced projects also increased markedly in Africa (up 60 per cent); while they slumped in Latin America and the Caribbean. The number of projects in developing countries rose by a more modest 12 per cent. The growth in the number of projects in typical early-industrialization industries – the type often attracted by SEZs – remained lackluster.
One country has defied the downward trend of global FDI: Africa. In 2018, roughly $46 billion worth of FDI flowed into Africa, an 11 percent increase compared to 2017. This is significant for the continent because when a company or an individual makes an FDI, they are said to be establishing a long-term business interest in the said foreign country. The expectation is that they will not only invest money but also time and soft assets such as training, expertise and technology.
The African Continental Free Trade Agreement (AfCFTA) allows 52 African countries to buy and sell goods without tariffs, thus making them less expensive. Commodities are the other big draw for investors and according to UNCTAD investment in African commodities such as gold is expected to rise. Dr. Kituyi has weighed in on this development and said, “The AfCFTA agreement will bolster regional cooperation along with upbeat growth prospects, this bodes well for FDI flows of the continent.”
A few economies, such as Kenya, Morocco and Tunisia, saw an encouraging increase in diversified investment while Egypt remained the largest FDI recipient in Africa in 2018, although inflows decreased by 8 per cent to $6.8 billion. France was the top investor in Africa, followed by the Netherlands, UK and USA.
How about Asia?
FDI inflows to developing Asia rose by 4 per cent to $512 billion in 2018. Growth occurred mainly in China, Hong Kong (China), Singapore, Indonesia and other ASEAN countries, and Turkey. Asia continued to be the world’s largest FDI recipient region, absorbing 39 per cent of global inflows in 2018, up from 33 per cent in 2017. FDI inflows to South Asia increased by 4 per cent to $54 billion, with a 6 per cent rise in investment in India to $42 billion, driven by an increase in mergers and acquisitions in services, including retail, e-commerce and telecommunication.
Around half of Southeast Asian FDI number went to Singapore. In fact, Singapore’s influx in FDI has been greater than the FDI attracted by all of Africa combined and far exceeded that of India ($42 billion) and Indonesia ($22 billion).
Among other South Asian countries, FDI flows to Sri Lanka and Bangladesh rose to record level, $1.6 billion and $3.6 billion respectively. While Pakistan, experienced a 27 percent decline to reach $2.4 billion.
INVESTMENT POLICY TRENDS
Foreign Investment regulations and restrictions are on the rise
Global foreign investment contractions come amid rising global protectionism fueled more so by the US profits being repatriated after the Trump Administrations 2017 tax reform. Dr. Kituyi, secretary-general of the (UNCTAD) said “For some time now, the global policy climate for trade and investment has not been as benign as it was in the heyday of export-led growth and development.”
In 2018, some 55 countries and economies introduced at least 112 policy measures affecting foreign investment. Two thirds of these measures sought to liberalize, promote and facilitate new investment. Thirty-four percent introduced new restrictions or regulations for FDI – the highest share since 2003.
Investment from Chinese multinationals also fell for the second year in a row, dropping 18 per cent to $130 billion, as a result of state policies to curb overseas investment, as well as growing screening of inward investment in the US and Europe. Last year the number of restrictive policy measures affecting foreign investment was close to a record high, according to UNCTAD’s annual global investment report. While only about one in 10 policy measures affecting investment was restrictive 16 years ago, by last year that proportion had risen to one in three.
Most of the trade restrictions introduced last year — 21 of 31 — were in developed countries, while there were substantial increases in 2017 and 2018 in screening processes for FDI. For example, Germany broadened the definition of critical infrastructure in its investment screening process to include news and media, while the UK lowered the thresholds that trigger investment screening from £70m to £1m in high-tech industries. In contrast, emerging economies in Asia overwhelmingly adopted measures aimed at the liberalization, promotion and facilitation of investment.
Unctad’s report also warns that last year an estimated $153bn worth of merger and acquisition deals were blocked or withdrawn for regulatory or political reasons — double the number in 2017. Disregarding the fluctuations caused by US tax reform and other volatile elements, “the underlying FDI trend…was till negative”, stated the report.
Screening of foreign investment
FDI screening has become more prevalent over recent years. At least 24 countries have a specific foreign investment screening mechanism in place. Tighter control over foreign acquisitions due to security and public interest concerns are also being addressed at regional levels.
SPECIAL ECONOMIC ZONES (SEZS)
As countries attract FDI to special economic zones (SEZs), active support to promote clusters and linkages is key to maximizing development impact, according to the UNCTAD report. “But multi-activity zones can extract some of the benefits of colocation. Proactive identification of opportunities, matching efforts and training programs, with firms within and outside the zone, significantly boosts the impact,” the report goes on to explain further.
The zones offer fiscal incentives and have streamlined regulations to attract FDI and can be found in both developed and developing countries. China operated 2543 such zones in 2019, followed closely by Philippines (528), India (373), USA (262). Bangladesh operated 39 SEZs, of which 9 are Export Processing Zones (EPZ) catering to textile and apparels.
“At least 101 countries have industrial policies, of which 80% were formulated over the past five years. We call them the new generation of industrial policies. Special economic zones are one of the major means of achieving industrial policy goals,” Dr James Zhan, lead author of the report, was quoted saying.
Special economic zones (SEZs) have ballooned across the globe in recent years, growing in number to nearly 5400, up from 4000 over the last 5 years. In line with new industrial policies, some SEZs have shifted their focus away from manufacturing, remodeling themselves to attract investments from new industries, such as hi-tech, financial services and tourism.
Despite the proliferation of SEZs, many have failed to meet the expectations of policy-makers, because they have not attracted the anticipated level of investment. “There are many examples of SEZs that have played a key role in transforming economies, promoting greater participation in global value chains and catalyzing industrial upgrading. But for every success story there are multiple zones policies, some SEZs have shifted their focus away from manufacturing, remodeling themselves to attract investments from new industries, such as hi-tech, financial services and tourism.
Despite the proliferation of SEZs, many have failed to meet the expectations of policy-makers, because they have not attracted the anticipated level of investment. “There are many examples of SEZs that have played a key role in transforming economies, promoting greater participation in global value chains and catalyzing industrial upgrading. But for every success story there are multiple zones that did not attract the anticipated influx of investors, with some becoming costly failures,” said Dr. Kituyi. This failure can be attributed to a number of factors including the use of SEZs as piloting zones for the rest of the economy, the erosion of SEZ privileges relative to the rest of the country and the operational design of the zones themselves.
Given the underperformance of the majority of SEZs, the report outlines a framework to tackle the main challenges, so “that international organizations can advise countries and provide technical assistance to help evaluate the results, and build a new generation of special economic zones for sustainable development,” added Mr. Zhan.
WHERE DOES BANGLADESH STAND?
FDI in Bangladesh went up by 67.94% in 2018, report says. Bangladesh reached the highest ever level of FDI in the country’s history at $3.61 billion. While China became the leading investor in the country with $1.03 billion, the United States, traditionally the top investor, dropped to fourth with only $0.17 billion in FDI for 2018 in Bangladesh, as per the report. The Netherlands stood as the second largest investor with of $0.69 billion, and the United Kingdom was the third highest investor with $0.37 billion.
Bangladesh received its highest net FDI, yet thanks to the one-off payment of $1.47 billion by Japan Tobacco Inc. to purchase Akij Group’s tobacco business. The power sector attracted the highest amount of FDI of $1.01 billion, followed by food at $729.69 million, textile and weaving at $408.08 million, banking at $282.54 million, telecommunication at $219.87 million, leather and leather products at $110.55 million and trading at $101.91 million.
“FDI flows have declined all over the world, but in Asia they increased, particularly in Bangladesh,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh. Yet Bangladesh’s inflows pale in comparison with neighboring India, up 6 percent to $42.29 billion from the previous year.
Still this inflow of funds is an indication that the country’s economy which was previously confined to exports and imports, is now expanding to investment, said Abul Kalam Azad, principal coordinator for the SDG affairs at the Prime Minister’s Office. Moreover, this is an indication of a growing foreign companies interest in local affairs. The latest mergers and acquisitions are testimonies of that rising interest.