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Foreign Direct Investment Flows Drop By Half in 2001
Sep 19, 2002

Foreign direct investment (FDI) inflows in 2001 declined by more than half to $735 billion according to the 2002 World Investment Report released by UNCTAD today. The sharp decline was the result of a sharp drop in cross border mergers and acquisitions(M&As) which in previous years pushed FDI flows to record highs. The drop in international mergers and acquisitions is attributed to the slowdown in the world economy and a weakening of business confidence.

Interestingly, the sharpest declines in mergers and acquisitions took place in services industries were activity dropped from $ 832 billion in 2000 to $387 billion in 2001. The 53% drop in the value of mergers and acquisitions in services was due to 69% drop in the value of M&As in telecommunications and transportation services, which in 2000 had accounted for over 40% of all M&As. Other significant drops were observed in business services wich falled by 60% and utilities M&As with 78%. M&As in financial services dropped by 24%, but given the sharp drop in communications M&As, financial services became again the largest source of cross border buy-outs of services firms.

But not all was bad news for services M&A activity. Mergers and acquisitions of health services and social security providers increased by 186% in 2001. A similar performance took place in other social services that grew by an astonishing 422%.

In terms of FDI flows, the downturn was concentrated in the developed countries (-59%), with smaller declines in flows to developing countries (-14%) and even a small increase in flows to Central and Eastern Europe (2%). There were also significant variations within the third world, with lower levels of inflows to Asia and Latin America but an increase to Africa. Africa, however, still remains a marginal recipient of FDI. Great variations can also be found at the country level. Whereas only three developed countries reported increased inflows last year, FDI flows grew in a majority of countries in the developing world (77 out of 146) and in most of Central and Eastern Europe (13 out of 19 countries). In fact, among the top 10 country gainers in terms of absolute increases, eight were developing countries, led by Mexico, China and South Africa. China’s role as the largest developing country recipient was further strengthened by the country's accession to the WTO.

The full report is available at the Unctad website

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