U.S. Loses First Place As Biggest Recipient Of Global Investment
By MICHAEL R. SESIT Staff Reporter of THE WALL STREET JOURNAL June 28, 2004
PARIS -- China last year for the first time eclipsed the U.S. as the biggest recipient of foreign direct investment, part of a huge increase in such investment by multinational companies in the world's underdeveloped, fast-growing economies, according to a new OECD report.
The report by the Paris-based Organization for Economic Cooperation and Development, the 30 member nations of which include the world's most highly industrialized, showed that net foreign direct investment, known as FDI, to emerging economies from the 30 OECD countries rose about sixfold in 2003 to a record $192 billion, or €158 billion, up from $31.7 billion in 2002.
Of that, China attracted $53 billion, slightly less than the year before, compared with $40 billion for the U.S. U.S. FDI was down from $72 billion in 2002 and $167 billion in 2001.
FDI mostly involves the purchase of physical assets, including mergers and acquisitions, joint ventures, investments in plants and equipment, the buying of property and capital transfers to foreign-owned enterprises. It doesn't include portfolio investment. In relatively poor or unsophisticated economies, FDI also can include benefits besides funding, such as managerial expertise, technological skills and access to the global network of the investing company.
"FDI flows can serve as an indicator of the attractiveness of the business climates of competing economies," said Hans Christiansen, a senior OECD economist and one of the study's authors.
Meanwhile, FDI into the 30 OECD member nations fell 28% to $384 billion last year from $535 billion in 2002, according to the study, which is scheduled to be released today. It was the third consecutive year of declines, down from a peak of $1.3 trillion in 2000.
The OECD sees FDI recovering in its member countries in the near to medium term. Its economists predict a rise in European and Japanese growth and continued strong growth in the U.S. over the next two years. "This, together with the recovery in stock prices in 2003, should result in higher direct investment flows," Mr. Christiansen said.
China's appeal reflects its fast growth, its status as the world's biggest market in terms of population and a continued venue for low-cost production. Still, Mr. Christiansen said that lately, FDI was largely motivated by a desire to produce consumer goods for the domestic Chinese market.
Investors haven't found India, which last year received $4 billion in FDI, as attractive. Nonetheless, Mr. Christiansen said that it is the world's second-most-populous country, that growth is picking up and that the government has become more accommodating to foreign investment. "If that trend continues, there can be little doubt that the outlook is for much higher FDI flows to India," he said.
For the time being, Russia's prospects aren't as bright. In 2003, the country attracted only $1 billion in FDI, the lowest amount since the mid-1990s. Most of the investment Russia does get goes to the energy sector, and the OECD said the country could bring in more if it made further broad-based institutional changes.
Although the U.S. experienced the biggest FDI decline in dollar terms, it had plenty of company in the industrialized world. For instance, FDI flows to Canada in 2003 were off 69%, while those to European countries fell 23%, including a 64% decline in flows to Germany and a 47% drop in flows to the U.K.
An exception was France, which attracted $47 billion, marginally less than the $48.9 billion the country drew in 2002 and roughly three times the sums invested in either Germany or Britain. In contrast to many other countries, France experienced some large-scale acquisitions, such as the takeover of aluminum company Pechiney SA by Canada's Alcan Inc. Secondly, despite French politicians' stated intention to create "national champion" industries that can compete with global rivals, "most of the French business sector is open to foreign purchases," Mr. Christiansen said. Lastly, he said France is a prime location for second homes in Europe.
The OECD blames the fall in direct investment to industrial countries on "the sluggish macroeconomic performance of many of the larger OECD economies, not the least in Europe." It also cites many companies' need to integrate past, high-price acquisitions -- made during the heyday of the New Economy boom of the 1990s -- instead of embarking on new ones.
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