South TNCs

Trends in FDI

Kanga Raja

Investment activity by transnational corporations (TNCs) from the developing economies increased by 30% in 2014, reaching a record level of US$486 billion, the UN Conference on Trade and Development (UNCTAD) said the other day.

In its latest Global Investment Trends Monitor (No. 19 of 18 May 2015), UNCTAD said that the share of South TNCs in global foreign direct investment (FD1) reached a record level of 36% up from 12% in 2007, the year prior to the financial crisis.

For the first time, developing Asia has become the world's largest investor region with US$440 billion invested, followed by North America (US$390 billion) and Europe (US$286 billion), said the UNCTAD report.

According to UNCTAD, among developing regions, TNCs from Asia, Latin America and the Caribbean increased their investment abroad, while those from Africa reduced theirs.

Developing Asian TNCs became the world's largest investors, accounting for almost one third of the total.

n 2014, investors from the South continued their expansion abroad, said UNCTAD, adding that the slowing down of their economies may have boosted the desire of their TNCs to diversify abroad.

"TNCs from developed countries were active in cross-border M&A markets both in new acquisitions and large divestments."

More than half of FDI outflows from TNCs in developing economies were in equity, while developed country TNCs continued to hold large amounts of cash reserves in their foreign affiliates in the form of reinvested earnings, which accounted for a record 81% of total FDI outflows, said the report.

In 2014, nine of the twenty largest investors were from developing or transition economies including Hong Kong-China, Mainland China, the Russian Federation, Singapore, the Republic of Korea, Malaysia, Chile, Kuwait and Taiwan.

FDI outflows from developing Asia increased by a third to some US$440 billion in 2014. The growth was widespread across all the major Asian economies and subregions.

In East Asia, investment by TNCs in Hong Kong-China jumped to a historical level of US$150 billion, making the economy the second largest investor in the world, trailing behind only the United States, while investment by Chinese TNCs grew faster than inflows into the country, reaching a new high of USS116 billion.

In South-East Asia, the increase was principally the result of surging outflows from Singapore, at US$41 billion in 2014 as a result of deals such as Temasek Holdings' acquisition of a 25% stake in AS Watson (Hong Kong-China) for US$5.6 billion.

Outflows from Malaysia rose as well, to US$16 billion.

In South Asia, FDI outflows from India reversed the slide of 2013, increasing fivefold to US$12 billion in 2014. As the performance of the Indian economy improved, large Indian TNCs resumed their international expansion.

Investments from West Asian TNCs rose by 16% in 2014, driven by increased flows from Kuwait that emerged once again as the region's largest overseas investor, with flows of US$12.7 billion. Investments by Turkish TNCs jumped by 89% to US$6.7 billion mainly through equity outflows.

TNCs from Latin America and the Caribbean (excluding offshore financial centres) increased their investment by 14% to US$35 billion in 2014. "This growth was driven by Chilean TNCs—the region's main direct investors abroad in 2014—with flows increasing by 51% to US$13 billion boosted by a strong increase in intra-company loans."

Brazilian TNCs continued to receive repayments of loans or borrowed loans from their foreign affiliates, resulting in negative FDI outflows for the fourth consecutive year.

Among the other main direct investors, Mexico's outward flows plummeted by 42% to US$8 billion—triggered mainly by the fall of intra-company loans.

Investments from Africa decreased by 21% in 2014 to US$11 billion. TNCs from South Africa invested in telecommunications, mining and retail while those from Nigeria focused largely on financial services. Intra-African investments rose significantly during the year.

TNCs from transition economies decreased their investment abroad by 31% to US$63 billion.

"Natural resource-based TNCs, mainly from the Russian Federation, reduced their investment abroad, due to constraints in international financial markets, low commodity prices and the strong depreciation of the rouble."

FDI From TNCs in the North
Investments from TNCs based in developed economies reached US$792 billion, virtually unchanged from 2013.
"But the static trend hides a flurry of both new investments and divestments that cancel each other out in the collated numbers, thus creating a skewed overall picture," said UNCTAD.

Outflows from European TNCs remained flat, rising by only 2%. The rise of investments by German and French TNCs were offset by the negative flows from the United Kingdom, Luxembourg and Italy.

Outward FDI increased from Germany (up US$82 billon to US$112 billion) and France (up US$59 billion to US$56 billion from a negative value) with the former becoming the largest investor country in Europe.

In addition to changes in the flows of intra-company loans, German and French firms actively made acquisitions abroad.

The report cited examples such as the acquisition of the consumer care business of Merck in the United States by Bayer (Germany) for US$14.2 billion and the acquisition of the United Kingdom-based manufacturer Invensys by Schneider Electric (France) for US$5 billion.

On the other hand, Vodafone's divestment from its stake in Verizon Wireless heavily dented outflows from the United Kingdom (down US$45 billion to US$60 billion).

Divestments by Italian TNCs, including Enel’s divestment from its oil interest in the Russian Federation and the Italian retailer Gruppo PAM's sale of its stake in the Swiss retailer the Nuance Group, contributed to the fall of Italian outward FDI to -US$1.1 billion.

Outflows from Luxembourg (down US$34 billion to US$4.3 billion) also fell sharply, primarily due to changes in intra-company loans.

According to the report, in North America, active acquisitions of assets by Canadian TNCs, such as Encana's bid for the United States oil and gas production and exploration company Athlon Energy for US$6.8 billion, pushed up its outflows to US$53 billion.

FDI from the United States rose by 3% to US$337 billon.

"Investment in and divestment from equity and lending, and the withdrawal of intra-company loans cancelled out each other so that all of United States TNC’s outward investment in 2014 constituted reinvested earnings."

FDI from Japan declined by 16% ending a three-year expansion run. Although Japanese TNCs' investments into North America kept apace, they declined sharply in major recipient economies in Asia and Europe.

Turning to cross-border mergers and acquisitions (M&A), UNCTAD said that in 2014, the value of cross-border M&A purchases surged by 28%, reaching US$399 bill largely on the back of increased investment flows from both developed and developing economy TNCs.

During 2014, cross-border M&As from developed country TNCs increased by 28% to US$228 billion, 90% of which targeted other developed country TNCs.

"The decline of investment in the primary and services sectors was more than compensated for by the rise of purchases in the manufacturing sector, mainly in chemicals," said the report.

Large acquisitions took place in pharmaceuticals—for example, Walgreen Co (United States) acquired the remaining 55% of Alliance Boots (Switzerland) for US$15.3 billion, and Bayer (Germany) acquired the consumer care business of Merck (United States) for US$14.2 billion.

At the same time, however, developed country TNCs divested heavily in 2014. In addition to the US$130 billion Vodafone-Verizon mega-deal, Nestle (Switzerland) sold its 8% share in L'Oreal for US$9 billion.

"Large acquisitions, mostly targeting developed countries, took place in 2014. Out of the 223 mega-deal acquisitions (i.e. deals with more than US$1 billion), 171 took place in developed economies."

According to the report, TNCs based in developing economies increased their M&As abroad by 27% to US$152 billion, continuing to acquire firms and other assets owned by developed country TNCs also in the host developing world.

For example, MMG South America Management Co Ltd (Hong Kong-China) acquired Xstrata Peru—a foreign affiliate of Glencore/Xstrata (Switzerland)—for US$7 billion, and Emirates Telecommunications Corp (United Arab Emirates) bought a 53% stake of Itissalat Al Maghrib SA—a foreign affiliate of Vivendi (France)—for US$5.7 billion.

Unlike cross-border M&As, said UNCTAD, the growth of announced greenfield investment projects was tepid, struggling to recover from the trough in 2012.

However, the aggregate picture disguises different performances by grouping.

"The growth of greenfield investment projects by developing economies in the past two years was steady and broad-based, while the trend of those by developed economies was weak."

As in the past years, South TNCs invested the bulk of greenfield projects (80% of the total in 2014) in other developing economies.

As for future trends in FDI in 2015 and beyond, UNCTAD said that the gradual improvement of macroeconomic conditions, especially in North America, and proactive monetary policy in the Eurozone, coupled with increased investment liberalisation and promotion measures will improve the investment appetite of TNCs.

In addition to record levels of cash holdings by TNCs, the prospects for developed economies have been upgraded with average economic growth rates projected to accelerate from 1.6% in 2014 to 2.2% in 2015.

Almost all major developed economies are expected to see the growth momentum picking up.

"However, negative factors, such as geopolitical instability and the decline in commodity prices will lower investment, but this is expected to be geographically limited and affect specific sectors only, including oil and gas and other commodity industries," said UNCTAD.
—Third World Network Features

Vol. 48, No. 5, Aug 9 - 15, 2015