By Peter G Hall *
Vice-President and Chief Economist Export Development Canada
Cross-border direct investment flows are a critical ingredient in the modern international trade recipe. These flows provide us with access to key resources and fast-growing markets, and allow for production systems that are better aligned to country or regional economic attributes owing to the efficiencies of global supply chains. As such, it is essential to keep a close eye on global investment movements. What can we say about recent activity?
Global foreign direct investment movements are tracked by UNCTAD, and figures for 2012 were released just three weeks ago. High level numbers point to some surprising movements. For the world as a whole, cross-border investment was down 18 per cent last year, following back-to-back post-crisis gains in 2010 and 2011. Developed markets bore the brunt of the decline in inflows, off 32 per cent from 2011 levels. They also put 23 per cent less on the table for investments elsewhere. At the same time, investment flows to emerging markets were also down, but by a more modest 4.4 per cent – enough to enable emerging markets to surpass developed markets’ investment inflows for the first time ever. Emerging markets now account for 52 per cent of global direct investment inflows.
Results across emerging markets are not even. Direct investment inflows were down in all of the BRICS and Mexico. Brazil was the only large market with a modest drop. All the rest excepting Russia sustained double-digit declines in 2012, with South Africa down 24 per cent, India down 29 per cent and Mexico – considered to have been a stable investment zone – saw inflows drop by a shocking 41 per cent, and simultaneously outflows more than doubled. Offsetting these large-market declines were increases – some very dramatic – in a broad variety of less stable emerging markets.
The story for developed markets is negative, with very few exceptions. Inflows to the EU were down 41 per cent in 2012, and outflows were down 37 per cent. Alongside talk of ‘reshoring’, total US inbound investment was down 26 per cent, and the more substantial outward flows were down 17 per cent. Other OECD nations saw inward investment shrink much more modestly, and thanks to a surge of Japanese foreign investing, outward flows from other OECD countries bucked the trend, adding a further 11 per cent to their post-crisis up-trend.
On balance, the numbers are disheartening, suggesting a debilitating recoil in additions to global production capacity. Taken in context, though, the setback makes some sense. Acute fears of a damaging domino effect in Europe related to the collapse of the Greek government created a ‘you-first’ mentality among corporations that were generally cash-rich. This was stoked further by fears of a broadly-based slowdown in emerging markets. A more recent rise in consumer and business confidence in the leading OECD nations, coupled with tightening capacity constraints in the US economy, could be indications that in 2013, companies are parting with more of their ready cash.
On an even brighter note, Canada’s record in 2012 was very positively off-trend. According to the UNCTAD figures, inward foreign direct investment rose 9.6 per cent, still well off the pre-recession peak, but the third successive increase. Similarly, Canadian direct investment abroad posted an 8.2 per cent gain in 2012, a sign of Canadian corporations’ sustained commitment to external markets.
The bottom line? Global investment can be volatile, and last-year’s movement may prove to be an overreactive blip. Investment does follow growth, and recent upward estimates of the latter bode well for a positive investment response. It’s nice to see that Canadian investors are ahead of the game.