Ninety graduate and undergraduate students of international economics, international trade, economics and management from four Russian Virtual Institute member universities joined 2012 World Investment Report (WIR) co-author, Astrit Sulstarova, for a videoconference discussion of global and regional foreign direct investment (FDI) trends, prospects and policy implications on November 27.
"Amid uncertainties over the global economy, global FDI inflows rose by 16 percent in 2011 to USD 1,524 billion," Sulstarova told participants from the Moscow State Institute of International Relations, the St. Petersburg State University of Economics and Finance, the St. Petersburg State University and the North-West Institute.
The WIR reports a strong growth (21 percent) in flows to developed countries, reaching USD 748 billion. Developing countries continued to account for nearly half of global FDI, as inflows reached a new record high of USD 684 billion. Sulstarova explained that the rise in 2011 was driven mainly by investments in Asia and better than average growth in emerging economies.
In the first half of 2012, however, global FDI inflows reached only USD 668 billion, a decline of 8 percent from the same period last year. He attributed the drop to lower inflows to the United States and BRIC countries (Brazil, Russia, India and China).
"This was due to increased uncertainty in the global economy, marked by fears of an exacerbation of the sovereign debt crisis in Europe and a slowdown of growth in major emerging market economies," Sulstarova said.
But developing and transition economies continued to absorb more than half of global FDI flows, indicating a pattern shift in FDI inflows from developed to developing economies.
"Emerging markets’ economic growth is playing a crucial role in the dynamics of FDI," Sulstarova said, stressing that investment is being driven not only by the search for natural resources or cheap labor, but by market-seeking behaviors.
“In Southeast Europe, competitive production costs and access to EU markets drove FDI, while in the CIS, large, resource-based economies benefited from continued natural-resource-seeking FDI and the continued strong growth of local consumer markets."
In the first half of 2012, however, FDI inflows to Russia declined.
"It remains to be seen what the factors of this decline are, but it is worth considering that the level of merger and acquisitions is not as significant as before," he said.
Nevertheless, UNCTAD projects continued growth of FDI flows to transition economies, reflecting a more investor-friendly environment, WTO accession by the Russian Federation and new privatization programmes in extractive industries, utilities, banking and telecommunications.
"Rising outflows, however, are still primarily driven by growth of outward FDI from developed countries," Sulstarova explained.
Global FDI outflows rose by 17 percent in 2011, exceeding the 2005–2007 pre-crisis average. FDI from developed countries rose by 25 percent.
While all three major developed-economy blocs – the European Union, North America and Japan – contributed to this increase, driving factors differed: a record level of reinvested earnings in North America; cross-border mergers and acquisitions in the European Union; and improved purchasing power of Japanese transnational corporations (TNCs) due to an appreciating yen, which doubled their FDI outflows.
Although the growth in FDI outflows from developing economies seen in the past several years lost some momentum in 2011, “the share of developing countries and transition economies in total FDI outflows keeps rising," Sulstarova said.
Outflows from the transition economies, for example, grew by 19 percent, reaching an all-time record of USD 73 billion. In the case of Russia, outflows reached a record level in 2011, due to Russian investments in natural resources, the banking sector and technologies.
"Natural-resource-based TNCs in transition economies, mainly in the Russian Federation, supported by high commodity prices and increasing stock market valuations, continued their expansion into emerging markets rich in natural resources," he said.
But "prospects for foreign direct investment continue to be fraught with risks and uncertainties," he warned.
TNCs in general are still holding record levels of cash which so far has not translated into investment. UNCTAD estimates that these cash levels have reached more than USD 5 trillion, including earnings retained overseas.
"Liquidity is not missing, investment opportunities neither,” Sulstarova said. “What is holding back investors are the current macroeconomic conditions, with significant uncertainty on the market."
Although countries worldwide continued to liberalize FDI as a means to support economic growth, regulatory activities of FDI are being strengthened.
To address these challenges, UNCTAD has formulated a comprehensive Investment Policy Framework for Sustainable Development (IPFSD), consisting of (i) Core Principles for investment policymaking, (ii) guidelines for national investment policies, and (iii) options for the design and use of international investment agreements.
"UNCTAD’s IPFSD can serve as a point of reference for policymakers in formulating national investment policies and offer a common language and platform for discussion with investment stakeholders" Sulstarova said.
The presentation triggered a record number of questions from the audience – 19 students and lecturers took the floor. Participants asked about the prospects for FDI inflows to Russia, given the country’s recent accession to the WTO and in the context of upcoming privatization programmes in the country. They also wondered about Russia's foreign investment abroad, the countries and regions in which it invests and the prospects in this regard, Policies were also on the agenda, with questions about the application of UNCTAD’s IPFSD in the CIS and how to reconcile the interests of governments and the business sector in the implementation of the framework, among others.
We connected with one university - MGIMO - in Moscow and three is St. Petersburg - the St. Petersburg State University of Economics and Finance (which hosted the event), the St. Petersburg State University and the North-West Institute.
“Let me express our deep gratitude on behalf of colleagues and students from MGIMO,” wrote Vi member coordinator, Anna Abramova, who hosted the videoconference in Moscow, and whose university contributed research to this year’s edition of the WIR.
“For MGIMO teachers and students, it has become a great tradition to discuss the key trends in international investment with the leading UNCTAD experts in the field. This year, in particular, it has been a very precious complement to the course on FDI delivered for Master's students.
“And also thank you very much for involving MGIMO experts in the preparartion of the materials for this year’s edition. This is a great honor!”
“Students were inspired,” wrote Elena Zhiryaeva, Vi member coordinator at the North-West Institute. “It was the first time for many of them to talk to an international expert.”