Half the global FDI to emerging marts

Emerging markets will account for over half the global foreign direct investment (FDI) flows in 2009 as the developed markets are still dealing with the effects of the global financial crises.

Global FDI flows stood at $1.73 trillion in 2008 — down 17% from the $2.09 trillion seen in 2007, which capped a four-year long boom in cross-border mergers and acquisitions and FDI, according to a report by the Vale Columbia Center on sustainable international investment. For 2009, FDI flows are estimated to drop 44% to less than a trillion dollars.

The report, authored by Laza Kekic, says total quantum of FDI flows is estimated to have fallen by nearly half (49%) in the first half of 2009 compared with 2008, but this year will yet be the best one for emerging market FDI flows ever.

Among  the emerging markets, India has better growth prospects, which bodes well for the country, experts said.

“Despite fall in growth, India and China have shown remarkable resilience in the current economic downturn. Other emerging markets in Asia, Eastern Europe and Latin America have relatively underperformed. As a result, India’s position on the radar of the global investor community has certainly become more prominent,” said Manoj Vohra, director-research at the Economist Intelligence Unit.

For the June quarter, China and India showed a growth of 7.90% and 6.10%, respectively, over the same quarter last year, according to data from Bloomberg. Taiwan degrew 7.54% and South Korea was down 2.20%. The Eurozone had a de-growth of 4.80%. In Latin America, Brazil was down 1.16% and Mexico was down 10.30%.
Policy decisions would play a key role in determining how much of this global pie would end up in India, suggested experts.

“Emerging markets are likely to see more inflows compared to developed ones.”

“Consumers in developed markets are de-leveraging and they are moving towards more savings. This leaves more scope for FDI in developing countries… In India, the right kind of policy noises would have a bearing on FDI flows,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

Vohra said key sectors would have to see changes for India to make the most of the flows. “To take full advantage of this, India should press ahead with the reform agenda. Liberalising foreign investment in certain sectors, refocusing on fiscal discipline and improving infrastructure should be top priorities. Sectors such as telecom, healthcare, insurance and retail have immense FDI potential. Without key reforms, India is unlikely to witness any substantial rise in FDI inflows,” he said.

According to an Economist Intelligence Unit survey quoted by the report, just under 60% of companies expect to derive more than 20% of their total revenue in emerging markets in five years’ time — almost double the present proportion of 31%.

“This would suggest that the shift in the distribution of global FDI flows in 2009 is a longer-term development and not just a transitory phenomenon,” said the report.