Foreign investment dries up

Companies are still investing in China

Foreign direct investment has plunged by 21% in 2002, dropping substantially for the second year in a row, according to the UN agency UNCTAD.

The two-year fall in the amount invested by companies abroad has been the biggest reduction in foreign direct investment for 30 years, since the oil crisis of the l970s.

The news comes as trade delegates are gathering for talks in Cancun, Mexico, which will begin debating measures to make it easier for foreign multinationals to invest abroad - plans that are fiercely opposed by many poor countries.

The annual UNCTAD report says that, among developing countries, those in Africa and Latin America were most affected by the fall-off in investment.

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But it was the United States that showed the largest drop in investment from overseas, falling from first to fifth position worldwide with a drop of 80% in foreign investment compared to 2001.

Investment in Britain also dropped 60% to $25bn.

Overall, world foreign investment dropped to $651bn compared to $1.4 trillion in 2000 and $840bn in 2001.

The fall was led by the sharp reduction in mergers and acquisitions, which dropped by nearly half to $370bn in the past year.

Asia still strong

However, Asia continued to attract a significant amount of investment despite the slump elsewhere.

TOP COUNTRIES FOR FOREIGN INVESTMENT Luxembourg: $80bn China: $53bn France: $52bn Germany: $38bn USA: $30bn Source: UNCTAD

Companies spent $53bn investing in China, an increase of 13%, while investment in Japan rose to $9bn as several big financial firms were sold.

And flows to Central and Eastern Europe rose by 15% to $29bn as those countries prepared for full membership of the European Union.

But flows to Africa were down 41% from $19bn to $11bn, while Latin America - where the financial crisis hit hardest - saw investment drop by 33% to $56bn.

Luxembourg was the largest single destination for foreign investment, reflecting its role as a tax-privileged financial centre.

Hopes for the future

UNCTAD said that investment flows were likely to rebound in 2004, but it warned that much depended on the economic recovery and investor confidence.

FALLS IN FOREIGN INVESTMENT Africa: -41% Latin America: -33% Asia: -11% Eastern Europe: +15% source: UNCTAD

"Low profits, falling equity prices, concerns about corporate debt and cautious commercial bank lending might all dampen prospects for increased investment," UNCTAD said.

The report said that the prospects for the mining and oil industry had improved despite the trend of declining investment.

But it said that the car industry and the aerospace industry remained weak.

It also predicted a further surge of investment into Eastern Europe and Russia after EU membership.

The study also looked at the growing number of international agreements governing the regulation of international investment.

It concluded that although such agreements can boost a country's foreign investment, nations must make sure they have leeway to set policies that direct investment toward their own development priorities.

Meanwhile, the World Bank, the IMF and the OECD called on rich countries to make concessions on agriculture at the Cancun trade talks.

"We need a decisive break with trade policies that hurt economic development," the three organisations said in a statement signed by World Bank president James Wolfensohn, IMF managing director Horst Koehler, and OECD Secretary General Donald Johnston.

"Donors cannot provide aid to create development opportunities with one hand and then use trade restrictions to take these opportunities away with the other."