Foreign direct investments into developing countries to increase by 17% in 2010 – Report

Foreign direct investments (FDI) into developing countries are expected to increase by 17% in 2010, a new report released by the World Bank Group, Multilateral Investment Guarantee Agency (MIGA) has said. The report is the second after one in 2009.

Overall, FDI inflows to developing countries are projected to increase by 17% to an estimated $416 billion in 2010. They should continue growing by a modest 20% and 13% a year in 2011 and 2012, respectively, as the global economic recovery strengthens.

By 2012, FDI flows to the developing world are expected to reach $575 billion— a figure still below the pre-crisis peak of 2008, thus highlighting the severe impact of the recent downturn, the report said.

According to the report investors are optimistic about prospects for a global economic recovery led by the developing world.

The report which was released December 9, 2010, also sheds light on investors’ political risk perceptions in conflict-affected and fragile economies, where top worry is adverse government intervention and not overt political violence.

The report is the outcome of a survey of 194 executives from Multinational Enterprises (MNEs) worldwide commissioned by the MIGA in June 2010, the composition of which mirrored that of actual FDI flows by sector and region.

Around 40% of those respondents who were surveyed in both 2009 and 2010 expect to increase their investments in developing countries over the next 12 months.

The report noted that investors from the extractive industries, as well as those based in developing countries, are particularly bullish in their investment intentions.

The finding represents the business world’s confirmation of economists’ projections – that FDI is expected to recover over the next couple of years, having declined sharply by 40% in 2009.

The report also found that the top worry for multinational executives when operating in developing countries over the next three years is political risk.

Political risk tops business concerns such as market size, lack of finance, and quality of infrastructure. About a fifth of the investors surveyed use political risk insurance to mitigate this risk, the report said.

The 2010 report also focuses on FDI into conflict-affected and fragile economies, where investors are primarily concerned about adverse government intervention (for example changes in regulations, breach of contract, non-honoring of sovereign guarantees, currency restrictions, and expropriation) rather than overt political violence. In fact, adverse changes in regulations not only rank first among investors’ concerns in conflict-affected and fragile economies, but also are most often responsible for losses in these destinations, the report found.

Commenting on the report, MIGA Executive Vice President Izumi Kobayashi, said, “This upsurge in FDI into developing countries is welcome news, especially considering last year’s drop,” adding, “FDI flows directed to productive assets can spur economic growth and reduce poverty.”

By Emmanuel K. Dogbevi