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Investment Promotion in TimesInvestment Promotion in Timesof Economic Crisisof Economic Crisis

By: Paul Wessendorp UNCTAD

Course for Permanent Missions in GenevaCourse for Permanent Missions in Geneva9 June 20099 June 2009Geneva, SwitzerlandGeneva, Switzerland

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Global FDI inflows 1980-2008 (Billions of US dollars)

Source: UNCTAD, based on FDI/TNC database and UNCTAD’s own estimates.

0

500

1000

1500

2000

2500

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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A bleak outlook for FDI in the coming years

Global FDI flows in 2008 are estimated to have declined by 15% from 2007. A further decrease can be expected in 2009, as the full consequences of the crisis continues to unfold.

In UNCTAD’s “World Investment Prospects Survey, 2009-2011”, 80% of TNCs reported negative impacts of the financial crisis and the economic downturn on their international investment plans.

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2007 2008 a Growth rate 2007 2008 a Growth rate

(%) (%)

World 1 940.9 1 658.5 - 14.5 1 699.8 1 205.4 -29.1Developed economies 1 341.8 1001.8 - 25.3 1 504.1 998.3 -33.6Europe 920.9 559.0 - 39.3 859.4 561.4 -34.7United States 232.8 320.9 37.8 389.2 318.2 -18.2Japan 22.5 19.0 - 15.6 24.6 19.5 -20.6Developing economies 512.2 549.1 7.2 161.6 182.1 12.7Africa 53.5 72.0 34.7 12.5 27.0 116.5Latin America and the Caribbean 127.3 139.3 9.4 31.1 32.8 5.5Asia and Oceania 331.4 337.8 1.9 118.1 122.3 3.6

West Asia 71.5 61.4 - 14.2 33.8 31.6 -6.6South, East and South-East Asia 258.7 275.2 6.4 84.0 90.4 7.6

Transition economies 86.9 107.6 23.8 34.1 24.9 -27.0

Source: UNCTADa Preliminary estimates.

(Billions of US dollars)

Region/economy

FDI inflows Cross-border M&As

So far, FDI in developed countries have been most affected by the crisis

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How does the crisis affect investors?

Companies are faced with:

• Tighter credit conditions • Shrinking profits• Falling stock values• Slower market growth• Gloomy future prospects

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…as a result, TNCs cut down on foreign investment

Access to financial resources is reduced due to higher cost of credit, declining profits, and falling stock prices.

Production capacities are adjusted to decreased demand in domestic and international markets.

Confidence levels are low and perceived risks are high, so investment plans may be based on worst-case scenarios.

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Worldwide FDI inflows Three different trajectories 1990-2012

Source: UNCTAD, based on FDI/TNC database (www.unctad.org/fdi statistics) and UNCTAD own estimates.

Note: The shapes of V, U and L scenarios are for illustrative purposes only and not based on any statistical methods.

(Billions of US dollars)

0

500

1000

1500

2000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Projection

Past trend

Scenario V

Scenario U

Scenario L

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Scenarios for a recovery in FDIshort-to-medium term (2010-2012)

Scenarios Underlying AssumptionsV (optimistic)

Quick upturn in FDI flows, beginning end 2009

a) End of the recession as early as the second half of 2009.

b) Quick return of investor confidence.

c) No protectionist setback.

d) Fresh wave of cross-border M&As.

U (base case)

FDI flows begin to pick up only in 2011

a) Global recession is worse than in the V scenario.

b) The global value of cross-border M&As remains limited due to the low price of stocks.

c) The trend towards the internationalization of companies is still at work in the medium term.

L (pessimistic)

FDI flows do not pick up before 2012

a) A longer and worse-than-expected economic depression results in, for example, increased protectionism.

b) Due to many negative factors, companies remain extremely cautious about investments, especially those aimed at international expansion.

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But some TNCs might remain committed to FDI

Some large emerging economies remain attractive to foreign investors.

In the medium term, companies are still committed to further internationalization.

New sources of FDI have emerged, especially from the South.

A number of fast-growing industries still offer promising FDI prospects.

The economic downturn offers opportunities for TNCs to buy assets at “bargain prices”.

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Policy implications

Effective government policy responses to the financial crisis and its economic aftermath - both at the national and international levels – will be crucial to create favourable conditions for a new pick-up in FDI.

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Number of national regulatory changes and the share of less favourable changes in the total, 1992-2007

Source: UNCTAD 2008.

0

50

100

150

200

250

300

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Nu

mb

er

0

5

10

15

20

25

30

%

Number of regulatory changes Share of less favaroble changes in regulatory changes

FDI policies: regulatory changes

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How can investment promotion institutions or agencies (IPAs) deal with the crisis?

Remedies that should beconsidered…

Less FDI will mean tougher competition for investmentprojects. At the same time, many IPAs are facing difficulties in securing adequate public funding from governments that are stretched for money. IPAs should therefore reassess their current activities and provide their governing bodies with plans on how to face the new challenges.

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…strengthen investor aftercare services

To soften the blow of the economic slowdown on the established business community.

To strengthen the ties between foreign affiliates and the local economy, e.g.

by promoting and developing local supply chains.

To develop a reputation that the host government cares for investors.

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…target investors in promising sectors

IPAs should shift their promotion efforts towards those foreign markets and economic sectors

that offer better FDI prospects.

The crisis can provide an opportunity to target new types of investors, such as SWFs.

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…advocate policies to improve the investment climate

IPAs should address immediate

problems that companies

face due to the crisis…

…and work to strengthen competitiveness in the long run, through improved infrastructure, legal framework, education, and training.

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…and improve the effectiveness of IPA operations

IPAs should review their roles and activities in order to strengthen effectiveness and efficiency.

The roles and activities of IPAs should be adapted to changed circumstances

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The role of diplomats

Besides activities related to improving the image of the country as a investment destination, diplomats can contribute in the areas of:

• Aftercare - The embassy could play an important role in maintaining contact with the headquarters of TNCs that are operating in their country.

• Investor targeting - Diplomats have a wide circle of influential contacts, including leading figures in the local business community. They may play a role in targeting potential investors as part of a national investor targeting strategy.

• Policy advocacy - Having good knowledge of public policies in their duty stations, diplomats could provide useful inputs to the IPA’s policy proposals.

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Conclusion IPAs could play a key role in softening the impact of the economic crisis on local

economies through efforts to retain the operations of foreign affiliates.

At the same time, IPAs should start preparing for the economic recovery by continuous efforts to improve the reputation and competitiveness of the location.

In order to stay effective and relevant, IPAs need to review their operations regularly so that they can easily adjust to the ever- changing economic environment that determines investment decisions.

Diplomats enjoy networks and prestige that can be used by IPAs to assist them in their efforts to attract and service investors overseas.

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Investment Advisory Series A

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Forthcoming IAS issues

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Thank you

UNCTAD

http://www.unctad.org