5. mezinárodní konference Řízení a modelování finančních rizik
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí
Ostrava
8. - 9. září 2010
FDI development during the crisis from 2008 till now
Michal Fabuš, Miroslav Kohuťár1
Abstract
Investments represent an important resource of country’s economic growth and they form a
material part of the GDP. FDI represent additional external resources that may be added to the
domestic investments to ensure faster or higher GDP growth rate. The turbulence on the
financial markets and global economic fall gradually influenced the development of the total
flow of foreign direct investments in 2008 and in the first half of 2009. After an uninterrupted
growth of foreign direct investments in the period between 2003 and 2007 the worldwide
inflow of foreign direct investments fell by 14% in 2008 to USD 1.697 billion from the record
amount of USD 1.979 billion in 2007.
Key words
Foreign direct investments, foreign capital, investments, economy growth
1. Introduction
The foreign direct investments (FDI) are defined as long-term investments of a foreign
direct investor in a company that is a resident of the economy of a state other than the one
where the foreign investor’s company is established. The relation of foreign direct investments
consists of parent company and foreign affiliations forming the global corporations together.
These investments may contribute to the solution of many long-term problems such as e.g.
completing the infrastructure construction, creating new jobs, renewal and development of
industry or support of the economy’s stability. „According to the estimates, the foreign direct
investments have a double positive effect – they are capable of completing the missing
domestic resources needed for the performance of economic transformation and foreign
companies also bring other positive secondary effects.“ (Ferenčíková, Dudáš, 2005)2 .
2. Definition of foreign direct investments
„According to the definition by the UN Conference on Trade and Development foreign
direct investments are defined as investments based on a long-term relation to a company and
reflecting permanent interest and control by the resident entity of one country (foreign investor
or parent company) in the company of other country’s resident.“ (Kordoš, 2008)3
1
Ing. Michal Fabuš, PhD., Vysoká škola ekonómie a manažmentu verejnej správy, Železničná 14, 821
07 Bratislava, michal.fabus@vsemvs.sk
Mgr. Miroslav Kohuťár, Vysoká škola ekonómie a manažmentu verejnej správy, Železničná 14, 821
07 Bratislava, miroslav.kohutar@vsemvs.sk
2
Ferenčíková, S., Dudáš, T.: Vplyv prílevu priamych zahraničných investícií na hospodársky rast v
nových členských štátoch Európskej únie zo strednej a z východnej Európy. In: Ekonomický časopis,
53, 2005, No. 3, ISSN 0013-3035, pg. 261 – 272
3
Kordoš, M.: Systém regulácie zahraničnoobchodných vzťahov USA. Scienfitic monograph of
Trenčianska univerzita Alexandra Dubčeka in Trenčín, Faculty of Social and Economic Relations,
TnUAD, Trenčín. 2008. AH 13,32 – pg. 204. ISBN 978-80-8075-307-8
5. mezinárodní konference Řízení a modelování finančních rizik
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí
Ostrava
8. - 9. září 2010
2.1 Components of foreign direct investments
The FDI are part of equity, reinvested profit and other capital (especially inside the
company or group – loans). Individual countries not always gather the data for every item
separately and for this reason the submitted data about the DFI cannot be fully compared
among individual countries. Especially the data about the amount of reinvested profit
dependent on the resolutions of global companies is often not disclosed in many countries.
2.2 Borders of capital ownership
The countries vary according to the threshold value for defining the foreign ownership of
capital that they consider to be an evidence of the relation to the DFI. It represents the level of
participation on the company’s economic activities management. The threshold value usually
used for foreign direct investments is 10 %. Some countries do not state the threshold value,
but they rely on completely different basis. In quantity terms, the impact of differences in the
threshold values used is quite small considering the high share of the DFI focused on majority
ownership of foreign branches.
There are also other possibilities of having a share on the equity of companies by which the
foreign investors may efficiently obtain a vote. These include subcontracting and manager
contracts, turnkey agreements, franchising, leasing and granting of licences. For instance, the
OECD considers the financial leasing between direct investors and their branches, subsidiaries
or affiliated companies as current loans, i.e. these relations are included in the modified
definition of the DFI. 4
„At the current level of globalisation development and the existing relation of individual
economies within its frame we can consider the export – in fact the economy’s ability to sell
the domestic products on foreign markets – to be one of the most important indicators of the
country’s economic development.“ (Csabay, 2007).5
3. Development of foreign direct investments during economic crisis
The current global financial and economic crisis has a dampening effect on foreign direct
investments (FDI). This is evidenced by the expected decrease of the foreign direct
investments inflow to USD 900 billion from USD 1,200 billion in 2009, although a slight
revival is expected in 2010 and an acceleration in 2011.
In 2008 and by the beginning of 2009 the global inflow of foreign direct investments
decreased after the constant growth period between 2003 and 2007. While the share of the
DFI on the development in transforming economies in global flows of the foreign direct
investments increased to 43% in 2008. The development is illustrated on the Chart 1 below.
4
According to http://www.unctad.org/Templates/Page.asp?intItemID=3147&lang=1
Csabay, M.: K teoretickému vymedzeniu podpory exportu. In: Ekonomický časopis, 55, 2007, No. 8,
ISSN 0013-3035, pg. 793-810
5
5. mezinárodní konference Řízení a modelování finančních rizik
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí
Ostrava
8. - 9. září 2010
Chart 1 – Development of DFI flows in the world from 1990 till 2008
Development of the FDI flows in the world from 1990 till 2008
(in USD billion)
2500
2000
1500
1000
500
0
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
Developing countries
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
Transitive economies
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
Developed countries
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
World
Source: own processing of data obtained at www.unctad.org/fdistatistics
The falling profits and decreasing stock prices significantly deteriorate the value and
possibilities of cross-border fusions and acquisitions – one of the most frequently used
methods of the foreign direct investments access into the developed countries and more and
more frequently also to the developing countries. The falling demand for merchandise and
services resulted in reviewing the investment plans by global companies including the access
into abroad – either by means of acquisition or fusion or green field projects. This method of
investing started to fall in 2009.
The DFI originally started to fall dramatically in developed countries that recorded 29%
decrease of their inflow, while the flows into the developing countries and transitive
economies of the south-east Europe and the Commonwealth of Independent States (CIS) were
still recording the growth of 17% or 26% respectively. However, by the end of 2008 and by
the beginning of 2009 also these groups of countries started to feel the impact of crisis on the
DFI inflow. Many of these economies faced a significant decrease of the foreign direct
investments inflow in 2009.
The turbulence on the financial markets and global economic decrease gradually influenced
the development of the total flows of foreign direct investments in 2008 and in the first half of
2009. After the constant growth of the foreign direct investments in the period between 2003
and 2007 the worldwide inflow of the foreign direct investments fell by 14% in 2008 to USD
1,697 billion from the record amount of USD 1,979 billion in 2007. While in 2008 the level of
the DFI was the second highest in the history, the foreign direct investments inflow started to
fall gradually in 2009. In the first half of 2009 the foreign direct investments inflow was
falling more quickly.
The foreign direct investments inflow and the DFI outflow from the developed countries
ended in 2008, subsequently the inflow fell by 29% to USD 962 billion and the outflow by
17% to USD 1,507. The DFI inflow continued to fall after the financial crisis entered the new
stage in September 2008 after the fall of Lehman Brothers (one of the biggest financial
institutions in the U.S.A. belonging to the group of five investment houses) and the developed
economies started to fall or approached the economic recession. It is estimated that in the first
5. mezinárodní konference Řízení a modelování finančních rizik
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí
Ostrava
8. - 9. září 2010
half of 2009 the DFI inflow into developed countries decreased by another 30-50% compared
to the second half of 20086. The development is illustrated in the Table 1 below.
in USD
billion
2000
Developing
countries
256,883
215,421
175,935
183,994
290,397
329,292
433,764
529,344
620,733
6,998
9,725
11,293
19,901
30,308
30,948
54,548
90,866
114,361
Developed
countries
1,117,795
595,284
442,448
361,265
414,186
613,089
World
1,381,675
820,430
629,675
565,160
734,892
973,329
972,762
1,461,07
4
1,358,62
8
1,978,83
8
962,259
1,697,35
3
Transformin
g economies
2001
2002
2003
2004
2005
2006
2007
2008
Table 1 – DFI development from 1998 till 2008
Source: own processing of data at www.unctad.org/fdistatistics
On the contrary, the developing and transforming economies recorded the foreign direct
investments growth in 2008 at the record level for both groups, their share on the worldwide
DFI inflow increased up to 37% from 27% in developing and to 7% from the original 5% in
the previous year in transforming economies. The cumulated share of these two groups on the
worldwide DFI volume was at the level of 43%, and it approached the historic maximum
recorded in 1982 and 2004 which proves the growing meaning of these economies as the host
countries for the foreign direct investments during the crisis, or at least in 2008.
However, the inflow started to fall by the end of 2008 as an expression of the economic
decrease on the main export markets that started to influence seriously the development of
their economies. The decrease of DFI inflow into the developing and transforming economies
started about a year after the decrease started in the developed countries. This reflects the time
delay relating to the economic decrease and the subsequent decrease of demand on the
markets in the developed countries that are important destinations for the merchandise
produced in the developed countries and in the countries with transforming economies.
By the end of 2008 and by the beginning of 2009 all three components of the DFI inflow
such as the equity, reinvested profit and other capital flows (especially loans within holdings)
decreased in the developed economies. The investments into stock were falling as well as the
cross-border fusions and acquisitions. Lower profits of foreign branches were reflected
especially by significant decrease of the reinvested profit, especially in 2009. The savings
from the restructuring of parent companies and their headquarters were in some instances used
for covering the outstanding loans of foreign branches. As a result, the net internal flows of
capital in global companies were falling to the detriment of foreign branches or they were
negative which led to the fall or decrease of the DFI inflow.
The structure of the current decrease of the DFI inflow is similar to the fall in 2001. This
development is astonishing because bigger share on the DFI flow decrease in result of the
capital investments decrease (unlike the reinvested profit and other capital flows) will
probably take longer. It is because the investments into the stock are quite demanding and are
made for longer period of time and are made for the purpose of production facility financing
and extension. Although the DFI inflow into the developing countries is falling, these proved
to be more resistant in 2008 and 2009. The main reason of that is that foreign direct
investments are more of long-term nature than other capital flows.
6
data from www.unctad.org/fdistatistics
5. mezinárodní konference Řízení a modelování finančních rizik
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí
Ostrava
8. - 9. září 2010
Positive and even quite high economic growth still existing in some developing countries
(e.g. China and India) is the driving force against the low demand for export and low price of
commodities making pressure on the foreign direct investments decrease.
The global companies were not influenced by the crisis evenly. This was caused by quite a
long-term ascending trend of the world economy in the recent four years and bigger
strengthening of financial and competitive position of many global companies. The financial
crisis and the decrease of the supplies on the market also provided them with the opportunity
to make use of new markets or the opportunity to take over the former competitors. In fact, the
need of consolidation of the most affected financial institutions and companies in other
industries has the potential to support the transactions in the field of the DFI. 7
References
[1] CSABAY, M.: K teoretickému vymedzeniu podpory exportu. In: Ekonomický časopis,
55, 2007, č. 8, ISSN 0013-3035, s. 793-810
[2] DUDÁŠ, T.: Priame zahraničné investície vo svetovom hospodárstve. Bratislava:
Ekonóm. 2006. s.159. ISBN 80-225-2139-6
[3] FABUŠ, M.: Priame zahraničné investície a ich vývoj, In: Verejná správa a regionálny
rozvoj, 2010, ročník VI, číslo 1, výkonný redaktor zborníka: doc. Ing. Mária Tokárová,
PhD. - Bratislava: Merkury, 2010 – ISSN: 1337-2955 - S. 49-55
[4] FERENČÍKOVÁ, S., DUDÁŠ, T.: Vplyv prílevu priamych zahraničných investícií na
hospodársky rast v nových členských štátoch Európskej únie zo strednej a z východnej
Európy. In: Ekonomický časopis, 53, 2005, č. 3, ISSN 0013-3035, s. 261 – 272
[5] KORDOŠ, M.: Systém regulácie zahraničnoobchodných vzťahov USA. Vedecká
monografia Trenčianskej univerzity Alexandra Dubčeka v Trenčíne, FSEV, TnUAD,
Trenčín. 2008. AH 13,32 – s. 204. ISBN 978-80-8075-307-8
[6] PRNO, I.: Investičná a inovačná politika, Bratislava: Merkury, 2008. ISBN 978-8089143-85-6
[7] TUHÁRSKA, E. a kol.: Investičná teória a politika. 1.vyd Bratislava: Ekonóm. 1996.
s.149 ISBN 80-225-0738-5
[8] VIDOVÁ, J.: Investičná politika a teória, Bratislava: Daniel NETRI. 2008. s.83. ISBN
978-80-969567-7-7
[9] WORLD INVESTMENT REPORT, 2009, UN Publication, ISBN 978-92-1-112775-1
[10] www.unctad.org/fdistatistics
Summary
Vývoj PZI počas krízy od roku 2008 do súčasnosti
Investície predstavujú dôležitý zdroj ekonomického rastu krajiny a tvoria významnú časť
HDP. PZI vyjadrujú dodatočné cudzie zdroje , ktoré môžeme pridať k domácim investíciám
aby sme zaistili rýchlejšie, resp. väčšie tempo rastu HDP. Otrasy na finančných trhoch a
globálny ekonomický pokles postupne vplýval na vývoj celkových tokov priamych
zahraničných investícií v roku 2008 a v prvej polovici roka 2009. Po nepretržitom raste
priamych zahraničných investícií v období rokov 2003 až 2007, celosvetový prílev priamych
7
WORLD INVESTMENT REPORT, 2009, UN Publication, ISBN 978-92-1-112775-1
5. mezinárodní konference Řízení a modelování finančních rizik
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí
Ostrava
8. - 9. září 2010
zahraničných investícií klesol o 14% v roku 2008 na 1.697 mld. USD, z rekordnej výšky
1.979 mld. USD v roku 2007.