Businesses Cut Back on Overseas Investments

By FeaturesDow Jones Newswires

Businesses around the world cut back on their overseas investments for the second straight year in 2017, a surprise development that suggests the globalization of economic activity may be slowing.

Figures released by the United Nations Monday recorded a 16% drop in foreign direct investment to $1.52 trillion, largely reflecting a sharp fall in the acquisitions of U.S. and U.K. firms by foreign businesses. In a report published last year, the U.N. had expected to see a rise of 10%.

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The decline included a 32% drop to a 14-year low of $571 billion in what are known as "greenfield" projects--where businesses build and equip new factories or other facilities. That drop was particularly sharp in developing economies.

Other forms of FDI include mergers and acquisitions, and profits that are reinvested in the country in which they are earned, rather than taken back to headquarters.

The decline in FDI flows came as a surprise because most other indicators have pointed to an increase in economic activity in 2017. The U.N. Conference on Trade and Development said it expects to see a rebound this year, given a continuation of those favorable economic trends. But it also warned that further setbacks are possible.

"The possibility that protectionist rhetoric translates into trade restrictive actions...may have an impact on FDI flows," Unctad said.

The U.N. also said a recent overhaul of U.S. company taxation will have an impact on the volume and destination of FDI flows this year.

"Tax reforms in the United States are likely to significantly affect investment decisions by United States MNEs (multinational enterprises), with consequences for global investment patterns," Unctad said.

FDI rose steadily from the 1980s until the onset of the global financial crisis as companies spread their activities and associated jobs across an increasing number of countries, creating what are known as "global value chains."

Many economists believe that has aided global economic growth by helping locate production where it is most efficient and increasing competition while also helping spread new technologies and know-how. But critics say the benefits haven't been shared equally, with low-skilled workers in developed economies seeing their incomes stagnate even as large numbers of people in developing economies have seen their wages rise.

A backlash against globalization by some voters in developed economies has led to greater uncertainty about the future regulatory treatment of cross-border investment flows, but as yet little action to discourage such activity. It is unclear whether the declines in 2016 and 2017 are a response to that threat, or reflect other dynamics. FDI flows fell in the wake of the financial crisis, but returned to precrisis levels in 2015.

UNCTAD's latest figures show that investment in Asia and Latin America rose slightly. There were also increases in a number of European countries, including Germany and France.

Investment in the U.K. fell by 90%, although Unctad said that reflected the absence of the very large acquisitions by foreign firms that had produced an "anomalous peak" in 2016. The 32% drop in investment in the U.S. to $311 billion from $457 billion in 2016 was mainly down to a fall in acquisitions by firms based in offshore financial centers. Despite that decline, the U.S. remained the favored destination for foreign investors, with China a distant second at $144 billion, a record high for the world's second-largest economy.

Foreign investment in Africa was flat, but fell by 17% in Russia and other countries that were part of the Soviet Union.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

January 22, 2018 12:14 ET (17:14 GMT)

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