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World Investment Report: Is private investment in developing countries increasing or falling?

Added 30 Jun 2016
The always interesting World Investment Report, 2016 edition, came out last week, highlighting an increase in foreign direct investment (FDI) which is seemingly contrary to other reports of an outward flood of private finance, and highlighting the continued rise of international investment treaties, and resulting cases brought by companies against developing countries. 

Did FDI rise or fall in 2015?

As I’ve pointed out before, interpreting FDI figures takes a lot of care, as not all of it is foreign, and not all is investment, and the routing of investment through tax havens over-inflates and distorts the figures. However, in broad terms, UNCTAD (the United Nations Conference on Trade and Development) that produce the World Investment Report (WIR) argues that $765 billion FDI flowed into developing countries in 2015, a 9% increase on the previous year. This means that developing countries took the majority (55%) of FDI. 
 
How to square this with the other excellent UN report, the World Economic Situation and Prospects (WESP), that, earlier this year, reported an enormous outflow of financial resources from developing countries in 2015? Well, most of the WESP trend is caused by non-FDI flows of private finance, such as portfolio investment (buying stocks and shares) and interbank loans. As these flows were overwhelmingly negative, the main overall takeaway from these two reports seems to me to be a reminder about how destabilising external financial flows can be, especially short-term flows, like portfolio investment.

It seems that methodological issues explain the difference between the two reports, but whoever is right, perhaps the most important thing to note is how small these flows are compared to the GDP of developing countries. Eurodad’s State of Development Finance report showed that FDI as a percentage of GDP has typically been around 2-3% of GDP over the last decade. When compared to domestic investment – public and private – of over 30% of GDP, it is clear that policy makers should spend far more time discussing the domestic investment landscape. 
 
It’s also worth remembering how multinationals’ efforts to dodge taxes distort the figure – how else could tiny Luxembourg be the world’s tenth biggest source of FDI? As we battle to get public country by country reporting to expose multinational’s accounts to public scrutiny, an interesting new section of this year’s report focuses on investor nationality, and highlights just how complex things have become:

“The top 100 [multinational enterprises] in UNCTAD’s Transnationality Index have on average more than 500 affiliates each, across more than 50 countries. They have 7 hierarchical levels in their ownership structure (i.e. ownership links to affiliates could potentially cross 6 borders), they have about 20 holding companies owning affiliates across multiple jurisdictions, and they have almost 70 entities in offshore investment hubs.”
For those who are not fans of jargon’ offshore investment hubs’ are also known as tax havens. 

Finally, the report confirms that investment treaties and agreements between states continued to mushroom with 3,304 international investment agreements in place by the end of 2015. This meant, naturally, an increase in the number of times companies sue states through the arbitration procedures these treaties contain. The majority of these cases are brought against developing countries, confirming why these treaties continue to be a major problem for developing countries.