UNCTAD's World Investment Report 1998 highlights
key investment trends in leading developed countries

FDI flows by leading developed countries 1996 and 1997
(millions of U.S. dollars)

Key United States and West European numbers

FDI outflows from the United States rose by 53 per cent to US$115 billion last year; of this figure, M&As represented over 90 per cent. FDI inflows to the United States increased by 19 per cent to US$91 billion. For both inflows and outflows, the European Union continued to be the most important investment partner for the United States, with German and Dutch investors the largest foreign investors accounting for more than US$10 billion of flows to the United States in 1997. Outside the European Union, Switzerland was an important source of FDI to the United States with a 1997 volume of US$8.3 billion, only slightly lower than the flows to the United States from France and the United Kingdom.

FDI into Western Europe reached US$115 billion (US$100 billion in 1996) and outflows amounted to US$196 billion (US$168 billion in 1996). Trends differed significantly from one country to another with the United Kingdom, for example, seeing large FDI inflow gains. On the other hand, significant falls were registered by France, Austria and Belgium, reflecting changing perceptions of locational attractiveness.

United States attractiveness

WIR98 highlights why the United States has become such an attractive location for FDI. High corporate profitability in general went along with improved profitability of foreign affiliates located in the United States, many of which reinvested a higher share of their earnings in the country. In addition to the attractiveness of its large and growing market, the United States is seen by foreign direct investors as attractive because of its flexible labour markets, its strength as the centre of technological innovation, its dynamic service sector, as well as the quality of management to be found in the country.

United States corporations are becoming increasingly transnational and one-third of United States FDI now flows to developing countries. Developing countries also account for 10 per cent of FDI flows into the United States. Latin America and the Caribbean is the major United States FDI partner. Manufacturing is key to inflows of FDI to the United States, but finance and insurance is the largest outflow sector.

European trends in FDI

An analysis of European corporate trends suggests that FDI flows among the member states of the European Union have lost some of their importance. For the first time 1989, in 1996, FDI outflows from the European Union to the rest of the world were about the same as those within the European Union. WIR98 explains this by noting that, "this could reflect the tapering off of the effects of economic integration. There are some signs, however, that intraregional FDI is again on the rise, after the announcement of European Monetary Union."

Much of inward FDI from outside the European Union comes from the United States, Switzerland and Japan. But Japanese FDI has been declining since 1995. Instead, Norway has become a large investor. The United States, Switzerland and Norway together accounted for more than 90 per cent of inward FDI flows from outside the European Union in 1996, the latest year for which figures are available.

Data on FDI outflows from selected European Union countries suggests an increasing orientation towards developing countries, states WIR98. The share of developing countries in total FDI outflows from these countries rose from 10 per cent in 1991 to 14 per cent in 1993 and to 17 per cent in 1996. In addition, FDI from European Union countries, notably Germany and Austria, were the most important source of FDI inflows into Central and Eastern Europe.

Japanese FDI slumps

Japan's outward flow of FDI has slumped, falling to an annual average of US$22 billion in the 1991-97 period from an average of US$32 billion in the 1986-90 period. WIR98 states, "the decline of Japan's importance as an investor country is mainly due to the burst of the "bubble" economy in the early 1990s, during which FDI outflows were inflated by the seemingly abundant liquidity in an overheated economy."

Other factors may well have been the weakness of the Japanese currency and the recognition by Japanese firms that fears of a protectionist "fortress Europe" were unfounded. The significant slowing of Japanese FDI outflows at a time of major global growth in flows and heightened United States and West Europe cross-border M&A activity may weaken Japanese global competitiveness. About 40 per cent of Japanese FDI goes to the United States, while one-quarter of the Japanese total continues to be accounted for by developing Asia.

FDI into Japan was at a record level of over US$3.2 billion in 1997, yet this compares to inflows, for example, of US$8.2 billion into Canada and US$9.6 billion into Australia. Indeed, Japan accounted for less than one per cent of 1997 global FDI inflows.