Thursday, September 29 2005 13:49 Hrs (IST) - World Time -

New Delhi: Foreign Direct Investment (FDI) inflow to developing world surged by 40 per cent at 233 billion dollars in 2004 driven largely by an increase in registered greenfield projects, half of which is accounted by India and China, United Nations Conference on Trade and Development (UNCTAD) said today(Sept 29, 2005).

At 648 billion dollars, world FDI inflows were 2 per cent higher in 2004 compared to the previous year, but developed countries as a group experienced a 14 per cent drop in their inward FDI, 'World Investment Report 2005' brought out by the UNCTAD said.

As a result, the share of developing countries in world FDI inflows was 36 per cent, the highest level since 1997.

Asia and Oceania were again the top destinations of FDI flows to developing regions, attracting 148 billion, which is 46 billion more than in 2003 marking the largest increase ever, the report said.

South Asia, with India at the forefront, received 7 billion dollars of FDI, it said.

East Asia saw a 46 per cent increase in inflows, to reach 105 billion dollars, driven largely by a significant increase in flows to Hong Kong.

In South-East Asia, FDI surged by 48 per cent to 26 billion dollars, while it grew from 6.5 billion dollars to 9.8 billion dollars of which more than half was concentrated in Saudi Arabia, the Syrian Arab Republic and Turkey.

China continued to be the largest developing country recipient with 61 billion dollar FDI inflows.

Prospects for FDI worldwide appear to be favorable for 2005, the UN report said. Global FDI flows can be expected to rise further in 2006 if economic growth is consolidated and becomes more widespread, corporate restructuring takes hold, profit growth persists and pursuit of new market continues.

The continued need of firms to improve competitiveness by expanding into new markets, reducing costs and accessing natural resources, and strategic assets abroad provides strong incentives for further FDI in developing countries in particular, UNCTAD said.

Profitability of TNCs likely trigger greater M&A activity

Also, the improved profitability of Trans National Corporations (TNCs) is likely to trigger greater M&A activity, which should also push up the levels of FDI in developed countries, it said.

UNCTAD said its survey of TNCs, experts and Investment Promotion Agencies (IPAs) corroborate this relatively optimistic picture, as do the findings of other surveys.

In the UNCTAD survey, more than half of responding TNCs as well as experts and four-fifths of the IPAs expected short-term (2005-06) growth in FDI flows, very few predicted a decline of FDI in the near future.

The competitive pressure on firms, continued offshoring of services, ongoing liberalization and the growth of TNCs from emerging markets were identified as factors that should lead to more FDI.

At the same time, there are grounds for caution in forecasting FDI flows, the report said.

The slowdown of growth in some developed countries, along with structural weaknesses and financial and corporate vulnerabilities in some regions, continue to hinder a strong recovery of FDI growth, the report said.

Continuing external imbalances in many countries and sharp exchange rate fluctuations, as well as high and volatile commodity prices, pose risks that may hinder global FDI flows.

There is some variation in the FDI prospects of individual regions. In view of the improved economic situation in Asia and Oceania, its important role as a global production centre, its improved policy environment and significant regional integration efforts, the prospects for FDI flows to the region are strongly positive.

According to TNCs, experts and investment promotion agencies, surveyed by UNCTAD, the region's outlook for FDI is bright.

In some developed as well as developing countries, increased inflows in 2004 were linked to an upturn in cross-border merger and acquisition activity.

FDI outflows increased in 2004 by 18 per cent to 730 billion dollars with firms based in developed countries accounting for the bulk of 637 billion dollars.