Archive:Foreign direct investment statistics
- Data from May 2010, most recent data: Further Eurostat information, Main tables and Database.
Foreign direct investment is the category of international investment made by an entity resident in one economy (direct investor) to acquire a lasting interest in an enterprise operating in another economy (direct investment enterprise). The lasting interest is deemed to exist if the direct investor acquires at least 10% of the voting power of the direct investment enterprise.
FDI is a component of the balance of payments showing all financial transactions between one country or area like the European Union, and all other countries.
This article discusses patterns of FDI in the European Union (EU), examining the inward flows and outward flows, the origin and destination of these flows, and the chief components of FDI.
Main statistical findings
Foreign Direct Investment flows hit by the crisis
Flows of FDI (new investments made during the reference period) fluctuate considerably from one year to the next, partly as a function of economic fortunes. FDI flows generally increase during times of rapid growth while disinvestment is more likely during periods of recession as companies focus on core activities in their domestic market.
The EU Foreign Direct Investment (FDI) flows have been severely affected by the global economic and financial crisis. Their peak reached a record level in 2007, but in 2008 a sharp drop both in inward and outward FDI flows was recorded (34% for outflows, 52% for inflows). A slight recovery took place in 2009 in the incoming FDI flows, whereas the EU investments abroad continued to decline (by 24%).
In 2007, EU foreign direct investment flows to the countries outside the European Union had reached the record level of EUR 530.7 bn mainly as a result of major cross-border mergers and acquisitions and reinvestment of earnings. In 2008, the reinvested earnings paid to extra-EU investors dropped by 50% and continued to decline in 2009. Equity capital, mainly mergers and acquisitions activity, showed a similar trend dropping by one third in 2008 and continuing to go down resulting in total EUR 263.3 bn EU outward investments in 2009.
The income received from the investments abroad has also come down from the record level of 2007, meaning that the rate of return on EU outward stocks fell to its lowest level since 2004.
FDI flows with main partner United States plummeted in 2008
FDI flows between developed economies were the first to be affected by the financial crisis. The United States is by far the main partner of the European Union, and the drop in incoming FDI flows was significant in 2008. Investments declined to EUR 50.5 bn in 2008 from the record high of 2007, when the US alone placed EUR 183.5 bn worth of investment in the European Union. However, a significant recovery in inward flows from USA was already noted in 2009. EU investment flows to the United States saw a more moderate annual decline in 2008 (from EUR 168.9 bn to EUR 121.4 bn), which continued in 2009 (to EUR 69.0 bn). In 2006-2007, EU foreign direct investment to Canada was high, due to mergers and acquisitions, but EU outflows fell to EUR 7.8 bn in 2008 and to only EUR 2.8 bn in 2009. Investments in many emerging economies still surged in 2008. The steady growth in EU investment flows to Russia reached their peak in 2008 (EUR 25.6 bn), but 2009 saw a sharp downturn towards disinvestment. EU investments to Africa still recorded growth in 2008, mainly due to EUR 9.8 bn outflows to Egypt by French companies. Total EU investments to Asia continued to grow in 2008. For Japan, however, there was a drop of 43 % in 2008 from the previous year, and in 2009 EU investments to Japan were worth only EUR 0.1 bn. EU foreign direct investment to China and India remained quite steady throughout the peak and the drop in total EU FDI outflows. The preliminary figures for 2009 show a slight recovery in outflows to China (from EUR 4.7 bn to EUR 5.3 bn). In 2008, inflows from outside the EU were worth only half of what they had been a year before. The drop would have been even more significant without a major inflow from Gulf Arabian countries to Luxembourg.
EU’s main FDI player — the United Kingdom — invests in USA and Canada
Being influenced by particularly large mergers and acquisitions, FDI flows can fluctuate considerably from one year to another. The main players among EU Member States, however, remain largely the same. The average of outward flows in 2006-2008 shows that the United Kingdom was the main investor in countries outside the EU, followed by Luxembourg. Luxembourg's share can be explained by the activities of Special Purpose Entities (SPEs)1. In some other EU Member States, especially the Netherlands and Hungary, SPEs likewise play an important role. However, the national data for these countries exclude SPEs here. The main partners of the United Kingdom were USA and Canada, followed by Australia and Switzerland. After peaking in 2007, the UK recorded a drastic drop in outflows to all these partner countries, except Australia. The fact that Luxembourg’s main partners are the USA, Switzerland and Offshore financial centres shows how important the financial sector is in Luxembourg.
The growth in FDI positions slowed down in 2008
The annual growth rate of both EU outward and inward positions (stocks) slowed down in 2008 compared to the previous three years. In 2007, annual growth in outward stocks was 13 % and in inward positions 16 %, whereas in 2008 they increased only by 5 % and 3 % respectively.
North America had by far the biggest share (37 %) of extra-EU stocks at the end of 2008. One third (EUR 1058.1 bn) of total EU outward positions were held in the USA, but annual growth slowed down, reflecting the financial crisis and the drop in EU investment flows. EU stocks held in the United States were mainly concentrated in the Service sector (69 % at end-2007), in particular in Financial intermediation and Business activities. In the Manufacturing sector the main activity was Manufacture of chemicals & chemical products. At the end of 2008, the United Kingdom was the main holder of FDI stocks in the US, with 24 % of the EU total (EUR 251.6 bn). With 14 % of total extra-EU stocks, Switzerland was the second most important destination of EU stocks, Financial intermediation being the main activity sector. EU stocks held in Russia have been growing significantly in recent years, up to EUR 92.0 bn at end-2008. The Service sector accounted for 55 % of all EU stocks held in Russia, but there has been major investment in Extraction of petroleum and gas. Among the Asian countries, the main destinations of EU positions were Singapore, Hong Kong and Japan. The fastest growth in the region was recorded for China and India, but still these countries were not in the top ten of main investment destinations, with 2008 levels at EUR 47.3 bn and EUR 19.4 bn respectively.
The US had the major share of the EU inward positions (43 % and EUR 1046.2 bn at end-2008). The Service sector had been the major investment destination for the USA in the EU, covering 79 % of all inward investments at end-2007. The stock held in the EU by Switzerland at end-2008 was EUR 306.2 bn, which was slightly less than at end-2007 (-2 %). The other developed countries with significant shares in EU-27 inward stock recorded no significant changes in 2008: Japan's stocks declined to EUR 116.9 bn at end-2008, and the stock held by Canada remained at EUR 105.1 bn. Finally, Brazil almost tripled its stocks in the EU during 2006-2008.
Financial intermediation the main activity sector
The structure of EU-27 FDI stocks by activity did not change significantly from 2006. Services represented the biggest share (70 %) in total positions abroad, confirming the trend of recent years. More than half were concentrated in financial intermediation, which registered an annual increase of 18.6 %. Unlike other main sectors, EU FDI stocks growth abroad in manufacturing slowed down in 2007, providing an indication of the coming recession. For inward positions, Services took the biggest part (80 %) in total activity, with financial intermediation again contributing the most. Foreign FDI stocks in EU-27 in transport and communication, and in machinery, computers and communication equipment, dropped significantly (by more than 20 %) from 2006 levels. Among the presented sectors, the EU had a negative stock balance vis-à-vis the rest of the world in 2007 only in textile and wood activities, and in real estate and business services.
Sharp drop in EU net income in 2008
The financial crisis has also cut down the income from investments abroad. EU investment income dropped sharply in 2008 to EUR 195.9 bn from the record high of EUR 261.4 bn in 2007. In particular, income received from EU investments in the United States declined from EUR 70.5 bn in 2007 to EUR 36.7 bn in 2008. EU income paid to extra-EU investors saw a moderate decline of 7 % in 2008, to EUR 126.3 bn. The resulting net FDI income dropped by 44 % in 2008 to EUR 69.6 bn (EUR 124.9 bn in 2007). Income in 2008 represented 0.56 % of EU-27 GDP, while a year before it had been 1,01 % of GDP. This significant decline brought the rates of return1 on both EU outward and inward stocks down to their lowest levels since 2004.
Data sources and methodology
Foreign Direct Investment statistics in the EU are collected according to Regulation (EC) No 184/2005 of the European Parliament and of the Council on Community statistics concerning balance of payments, international trade in services and foreign direct investment.
The methodological framework used is that of the OECD Benchmark Definition of Foreign Direct Investment Third Edition, a detailed operational definition fully consistent with the IMF Balance of Payments Manual, Fifth Edition (BPM5).
Annual EU foreign direct investment statistics give a detailed presentation of FDI flows and stocks, showing which Member State invests in which countries and in which sectors. The EU statistical office Eurostat collects FDI statistics for quarterly and annual flows, as well as for stocks at the end of the year. FDI stocks (assets and liabilities) are part of the international investment position of an economy at the end of the year.
Through outward FDI flows, an investor country builds up FDI assets abroad (outward FDI stocks). Correspondingly, inward FDI flows cumulate into liabilities towards foreign investors (inward FDI stocks). However changes in FDI stocks differ from FDI flows because of the impact of revaluation (changes in prices and, for outward stocks, exchange rates) and other adjustments such as catastrophic losses, cancellation of loans, reclassification of existing assets or liabilities.
FDI flows are components of the financial account of the Balance of Payments, while FDI assets and liabilities are components of the International Investment Position. Finally, FDI income consists of the income accruing to the direct investor from its affiliates abroad. Income earned from outward FDI is recorded among credits in the current account of the Balance of Payments, while income paid to foreign owners of inward FDI stocks is recorded among debits.
FDI flows and positions are recorded according to the immediate host/investing country criterion. The economic activity for both flows abroad and flows in the reporting economy are classified according to the economic activity of the resident enterprise. The same applies to FDI positions in the reporting economy while FDI positions abroad are classified according to the activity of the non-resident enterprise.
FDI flows are new investment made during the reference period, whereas FDI stocks provide information on the position, in terms of value, of all previous investments at the end of the reference period. The intensity of FDI can be measured by averaging the value of inward and outward flows during a particular reference period and expressing this in relation to GDP.
The sign convention adopted for the data shown in this section, for both flows and stocks, is that investment is always recorded with a positive sign, and a disinvestment with a negative sign.
EU aggregates include Special Purpose Entities (SPEs), which are a particular class of enterprises (often empty shells or holding companies) not included in all countries' national statistics. Therefore, the EU aggregates are not simply the addition of national figures.
Context
In a world of increasing globalization, where political, economic and technological barriers are rapidly disappearing, the ability of a country to participate in global activity is an important indicator of its performance and competitiveness.
In order to remain competitive, modern-day business relationships extend well beyond the traditional foreign exchange of goods and services, as witnessed by the increasing reliance of firms on mergers, partnerships, joint ventures, licensing agreements, and other forms of business co-operation.
FDI may be seen as an alternative economic strategy, adopted by those enterprises that invest to establish a new plant/office, or alternatively, purchase existing assets of a foreign enterprise. These enterprises seek to complement or substitute external trade, by producing (and often selling) goods and services in countries other than where the enterprise was first established.
There are two kinds of FDI, namely the creation of productive assets by foreigners or the purchase of existing assets by foreigners (acquisitions, mergers, takeovers, etc.). FDI differs from portfolio investments because it is made with the purpose of having control or an effective voice in management and a lasting interest in the enterprise. Direct investment not only includes the initial acquisition of equity capital, but also subsequent capital transactions between the foreign investor and domestic and affiliated enterprises. FDI is a type of international investment where an entity that is resident in one economy (the direct investor) acquires a lasting interest (at least 10 % of the voting power) in an enterprise operating in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise, and a significant degree of influence by the investor on the management of the enterprise.
Conventional trade is less important for services than for goods. While trade in services has been growing, the share of services in total intra-EU trade has changed little during the last decade. However, FDI is expanding more rapidly for services than for goods, increasing at a more rapid pace than conventional trade in services. As a result, the share of services in total FDI flows and positions has increased substantially, with European services becoming increasingly international.
Further Eurostat information
Publications
Main tables
- European Union direct investments (t_bop_fdi)
Database
- European Union direct investments (bop_fdi)
Other information
External links
- OECD Benchmark Definition of Foreign Direct Investment
- United Nations Conference on Trade and Development (UNCTAD) - FDI Statistics