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September 6, 2006 3:00 am

US to retain appeal for foreign investors

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The US will maintain its pre-eminent position as a destination for foreign direct investment, attracting al-most a quarter of all FDI flows over the next five years, according to forecasts published today.

A report on world investment prospects by the Economist Intelligence Unit and Columbia University in the US predicts a jump of 22 per cent in FDI inflows worldwide this year to $1,200bn (€933bn, £630bn), up from $955bn in 2005 and the highest level since 2000.

However, growth is expected to slacken in subsequent years, due partly to lacklustre investment in emerging markets and a political backlash against foreign take-overs in industrialised countries. It will take until 2010 to match the 2000 FDI peak of $1,400bn, the report says.

The US is set to attract FDI inflows of nearly $190bn this year, up from $110bn in 2005. Although investment into the UK is expected to fall back from last year's exceptional $164bn, which was fuelled by several large mergers and acquisitions, it will still be in second place this year with inflows of $130bn, the report says.

China, in third place, will see FDI inflows rise to $86.5bn in 2006 from $79bn in 2005, followed by France ($68bn this year).

These rankings are expected to remain unchanged from 2006 to 2010, the report suggests. FDI will remain concentrated on a relatively few countries, with the top 10 recipients accounting for more than two-thirds of global flows.

In general, most investment will flow to the developed world, through cross-border M&A activity, but Hong Kong also features in the top 10 destinations and Brazil, Mexico, Russia and India are in the top 20.

In terms of outgoing in-vestment, the European Union will remain the largest direct investor in foreign markets, the report predicts.

Robin Bew of the Economist Intelligence Unit said the forecasts were based on an assumption of "constrained globalisation", in which rising political anxieties over the impact of FDI restrained but did not undermine cross-border capital movements.

A number of countries, notably France and the US, have recently tried to block or discourage foreign take-overs of domestic companies, especially where the deals involved developing-country buyers. CNOOC, the Chinese oil company, was frustrated in its bid for US-based Unocal last year, while India's Mittal steel giant won control of Arcelor of France earlier this year in the teeth of government opposition.

Economic nationalism is also on the rise in emerging economies, including China. "Although China will remain open to foreign capital . . there are signs of unease with what some are beginning to see as excessive dependence on FDI," the report notes. These reactions represent a potential risk to the rosy global investment outlook, it says.

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