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Donald Trump’s pledges to renegotiate major US trade deals and the start of Britain’s protracted Brexit process threaten to outweigh the positive effect of rising global growth and trade volumes for foreign direct investment in 2017, according to the latest figures from the United Nations.
Global FDI fell 13 per cent in 2016 to $1.52tn – dipping from 2015′s post-financial crisis high in a year marked by subdued economic growth, a host of political risks and a slump in world trade, the UN’s investment trade monitor has found.
Declining FDI flows were most notable in Europe where inflows dropped off by 29 per cent to $385bn – the worst performing continent last year according to the UN’s figure.
Despite a broader slowdown in FDI, 2016 marked a bumper year for international mergers & acquisitions which accelerated by 13 per cent to the highest level since before the financial crisis in 2007.
M&A activity and cross border investment helped the US notch up an 11 per cent rise in total FDI inflows to a record $385bn in its presidential election year. Corporate “megadeals” last year included a $23bn reverse takeover of Johnson & Johnson by Tyco and a $39bn deal from Teva Pharmaceuticals for a drugs unit owned by Allergan.
But the new White House administration’s vows to tear up the terms of the North American Free Trade Agreement and abandon a wide-ranging US-EU free trade deal threaten to stem rising investment flows this year, said the UN.
One of President Trump’s chief economic advisers, Peter Navarro, has said the administration is prioritising an unwinding and repatriation of international supply chains on which many US multinational companies rely on in a bid to boost domestic job creation.
The Federal Reserve’s suggestion that it will also increase the pace of its interest rate rises could also hold back global FDI by tightening global credit conditions, said the UN.
But noting the doubled-edged effect of Mr Trump’s economic promises, James Zhan, head of Unctad’s investment division and a leading export on global FDI inflows, said rising in infrastructure spending and lower corporate tax rates could all prove a boon for FDI in the US.
“Overall, the US economy is growing faster and fundamentals for FDI are expected to be sound”, he said.
Britain meanwhile saw FDI inflows climb to six times the value of 2015, jumping from $33bn to $77bn, on the back of mega corporate mergers and acquisitions, including SoftBank’s £24bn deal for ARM Holdings and SAB Miller’s £77bn deal for Belgium’s Anheuser-Busch Inbev.
The UK government hailed the deals to invest in British companies as a sign of confidence in the post-referendum economy. But the UN warned the full Brexit effect had not yet been felt for foreign investors or companies.
“Most of the firms are more in the mode of putting in place contingency plans than taking actions”, said Mr Zhan.
“The data for 2016 reflects the mega-deals that [were] underway already prior to the EU referendum”.
The UN also warned that bumper M&A activity was not necessarily good for creating jobs and raising productivity in host economies. It expects overall employment growth to fall again this year to 1.1 per cent despite a projected 3.4 per cent rise in global GDP.
“FDI flows have largely been shaped by cross-border M&As that have not necessarily resulted in a concomitant increase in gross fixed capital formation”, said the UN.