Global foreign direct investment (FDI) declined by a fifth in 2002 – for the second consecutive year – to $651-billion, the lowest level since 1998.

Africa was no exception to this trend, with FDI inflows declining to $11-billion in 2002 from $19-billion in 2001, however, prospects for a rapid recovery were described by Unctad as promising.

This was revealed yesterday in the United Nations Conference on Trade and Development’s (Unctad) World Investment Report 2003: FDI Policies and International Investment Agreements, at a function hosted by the Industrial Development Corporation.

The report states that FDI flows declined in 108 out of 195 economies, mainly due to the slow economic growth in most parts of the world and dim prospects for recovery in the short term.

Other important factors influencing FDI flows include falling stock market valuations, lower corporate profitability, a slowdown in the pace of corporate restructuring in some industries and the winding down of privatisation in some countries.

The report found that the FDI decline in 2002 was uneven across regions and countries, as well as sectorally – flows into manufacturing and services declined, while those into the primary sector rose.

The equity and intracompany loan components of FDI declined more than reinvested earnings and FDI entering host economies through mergers and acquisitions went down more than that through greenfield projects.

It was also found that, geographically, flows to developed and developing countries each fell by 22% – to $460-billion and $162-billion, respectively.

Two countries, the US and the UK, accounted for half of the decline in countries with reduced inflows.

Africa showed a decline of 41%; however, following adjustment for exceptional FDI inflows in 2001 there was no decline.

The continent suffered a dramatic decline in FDI inflows – from $19-billion to $11-billion in 2002, largely due to exceptionally high inflows in the previous year (two mergers and acquisitions in South Africa and Morocco, not repeated in 2002). Flows to 23 of the continent’s 53 countries declined.

FDI in the oil industry remained dominant, with Angola, Algeria, Chad, Nigeria and Tunisia accounting for more than half of the 2002 inflows.

Only South African enterprises made significant investments abroad. Oil exploration by major ‘largest transnational corporations’ in several oil-rich countries make the 2003 outlook for FDI inflows more promising.

Three major factors – expanded exploration and extraction of natural resources, continued and enhanced implementation of regional and interregional free trade initiatives and a possible continuation of privatisation programmes – are likely to lead to a moderate increase in total FDI inflows in 2003.

FDI in natural resources has well-known shortcomings as a force for development in host countries, notably limited linkages to domestic enterprises. But it is likely to be a major source of recovery for flows to Africa.

Latin America and the Caribbean suffered declines for the third consecutive year, with a drop in FDI inflows of 33% IN 2002.

The report states that the Pacific and Asia reflected the smallest decline in FDI inflows in the developing world because of China, which received a record inflow of $53-billion and became the world’s biggest host country.

Central and Eastern Europe did the best of all regions, increasing FDI inflows to a record $29-billion.

The report notes that Unctad FDI levels will stabilise in 2003 and will likely be comparable to those in 2002 for developed and developing countries, while those to Central and Eastern Europe are likely to continue to rise.

In the longer term, beginning with 2004, global flows are expected to rebound and return to an upward trend. The prospects for a future rise depend on factors at the macro-, micro- and institutional levels.