Foreign Direct Investment Flows Indicative of Growth Opportunities

The foreign direct investment [FDI] inflows to and outflows from a country may be useful indicators of economic health and investment appeal. Countries with major inflows probably represent growth opportunities. Countries with major outflows probably represent created wealth, or strategic positioning, or less appealing home country investments. Inflows are probably clearer indications of what is going on than outflows.

The United Nations Conference on Trade and Development published a report on FDI and made these excerpted summary statements in their “World Investment Report 2006″:

Global foreign direct investment [FDI] inflows rose substantially in 2005 … spurred by cross-border mergers and acquisitions.

… Global FDI inflows were 29% higher than in 2004 - a total of $916 billion. Flows to developing countries in 2005 rose by 22% to reach a record high of $334 billion. Developed countries also saw increased flows. They saw a rise of 37% to $542 billion.

… Among developing regions, the highest growth rate in inward FDI was seen in West Asia (85%) which received record inflows of $34 billion. The second highest growth was in Africa which saw a 78% increase to $31 billion. FDI inflows in the 50 least developed countries also recorded a historic high of US$10 billion.

Higher prices for many commodities have further stimulated FDI in developing countries rich in natural resources. … The most notable growth in developing-country FDI outflows was from China and West Asia.

A key driver of Chinese outward FDI is the country’s growing demand for natural resources, as suggested by its investment projects in this sector in Latin America and Africa. … emergence of developing countries and the transition economies of South-East Europe and the CIS as significant outward investors …

That same UNCTAD report ranked countries by the magnitude of FDI inflows and outflows, as shown in the chart below:

We excluded money center countries such as Bermuda and British Virgin Islands in the belief that they are intermediary money processing countries and that their flows are not indicative off the local economy.

Summarizing the data by developed countries (EFA) and emerging countries (iShares MSCI Emerging Markets Index (EEM) and Vanguard Emerging Markets ETF (VWO)) and South-East Europe and CIS (Russia (RSX) and former satellites), money flows on a percentage basis came and went as shown in this chart:

A more meaningful analysis would compare the actual size of the FDI flows to the GDP of each country. If we can obtain the FDI data, instead of the rankings, we will publish the ratios of FDI to GDP in a follow-up article.

For example, we have expressed a current preference for Brazil (EWZ) over China (FXI). The fact that China received far more FDI inflow than Brazil may or may not look the same when the amounts of the inflows are divided by the GDP of each country. Let’s see what the data says when we get it.

Disclosure: Author owns EFA, VWO, and EWZ