THE UN Conference on Trade and Development (UNCTAD) on June 7 released its annual flagship investment report entitled “World Investment Report 2017: Investment and the Digital Economy.”
The 252-page report finds that investment policing is becoming more complex, divergent and uncertain. To reduce uncertainty and improve the stability of investment relations, the UNCTAD suggests a rules-based investment that is reliable, has broad international support and encourages sustainability and inclusiveness.
The report also emphasizes that the digital economy is becoming an ever-more important part of the global economy. It offers many new opportunities for inclusive and sustainable development, and comes with serious policy challenges, starting with the need to bridge the digital divide.
Global foreign direct investment (FDI) is expected to rise by 5 percent to almost $1.8 trillion in 2017 after FDI flows retreated marginally in 2016 by 2 percent to $1.75 trillion. The more optimistic projections for 2017 are attributed to higher economic growth expectations across major regions, a resumption of growth in trade and a recovery in corporate profits. However, this still puts FDI below the all-time peak of $1.9 trillion in 2007, the report said.
“The road to a full recovery for FDI remains bumpy, but we are cautiously optimistic. Although this report projects a modest increase for 2017, other factors such as the elevation of geopolitical risks and policy uncertainty may affect the scale of the upturn,” said UNCTAD Secretary-General Mukhisa Kituyi.
The new UNCTAD report reveals that in 2016, the US remained the largest recipient of FDI, attracting $391 billion in inflows (up 12 percent from the year before), followed by the UK with $254 billion, vaulting from its No. 14 position in 2015 on the back of large cross-border mergers and acquisitions deals. China was third with inflows of $134 billion, a slim decrease of 1 percent from the previous year.
Digital radically changes FDI patterns
The report emphasizes that digital multinational enterprises (MNEs), such as Internet platforms and e-commerce and digital content firms, are expanding dramatically faster than other multinationals.
Nonetheless, in the first ranking of its kind, the World Investment Report 2017 shows that three countries are home to 75 percent of the top 100 digital multinationals. More than 60 of the top 100 digital MNEs are from the US, followed by the UK and Germany.
“The digital economy has important implications for investment, and investment is critical for digital development,” said Kituyi. “Developing countries cannot be left behind. We need to create enabling policies that close the digital divide...”
In the Arab world, weak oil prices and political uncertainty continued to weigh on FDI inflows to the region. That said, FDI inflows increased by almost 19 percent, from $25.28 billion in 2015 to $31.08 billion in 2016. To put this into perspective, Arab countries absorbed only 1.4 and 1.8 percent of the world’s FDI inflows in 2015 and 2016, respectively.
The UAE ($8.9 billion), Egypt ($8.1 billion) and Saudi Arabia ($7.4 billion) represent the lion’s share of inward FDI in the region. The three countries together attracted almost 79 percent of the total FDI inflow to the Arab countries in 2016.
Robust FDI to Egypt continues to boost inflows to North Africa. FDI flows into North Africa rose by 11 percent to $14.5 billion, driven by foreign investment reforms and new gas discoveries. As in 2015, much of the growth was due to investments in Egypt, where FDI inflows increased by 17 percent, from $6.92 billion in 2015 to $8.1 billion last year.
But the impact of low oil prices on FDI activities in the region continued to be similar in key economies such as Saudi Arabia, where FDI flows declined by 8.5 percent, from $8.14 billion in 2015 to $7.45 billion in 2016.
Conflicts in countries lying at regional crossroads, such as Iraq and Syria, have interrupted traditional business links, dragging down FDI flows in most Arab economies.
Dr. Naser Al-Tamimi
The report noted that two factors stood out as major determinants of FDI inflows to Arab states. First, oil price volatility. When the global financial crisis in 2008 disrupted the oil price super-cycle, FDI flows to Arab countries had declined. The collapse of oil prices in mid-2014 accentuated the trend in 2015 and 2016.
Second, protracted political instability and regional conflicts have weighed heavily on FDI. Conflicts in countries lying at regional crossroads, such as Iraq and Syria, have interrupted traditional business links, dragging down FDI flows in most Arab economies, according to the report.
FDI outflows from Arab countries also slid by 7 percent from $34.7 billion in 2015 to $32.2 billion last year. That figure represented only 2.2 percent of the global FDI outflows, which was $1.45 trillion in 2016.
FDI flows from Kuwait declined to negative $6.3 billion from $5.4 billion in 2015, mainly due to large divestments. FDI flows from the UAE fell to $15.71 billion last year from $16.69 billion in 2015, though the UAE still accounted for about half of FDI flows from Arab states.
In contrast, there was a rise in FDI outflows from some other oil-producing and oil-exporting countries, including Qatar and Saudi Arabia, where outflows surged by 96 percent and 55 percent, respectively. In the latter, outflows reached $8 billion, a new high. Most of these outward FDI projects were related to diversification efforts of the home countries.
Looking forward, FDI to Arab states is expected to remain flat, with the positive effect of recovering oil prices offset by political and geopolitical uncertainty.
• Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He can be reached on Twitter @nasertamimi and e-mail: [email protected]