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Wednesday, June 25, 2003

Foreign Direct Investment Taking a Knock

The Economist summarises a new OECD report which shows inward flowing FDI to OECD countries could fall a further 25% to 30% this year, after falling continuously since 2000. Whatever your opinions on mergers and acquisitions activity this is surely not a sign of a growth-prone global environment.

The days when companies boldly scooped up competitors abroad, especially in now-distressed sectors like technology or telecommunications, are long over. Big mergers have now slowed to a trickle, with cross-border M&A activity reaching its lowest level this spring since the mid-1990s, according to Dealogic, a research firm. M&A bankers (those, that is, who haven’t already been laid off) have been left twiddling their thumbs.

The magnitude of the M&A drop shows up in a foreign-investment report released last week by the Organisation for Economic Co-operation and Development (OECD). Inflows of foreign direct investment (FDI) to the OECD’s 30 member countries fell by more than 20% last year. Merger activity comprises the largest chunk of FDI in rich countries (the other big bit consists of companies adding factories in foreign countries), and it fell sharply. The OECD says that in 2002 and early 2003, just eight cross-border M&A deals had values above $5 billion. At the height of the bubble, by contrast, corporate takeovers of that size were being announced almost daily.

Underlying the slump in merger activity, and FDI at large, is global uncertainty. Investing abroad means taking on the receiving country’s risk. Fears of terrorism and war, combined with weak economies in most rich countries, make such risks greater and harder to bear. Talk of deflation in America (and in Germany, where consumer prices have recently fallen) has also scared foreigners, as have corporate scandals. Chief executives are also finding it harder to persuade their shareholders and other sources of finance that mergers and takeovers make sense. In the current tough climate, most investors would prefer to see managers focus on improving the businesses they already run.

The M&A volatility has probably been felt most keenly in America and Britain, both traditional investment hot-spots. FDI inflows declined sharply last year in America (down by 77%) and Britain (down by 60%). Foreign investment in both countries is a mere shadow of what it was at the peak three years ago—in America, FDI inflows last year were a mere tenth of the amount received in 2000; in Britain, about a fifth.
Source: The Economist

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