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Foreign Direct Investment Falls Sharply In 2009

A new report says Foreign Direct Investment (FDI) fell by nearly 40 percent from $1.7 trillion in 2008 to a little over $1 trillion in 2009. The report by the Geneva-based U.N. Conference on Trade and Development or UNCTAD, sees a moderate recovery in 2010.

The report finds declines in all regions of the world. It notes developed countries experienced a severe fall in FDI flows in 2008 and the dramatic decline continued in 2009, by a further 41 percent.

U.N. Economists says the situation, in many ways, is probably worse for developing and transition economies. UNCTAD Director of the Division on Investment and Enterprise James Zhan says FDI flows to these countries reached historical highs in 2008.

But, he says, they declined by 35 and 39 percent respectively in 2009 as the impact of the global financial and economic crisis unfolded. "In Africa, we have seen a fall of roughly 36 percent of FDI flows. And, this was after the peak year of 2008 for Africa. And, such declining is a matter of concern for the international community and for developing agencies like us as we have seen that overall that FDI accounts for 29 percent of the total capital formation for the African continent," he said.

Furthermore, Zahn says FDI flows to Africa's 33 least-developed countries suffered a major decrease last year due to a lull in the global demand for commodities.

The report finds the upward trend that lasted in Asia for the past six years came to an end. It says the region experienced its worst downturn since the Asian financial crisis of the late 1990s.

It says Latin America and the Caribbean also put in a poor showing with a 41 percent decrease in foreign direct investment.

Zahn says foreign direct investment is vulnerable to cyclical changes. "Like automobiles, like some luxury goods related production, they have gone down drastically. And with regard to those less prone to cyclical factors, like pharmaceuticals, agriculture, natural resources, the decline is less. But, it does not mean there is no decline, but the decline is less. And, that applies to both developed and developing countries," he said.

The report says the world's six largest FDI recipients in 2009 are the United States, China, France, Russia, the Netherlands and Hong Kong. All experienced sharp foreign direct investment declines, except for the Netherlands and China,

UNCTAD says the overall environment for international investment is slowly improving. As a consequence, it expects global FDI flows will rebound modestly in 2010.

The economists say improving conditions will ultimately encourage companies to invest more in foreign countries this year, prompting a stronger recovery in 2011.