North, South, East and Invest
The World Investment Report for this year has been released by UNCTAD. I am always a little wary of Foreign Direct Investment (FDI) figures. Indian figures, for example, only count FDI by Indian companies that require foreign exchange released by the central bank, the Reserve Bank of India. But if an Indian firm like Tata Motors raises money in the city of London and uses it to invest in Mozambique, this won’t register in Indian books.
The reverse is also true. South Korean brands are all over India, but the FDI figures are small. This is because Samsung and the like finance a lot of their investment by issuing shares and bonds on the Indan stockmarket.
Comparing two different assessments of Indian FDI in Africa, I found the figure stretched between $ 40 billion to $ 100 billion depending on the index used.
But reports can tell you FDI trends. My takeaways:
One, safety is overriding. FDI to developing countries grew, but at about half the rate of FDI to the developed world. And this despite the eurozone crisis and the slowdown in the US. Returns right now are less important than security.
Multinationals showed similarly caution, racking up huge cash reserves and putting them in the bank. The report estmates MNCs have $ 500 billion in investable funds. But won’t invest.
Two, global inflation has meant companies have focussed on primary sector investments, especially in resources. So things like mining have gone from being ugly ducklings to much desired swans. Services investments across borders are no longer so attractive and manufacturing is slumping. Not too good for India which is not the best place for investing in primary sector stuff. But extractive industry investment to South Asia is not doing too badly, says the report.
Three, India doesn’t have an FDI problem. It’s not so massive a flow, but it is holding steady. But it does have a current account deficit problem which is really bad. But it is the trade deficit and the outflow of foreign institutional investors that is stressing the country’s foreign exchange reserves. Since New Delhi can’t do much about the latter two, it is trying to plug the hole with FDI and remittances.