VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí 8. -. září FDI development during the crisis from 8 till now Michal Fabuš, Miroslav Kohuťár Abstract Investments represent an important resource of country s economic growth and they form a material part of the GDP. FDI represent additional external resources that may be added to the domestic investments to ensure faster or higher GDP growth rate. The turbulence on the financial markets and global economic fall gradually influenced the development of the total flow of foreign direct investments in 8 and in the first half of. After an uninterrupted growth of foreign direct investments in the period between 3 and 7 the worldwide inflow of foreign direct investments fell by 4% in 8 to USD.67 billion from the record amount of USD.7 billion in 7. Key words Foreign direct investments, foreign capital, investments, economy growth. Introduction The foreign direct investments (FDI) are defined as long-term investments of a foreign direct investor in a company that is a resident of the economy of a state other than the one where the foreign investor s company is established. The relation of foreign direct investments consists of parent company and foreign affiliations forming the global corporations together. These investments may contribute to the solution of many long-term problems such as e.g. completing the infrastructure construction, creating new jobs, renewal and development of industry or support of the economy s stability. According to the estimates, the foreign direct investments have a double positive effect they are capable of completing the missing domestic resources needed for the performance of economic transformation and foreign companies also bring other positive secondary effects. (Ferenčíková, Dudáš, 5).. Definition of foreign direct investments According to the definition by the UN Conference on Trade and Development foreign direct investments are defined as investments based on a long-term relation to a company and reflecting permanent interest and control by the resident entity of one country (foreign investor or parent company) in the company of other country s resident. (Kordoš, 8) 3 Ing. Michal Fabuš, PhD., Vysoká škola ekonómie a manažmentu verejnej správy, Železničná 4, 8 7 Bratislava, michal.fabus@vsemvs.sk Mgr. Miroslav Kohuťár, Vysoká škola ekonómie a manažmentu verejnej správy, Železničná 4, 8 7 Bratislava, miroslav.kohutar@vsemvs.sk Ferenčíková, S., Dudáš, T.: Vplyv prílevu priamych zahraničných investícií na hospodársky rast v nových členských štátoch Európskej únie zo strednej a z východnej Európy. In: Ekonomický časopis, 53, 5, No. 3, ISSN 3-335, pg. 6 7 3 Kordoš, M.: Systém regulácie zahraničnoobchodných vzťahov USA. Scienfitic monograph of Trenčianska univerzita Alexandra Dubčeka in Trenčín, Faculty of Social and Economic Relations, TnUAD, Trenčín. 8. AH 3,3 pg. 4. ISBN 78-8-875-37-8
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí 8. -. září. Components of foreign direct investments The FDI are part of equity, reinvested profit and other capital (especially inside the company or group loans). Individual countries not always gather the data for every item separately and for this reason the submitted data about the DFI cannot be fully compared among individual countries. Especially the data about the amount of reinvested profit dependent on the resolutions of global companies is often not disclosed in many countries.. Borders of capital ownership The countries vary according to the threshold value for defining the foreign ownership of capital that they consider to be an evidence of the relation to the DFI. It represents the level of participation on the company s economic activities management. The threshold value usually used for foreign direct investments is %. Some countries do not state the threshold value, but they rely on completely different basis. In quantity terms, the impact of differences in the threshold values used is quite small considering the high share of the DFI focused on majority ownership of foreign branches. There are also other possibilities of having a share on the equity of companies by which the foreign investors may efficiently obtain a vote. These include subcontracting and manager contracts, turnkey agreements, franchising, leasing and granting of licences. For instance, the OECD considers the financial leasing between direct investors and their branches, subsidiaries or affiliated companies as current loans, i.e. these relations are included in the modified definition of the DFI. 4 At the current level of globalisation development and the existing relation of individual economies within its frame we can consider the export in fact the economy s ability to sell the domestic products on foreign markets to be one of the most important indicators of the country s economic development. (Csabay, 7). 5 3. Development of foreign direct investments during economic crisis The current global financial and economic crisis has a dampening effect on foreign direct investments (FDI). This is evidenced by the expected decrease of the foreign direct investments inflow to USD billion from USD, billion in, although a slight revival is expected in and an acceleration in. In 8 and by the beginning of the global inflow of foreign direct investments decreased after the constant growth period between 3 and 7. While the share of the DFI on the development in transforming economies in global flows of the foreign direct investments increased to 43% in 8. The development is illustrated on the Chart below. 4 According to http://www.unctad.org/templates/page.asp?intitemid=347&lang= 5 Csabay, M.: K teoretickému vymedzeniu podpory exportu. In: Ekonomický časopis, 55, 7, No. 8, ISSN 3-335, pg. 73-8
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí 8. -. září 5 Chart Development of DFI flows in the world from till 8 Development of the FDI flows in the world from till 8 (in USD billion) 5 5 3 4 5 6 7 8 3 4 5 6 7 8 Developing countries Transitive economies Developed countries World Source: own processing of data obtained at www.unctad.org/fdistatistics The falling profits and decreasing stock prices significantly deteriorate the value and possibilities of cross-border fusions and acquisitions one of the most frequently used methods of the foreign direct investments access into the developed countries and more and more frequently also to the developing countries. The falling demand for merchandise and services resulted in reviewing the investment plans by global companies including the access into abroad either by means of acquisition or fusion or green field projects. This method of investing started to fall in. The DFI originally started to fall dramatically in developed countries that recorded % decrease of their inflow, while the flows into the developing countries and transitive economies of the south-east Europe and the Commonwealth of Independent States (CIS) were still recording the growth of 7% or 6% respectively. However, by the end of 8 and by the beginning of also these groups of countries started to feel the impact of crisis on the DFI inflow. Many of these economies faced a significant decrease of the foreign direct investments inflow in. The turbulence on the financial markets and global economic decrease gradually influenced the development of the total flows of foreign direct investments in 8 and in the first half of. After the constant growth of the foreign direct investments in the period between 3 and 7 the worldwide inflow of the foreign direct investments fell by 4% in 8 to USD,67 billion from the record amount of USD,7 billion in 7. While in 8 the level of the DFI was the second highest in the history, the foreign direct investments inflow started to fall gradually in. In the first half of the foreign direct investments inflow was falling more quickly. The foreign direct investments inflow and the DFI outflow from the developed countries ended in 8, subsequently the inflow fell by % to USD 6 billion and the outflow by 7% to USD,57. The DFI inflow continued to fall after the financial crisis entered the new stage in September 8 after the fall of Lehman Brothers (one of the biggest financial institutions in the U.S.A. belonging to the group of five investment houses) and the developed economies started to fall or approached the economic recession. It is estimated that in the first
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí 8. -. září half of the DFI inflow into developed countries decreased by another 3-5% compared to the second half of 8 6. The development is illustrated in the Table below. in USD billion 3 4 5 6 7 8 Developing countries 56,883 5,4 75,35 83,4,37 3, 433,764 5,344 6,733 Transformin g economies 6,8,75,3, 3,38 3,48 54,548,866 4,36 Developed countries,7,75 55,84 44,448 36,65 44,86 63,8 7,76,46,7 World,38,675 8,43 6,675 565,6 734,8 73,3 4 Table DFI development from 8 till 8 Source: own processing of data at www.unctad.org/fdistatistics,358,6 8 6,5,78,83,67,35 8 3 On the contrary, the developing and transforming economies recorded the foreign direct investments growth in 8 at the record level for both groups, their share on the worldwide DFI inflow increased up to 37% from 7% in developing and to 7% from the original 5% in the previous year in transforming economies. The cumulated share of these two groups on the worldwide DFI volume was at the level of 43%, and it approached the historic maximum recorded in 8 and 4 which proves the growing meaning of these economies as the host countries for the foreign direct investments during the crisis, or at least in 8. However, the inflow started to fall by the end of 8 as an expression of the economic decrease on the main export markets that started to influence seriously the development of their economies. The decrease of DFI inflow into the developing and transforming economies started about a year after the decrease started in the developed countries. This reflects the time delay relating to the economic decrease and the subsequent decrease of demand on the markets in the developed countries that are important destinations for the merchandise produced in the developed countries and in the countries with transforming economies. By the end of 8 and by the beginning of all three components of the DFI inflow such as the equity, reinvested profit and other capital flows (especially loans within holdings) decreased in the developed economies. The investments into stock were falling as well as the cross-border fusions and acquisitions. Lower profits of foreign branches were reflected especially by significant decrease of the reinvested profit, especially in. The savings from the restructuring of parent companies and their headquarters were in some instances used for covering the outstanding loans of foreign branches. As a result, the net internal flows of capital in global companies were falling to the detriment of foreign branches or they were negative which led to the fall or decrease of the DFI inflow. The structure of the current decrease of the DFI inflow is similar to the fall in. This development is astonishing because bigger share on the DFI flow decrease in result of the capital investments decrease (unlike the reinvested profit and other capital flows) will probably take longer. It is because the investments into the stock are quite demanding and are made for longer period of time and are made for the purpose of production facility financing and extension. Although the DFI inflow into the developing countries is falling, these proved to be more resistant in 8 and. The main reason of that is that foreign direct investments are more of long-term nature than other capital flows. 6 data from www.unctad.org/fdistatistics
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí 8. -. září Positive and even quite high economic growth still existing in some developing countries (e.g. China and India) is the driving force against the low demand for export and low price of commodities making pressure on the foreign direct investments decrease. The global companies were not influenced by the crisis evenly. This was caused by quite a long-term ascending trend of the world economy in the recent four years and bigger strengthening of financial and competitive position of many global companies. The financial crisis and the decrease of the supplies on the market also provided them with the opportunity to make use of new markets or the opportunity to take over the former competitors. In fact, the need of consolidation of the most affected financial institutions and companies in other industries has the potential to support the transactions in the field of the DFI. 7 References [] CSABAY, M.: K teoretickému vymedzeniu podpory exportu. In: Ekonomický časopis, 55, 7, č. 8, ISSN 3-335, s. 73-8 [] DUDÁŠ, T.: Priame zahraničné investície vo svetovom hospodárstve. Bratislava: Ekonóm. 6. s.5. ISBN 8-5-3-6 [3] FABUŠ, M.: Priame zahraničné investície a ich vývoj, In: Verejná správa a regionálny rozvoj,, ročník VI, číslo, výkonný redaktor zborníka: doc. Ing. Mária Tokárová, PhD. - Bratislava: Merkury, ISSN: 337-55 - S. 4-55 [4] FERENČÍKOVÁ, S., DUDÁŠ, T.: Vplyv prílevu priamych zahraničných investícií na hospodársky rast v nových členských štátoch Európskej únie zo strednej a z východnej Európy. In: Ekonomický časopis, 53, 5, č. 3, ISSN 3-335, s. 6 7 [5] KORDOŠ, M.: Systém regulácie zahraničnoobchodných vzťahov USA. Vedecká monografia Trenčianskej univerzity Alexandra Dubčeka v Trenčíne, FSEV, TnUAD, Trenčín. 8. AH 3,3 s. 4. ISBN 78-8-875-37-8 [6] PRNO, I.: Investičná a inovačná politika, Bratislava: Merkury, 8. ISBN 78-8- 843-85-6 [7] TUHÁRSKA, E. a kol.: Investičná teória a politika..vyd Bratislava: Ekonóm. 6. s.4 ISBN 8-5-738-5 [8] VIDOVÁ, J.: Investičná politika a teória, Bratislava: Daniel NETRI. 8. s.83. ISBN 78-8-6567-7-7 [] WORLD INVESTMENT REPORT,, UN Publication, ISBN 78---775- [] www.unctad.org/fdistatistics Summary Vývoj PZI počas krízy od roku 8 do súčasnosti Investície predstavujú dôležitý zdroj ekonomického rastu krajiny a tvoria významnú časť HDP. PZI vyjadrujú dodatočné cudzie zdroje, ktoré môžeme pridať k domácim investíciám aby sme zaistili rýchlejšie, resp. väčšie tempo rastu HDP. Otrasy na finančných trhoch a globálny ekonomický pokles postupne vplýval na vývoj celkových tokov priamych zahraničných investícií v roku 8 a v prvej polovici roka. Po nepretržitom raste priamych zahraničných investícií v období rokov 3 až 7, celosvetový prílev priamych 7 WORLD INVESTMENT REPORT,, UN Publication, ISBN 78---775-
VŠB-TU Ostrava, Ekonomická fakulta, katedra Financí 8. -. září zahraničných investícií klesol o 4% v roku 8 na.67 mld. USD, z rekordnej výšky.7 mld. USD v roku 7.