The End of an Era for Foreign Investment?
For much of the late 20thand early 21stcentury, soaring levels of foreign investment were a key driver of global economic growth as investment flowed into both developed economies and emerging markets at a very high rate. In the last two decades of the 20thcentury, foreign investment expanded at an average rate of 30% per year. While growth slowed in the between 2000 and 2011, foreign investment growth still averaged 17% per year during this period, with an increasing amount of foreign investment going into emerging markets and high-tech industries and services.
However, since 2012, foreign investment levels have essentially stagnated, with foreign investment actually declining in five of the past six years. To many, this indicates that business and investor confidence levels are much lower than other indicators suggest, as foreign investment growth remains a very reliable measurement of confidence among businesses and investors. This has raised concerns that the three-decade period of rapid foreign investment growth is over and that we have entered into a period of lower levels of foreign investment as economic growth slows and protectionism increases. Here is a look at some of the trends that are impacting foreign investment today.
The United States: The United States remains the world’s leading recipient of foreign investment by a wide margin, having received $4 trillion in foreign investment since 2000 (and $1.6 trillion over the past five years alone). This is due to the fact that the United States remains the world’s largest market for goods and services, with US consumers continuing to have higher levels of purchasing power than those of any other large economy. Furthermore, foreign investment has continued to pour into the high-tech industries and services in which the US remains the world leader, while many investors continue to view the US as the leading save haven for investment. Nevertheless, rising protectionist sentiment, particularly when it comes to investments in sensitive sectors of the economy, has raised fears that foreign investment levels could fall in the near future. Foreign investment inflows in the US did fall in the first half of 2018, before rebounding in the second half of the year.
China: China has emerged as the world’s second leading destination for foreign investment, with that country receiving $1.7 trillion in foreign investment since 2000 ($658 billion over the past five years). If you combine Hong Kong’s foreign investment inflows with China, than the country has received 80% of the level of foreign investment as the United States in recent years and more than four times as much as any other country. Earlier investment had focused on China’s vast manufacturing sector, but as Chinese consumers have become wealthier, an increasing amount of foreign investment in China has been aimed at providing goods and services for the Chinese domestic market. However, China’s recent trade war with the United States and growing concerns about China’s economic policies have raised concerns that foreign investment growth in China could slow sharply. Nevertheless, foreign investment in China is likely to continue to remain quite high for the foreseeable future.
Europe: Europe is another important destination for foreign investment, although foreign investment inflows into Europe have grown at a much lower rate than in the US or China. Much of the foreign investment that has gone to Europe in recent years has been focused on the region’s low-tax centers such as the Netherlands, Ireland and Luxembourg. In the region’s larger economies, foreign investment levels have actually fallen, with Germany, France, Italy and Spain all recording much lower levels of foreign investment in recent years. Likewise, the United Kingdom had been the region’s leading recipient of foreign investment, but uncertainty over Brexit has led to a major fall in foreign investment over the past two years. With economic growth in Europe forecast to be quite subdued in the coming years, and with protectionist sentiment also on the rise in this region, foreign investment levels are expected to trend downwards in Europe.
Tax Havens: In recent years, tax havens and other low-tax centers have managed to record much higher levels of foreign investment, typically at the expense of more traditional recipients of foreign investment. For example, the Caribbean tax havens of the British Virgin Islands and the Cayman Islands have received a combined $464 billion in foreign investment over the past five years, more than any other country in the world outside of the United States and China. Likewise, three tax avoidance centers in Europe (the Netherlands, Ireland and Luxembourg), received a total of $758 billion in foreign investment over the past five years, seven times more foreign investment than Germany received over the same period. This dramatic shift in foreign investment to tax havens and low-tax centers has led to calls for a crackdown on the flow of investment to such economies, one that, if enacted, could dramatically shake up foreign investment flows in the years ahead. In fact, as global economic growth slows, this could emerge as a highly contentious issue in the years ahead.
Rising Barriers to Investment: Most of the focus on the rising level of protectionism in the world has been on its impact on global trade. However, protectionism is also having an increasing impact on foreign investment, as more and more countries are calling for a restriction on foreign investment in key sectors of their economies. This is evident in recent efforts by many countries to declare certain sectors of their economies off-limits to foreign investment in order to protect domestic businesses or jobs, or to allow fledgling domestic industries to grow. Meanwhile, foreign investment from China has come under increasing scrutiny in many areas of the world as China has emerged as a leading source of foreign investment in recent years. Should these barriers proliferate, foreign investment levels could fall significantly in the coming years and their impact is already being felt today in many countries and in many sectors of the global economy.
At many points in history, rising levels of foreign investment have proven to be a leading driver of global economic growth. This includes the rapid economic growth that was achieved in the 1990s and early 2000s, much of which was driven by the newly-found inter-connectivity of the world’s leading economies that was facilitated by the dramatic increase in foreign investment levels during that period. This helped raise living standards for billions of people around the world, at least for a time. Now, a backlash has emerged in many traditional economic centers, as people in these countries have grown angry at the shift in foreign investment to emerging markets and tax havens. As the middle and lower classes in many of these traditional economic centers suffer from these shifts, support for restrictions on foreign investment is growing, just as it is for restrictions on trade. As support for protectionism rises, and business and investment confidence falls, there is a strong possibility that foreign investment levels could fall precipitously in the near-future. In fact, we may be at the end of the era of rapid foreign investment growth, a development that could have massive repercussions for the global economy in the years and decades ahead.