Protectionism can undermine FDI growth in Russia, China – Analysts

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Direct foreign investment is likely to surge in Russia and China in the next few years, although growth could be undermined by protectionist sentiment in emerging and developed markets, according to a survey on foreign direct investment (FDI) undertaken by the Economist Intelligence Unit (EIU) and Columbia University. The analysts expect global FDI to recover from a deep slump and start growing fast from 2009.

The EIU has partnered with Columbia University to release World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk to analyze current macroeconomic, financial and political risks worldwide and forecasts FDI flow to 2011.

Global FDI recovered strongly between 2004 and 2006 after a three-year decline. In 2003, FDI dropped by 8.8% while in 2004 it rose 29.6%. In 2007, growth continued at a slower rate of 10.5%, to $1.474 trillion, against 37.4% in 2006. Authors of the research predict investments to fall 4.6%, to $1.406 billion. This will accompany slowdown in activity in mergers and acquisitions (M&As), which account for the bulk of FDI, due to volatility in financial markets, according to the report. The Global Legal Group estimates that the M&A market may lose up to 70% this year.

“The slowdown in M&As, and FDI is likely to be a soft landing, rather than a hard crush like the one that occurred in 2001,” the report says. In 2009, FDI is expected to return to steady growth of an average 4.5% to reach $1.604 trillion by 2011.

“The slowdown in the FDI market began in spring 2001, driven primarily by the collapse of the dot.com bubble and slowdown in telecom sectors,” says Roel Spee, director of PwC Consulting-PLI. The projected FDI growth is to be based on better business environments worldwide, technological change, the search for relatively cheap skills and lower-cost countries to operate in, the researchers say in the report which surveyed 450 executives in global companies.

The EIU expects the US to remain the main recipient of FDI, annually accounting for 17% of the world total, or an average $250.9 billion, for 2007-2011. Great Britain comes in second with $112.9 billion (7.5% of global FDI), China is third with $86.8 billion (5.8%), followed by France with $78.2 billion (5.2%). The report ranks Russia 13th among 86 countries with the largest anticipated FDI flows. Russia, with $31.4 billion (2.1% of global FDI), follows Australia with $37 billion and but outdoes Brazil at $27.5 billion.

The report writers expect Russia to become the second-largest emerging economy after China in terms of FDI flow. Investors are likely to be attracted by Russia’s large and dynamic market and high returns on investments compared to other leading emerging markets Still, the US researchers give a more pessimistic prognosis than the Russian Economic Development Ministry. The report says risks in Russia are still high. Russia is still vulnerable to a decline in international commodity prices. Manufacturing will be “adversely affected by real ruble appreciation.” Many negative features of the business will persist, including inefficient bureaucracy and courts.

The growing risk of protectionism is to become the chief constraining factor to FDI flows in Russia and other countries, according to the survey. “The risk of protectionism is now greater, the global geopolitical climate appears more threatening and the outlook for securing a stable and cooperative international trading and investment environment is worse than in the recent years. However, growing opportunities will make up for political risks.”

The protectionism issue topped the agenda at the Summer Davos meeting in Dalian. Almost all speakers had to admit that a new wave of protectionism is inevitable. Merrill Lynch Vice Chairman Kevan Watts compared the current situation to that of the mid-1970s. “The problem with investments of state-owned companies by third countries is similar to fears in Thatcher’s Britain when the whole country was afraid that a Kuwaiti state fund would buy BP,” he said. “Sovereign funds are not about business only. We oppose any restrictions on their investments, but we must also understand those who press for the curbs.” (kommersant.com)

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