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World Investment Report 2010: Investing in a low-carbon economy

Low-carbon FDI in areas such as renewables, recycling and low-carbon technology manufacturing is already large (some $90 billion in 2009), but its potential is huge. This is one of the conclusions of UNCTAD’s 2010 World Investment Report, released last month. The report is the most recent in an annual series exploring the latest trends and prospects for FDI flows and recent policy changes, and also offers a deeper analysis of a topically relevant issue of the day.

This year’s report attempts to dive into the hot topic of foreign investment and climate change. It’s definitely worth checking out for anyone interested in the climate change agenda. The report is also supported by the world’s most authoritative database of FDI statistics – an excellent source of data on FDI stocks and flows for anyone who is interested.

But if you do not have the time to bury your head in the nearly 200-page report or database, here are some of the highlights from my reading:

  • FDI inflows fell 37 percent from 2008 to 2009 to $1.114 trillion (see Figure I.13 below). However, this amount still represents the 5th highest amount of cross border investment flows since data began to be recorded. It accounts for a whopping 11% of global GDP output and over 80 million jobs. In addition early signs from the beginning of 2010 suggest there will be modest and uneven recovery in 2010 with global inflows expected to reach $1.2 trillion in 2010, $1.3-1.5 trillion in 2011 and head towards $1.6-2.0 trillion by 2012.

Global fdi flows

  • The drop off in 2009 in cross-border mergers and acquisitions (M&A) of 34 percent was more pronounced than the rather moderate drop of 15 percent in new Greenfield FDI projects (of which there were 14,000). However, the recovery in cross-border M&A in 2010 is also expected to be more pronounced, as valuations will be relatively cheap and many companies may move towards increased consolidation.
  • Developing and transition economies took in almost half (~49%) of global FDI inflows and approximately one quarter of FDI outflows. Within developing and transition economies it should be little or no surprise that the BRICs – Brazil, Russia, India and China took the largest share of FDI inflows (nearly 41%) while the new emerging market category labeled by HSBC CEO Michael Geoghegan as the CIVETS – Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa took a much smaller share (just under 9%).
  • Around 40 percent of low-carbon emission FDI projects by value during 2003-2009 were in developing countries. Yet there is potential for much more “green” FDI to flow into developing economies and the role of the private sector will be critical in tackling climate change by expanding its presence in those countries. Recipient countries will need to do more by adopting market-creating policies that can foster demand for new low-carbon products and services.
  • Cross-border FDI into services represented more than half of all FDI flows in 2009, which continues the trend of services and primary sectors continuing to capture an increasing share of total FDI. Manufacturing FDI continues to decrease in importance overtime.
  • On the policy side, in 2009 there were 102 new national policy measures introduced which effect FDI. 70 percent of these represented policies that further liberalized regimes towards new FDI. However, 30 percent introduced measures that were more restrictive to FDI, signaling a new trend that governments may be using regulation to pursue broader policy objectives. A big shift from earlier in the decade where 90 percent or more of all policy changes were towards liberalization.     

These were some of the highlights which jumped out at me; check out the report if you want to learn more.

Comments

The focus of the report on low carbon investment is very welcome, as this is an issue that policymakers are still getting to grips with. The message in the report is consistent with findings from our own work on low carbon growth, which confirms that private investment will be absolutely key to achieving low carbon growth, but governments need to put in place the right policy framework and appropriate incentives to ensure this happens. Our report examines the low carbon growth strategies that have been put in place by a number of both developed and developing countries and asks to what extent the traditional growth agenda needs to be adapted. In another report, we examine the potential impact of international mitigation efforts and carbon markets on the growth prospects in developing countries and identify a range of threats and opportunities. This is an area where many developing country governments will need assistance to understand how they can take advantage of any opportunities, and manage any threats to their growth prospects, that may arise from mitigation by other countries. Karen Ellis Head of the Business & Development Programme Overseas Development Institute, London

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