Real Estate News – Poor nations push investment boom

There has been growing evidence of a shift in global business power, with foreign investment from developing countries now a major factor in the world economy.

In its latest report, the United Nations Conference on Trade and Development (Unctad) has confirmed the trend that has prompted speculation of billion dollar takeovers in Europe by firms including Indian steelmaker Tata.

According to Unctad, foreign direct investment from developing countries and transition economies, such as Russia and the former Soviet Union, rose 5% to $133bn (£70bn) in 2005 - with more and more firms in developing nations flexing their muscles and investing overseas.

And its not just one-way traffic.

Foreign investment is also flowing into developing countries, with $335bn - about one-third of the total - moving into poorer nations, far more than is provided by official aid flows.

Unctad estimates that investment to developing countries has nearly doubled in two years, from $175bn in 2003.

The boom is being fed by rapid economic growth, especially in China and India, high prices for raw materials, and the increasing liberalisation of the economy in many developing countries, which has made investment easier, it said.

As a result, it has been a bumper year for foreign investment, which has now recovered sharply from the slowdown which began in 2001.

Total FDI flows rose 29% to $916bn, driven by cross-border mergers in rich countries, Unctad said.

Highly concentrated

Overall, companies in developing countries now own $1.4 trillion in assets abroad, up from just $148bn in 1990.

These assets are highly concentrated, with just a few third world countries and a few companies owning a large percentage of these assets.

The biggest share is held by China, which accounts for one-third of the total.

Off-shore financial centres like the British Virgin Islands and Singapore are also important investors.

But there has been a sharp rise in overseas investment by countries rich in natural resources, such as Russia and South Africa, Unctad said.

Russia, for example, has invested widely in South-East Europe and the former Commonwealth of Independent States (CIS) members, not only in oil, gas and metals mining, but also in telecoms.

And direct investment doubled from oil-exporting states in West Asia such as Kuwait, Saudi Arabia and the UAE to $16bn in 2005, compared with $7bn in 2004.

However, the overall pattern over the past decade has the rise of Asia as a source of investment, overtaking Latin America, which has suffered a series of economic crises.

Sectors and companies

Developing countries have been increasing their investment in the service sector rather than manufacturing or primary production like mining or oil extraction, Unctad said.

These include projects in real estate, telecommunications and financial services.

In terms of manufacturing, the most important sectors are electronics, minerals, and rubber and plastics.

And much of developing country foreign direct investment goes to other countries in the same region, with the inter-relationships strongest in Asia.

Africa is growing in importance, Unctad said, and in terms of proportion of investment, 28% of its FDI comes from developing countries, twice the world average.

These trends can also been seen by looking at the biggest companies in the developing world in terms of foreign assets.

Out of the top 100 leading firms in developing countries, 35 are from China or Hong Kong, and 15 from Taiwan, Unctad said.

Among the leading outward investors are the Malaysian and Venezuelan oil companies, two Korean electronics companies, and Singapore's leading telecoms company.

However, four of the top 10 are Chinese-owned, including Hutchison Whampoa (which also has large telecoms interests), Jardine Matheson, CITEC and China Ocean Shipping.

Overall, the top 50 developing country transnational companies own $1.1 trillion in assets (of which $336bn are overseas), employ 3.3 million people, and have sales $738bn per year.

Inward flows

The flow of money to developing countries has also been increasing, with large transnational corporations increasingly finding them attractive investment destinations.

Again, such flows have been concentrated in a few countries and a few regions, with Asia receiving the bulk of foreign direct investment.

China continued to be the largest recipient of FDI, with $72bn in 2005, followed by Hong Kong with $36bn and Singapore with $20bn.

The top five developing countries (which also include Mexico and Brazil) accounted for nearly half of all foreign investment.

But there was strong growth in investment flows to South Asia, with a rise of 21% to India, 50% to Bangladesh, and 95% to Pakistan.

The Asian region was also attracting an increasing proportion of hi-tech and service sector investments.

Africa also had a proportionately large increase in investment, with $31bn invested in 2005, compared with $17bn the previous year, driven by higher commodity and oil prices.

But Africa still represented only 3% of the world total of foreign direct investment, Unctad said.

This is a problem for the world economy, whose development has still proven to be highly uneven, even though companies from the south have tended to invest more in developing countries.

However, as the Unctad report notes, "the rise of transnational companies from developing economies is part of a profound shift in the world economy."

In other words, rich countries are facing a shrinking share of global growth, trade and investment, while the rising economic power of Asia is now the central fact in the world political economy.

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