Foreign Direct Investment In China And Worldwide

3902 words - 16 pages

Topic: Outline some of the recent and most salient trends and developments with regards to foreign direct investment worldwide and critically examine the determinants of inward foreign direct investment in China.Part 1: Outline some of the recent and most salient trends and developments with regards to FDI worldwide.Since the mid 1970s the amount of foreign direct investment (FDI) has been increasing at a fast pace. The world inward stock of FDI in 2003 was 22.9 percent in comparison to a mere 4.4% in 1960 (UNCTAD-DTCI 1994; cited in Ietto-Gillies 2005). The developing countries have the highest percentage of FDI, a testimony that FDI is a relevant element for developing economies. Over the ...view middle of the document...

Consistent with prior years, in 2005, private equity firms in the United Kingdom and United States accounted for 85% of raised funds (Private Equity Intelligence, 2006 cited in UNCTAD, 2006: 18). The concentration of private equity firms in these regions has been on ongoing trend however recently, there has been growing levels of expansion into other regions of the world. In 2005, 10 percent of all private equity funds raised were spent outside Europe and North America (Private Equity Intelligence, 2006: 9; cited in UNCTAD 2006). The nature of firms that private equity funds are attracted to is illustrated by their prominence in the European financial markets and the companies in Asia that were financially distressed following the 1997 Asian financial crisis.Hedge funds are another form of FDI that like private equity firms, participates in buyout transactions. In 2005, hedge funds raised a record $1,200 billion in 2005 (UNCTAD, 2006: 18).New institutional investors from developing countries are also emerging in prominence, such as Capital Asia and Dubai International Capital based in Hong Kong and United Arab Emirates, respectively (UNCTAD, 2006: 19). These funds often utilise bank loans to finance private equity buyouts, essentially exposing the private equity funds to substantial vulnerability to the global macroeconomic environment, such as a sharp increase in interest rates.Sector AnalysisBy sector, in 2005 the primary sector has increased in importance in contrast to the declining trend in the manufacturing and services industry. The growth of the primary sector has been fuelled chiefly by the strength of the mining industry. The magnitude of its cross border M&As sales and purchases is estimated to have "rose more than six fold" (UNCTAD, 2006: 7) from 2004. The sector's share in both sales and purchases in 2005 of 20% closely mirrors the peak attained in 1987 - 1988 (Loc. cit).Figure :Sectoral breakdown of cross-boarder M&A sales, 1987-2005Source: UNCTAD, 2006:7In 2005, inward FDI has been highest in the "oil and gas, utilities, banking and real estate" (UNCTAD, 2006: 7). More significant is the emergence of the petroleum industry in receiving FDI, recording a 14% share of all cross border M&A sales (UNCTAD, 2006: 8). The petroleum, finance and telecommunications industry collectively accounted for more than one third of the total value of M&A deals in 2005 (Loc. cit).In terms of outward FDI, the petroleum and telecommunications industry although remained high ranking acquiring industries, were second best to the collective investment institutions, who in 2005, "accounted for more than 30% of total cross border M&A purchases in terms of value" (UNCTAD, 2006: 9). What is notable with the current FDI growth trends discussed above is the concentration in a few specific industries rather than broad-based industrial sectors.Region analysis: TriadRecently, the Triad (European Union, United States and Japan) share in global...

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