The ups and downs of cross-border investment

26 February 2024

Investment flows between regions and nations date back to the ancient empires and civilisations. But it was not until the nineteenth century, during a period of rapid globalisation and industrialisation, that modern foreign direct investment (FDI) took shape, with major western companies building factories overseas to serve national and regional market.

Technology was in the vanguard. The Singer sewing machine company of the US was Apple Corporation of the nineteenth century, the manufacturer of the world’s first mass produced, mass marketing consumer technology and, by 1912, the world’s seventh largest firm by market capitalisation. Singer products sold around the world and its manufacturing capacity followed, with one of its earliest overseas factories being built in Glasgow in 1867 to serve the UK market. 15 years later, the Bell Telephone Manufacturing Company, a US business, opened a factory in Antwerp to manufacture telephones for the European market. Ford opened its first plant outside North America in 1911 in Manchester, and rapidly became the UK’s largest carmaker.

FDI flows accelerated after the second world war as multinational corporations (MNCs) built global networks in consumer goods, finance, autos, retail, leisure and energy. The culmination of this period of globalisation occurred between the early 1980s and the early 2000s driven by new technologies, trade liberalisation and the end of the cold war. Investment in new factories and facilities surged and companies sought acquisitions overseas. In the 1990s global FDI grew by an average of 23% a year.

The pace slowed in the 2000s, with inward investment into rich countries dampened by shocks including the dotcom crash of 2001, the financial crisis in 2008 and the euro crisis of the early 2010s. This marked the beginning of a new, more turbulent era. In recent years foreign investors have had to contend with rising geopolitical tensions, the pandemic and higher interest rates. FDI has continued to grow, but investors have become more cautious, and selective.

One of the most significant shifts has been the slowing of Chinese investment into the US in the face of new US restrictions and a more troubled bilateral relation. Although Chinese ownership of US assets has risen since the turn of this century. In 2019, China accounted for just 1.4% of the entire stock of US FDI, a third of which was in real estate. In this area at least China is a small player compared to longstanding western investors, particularly the UK, Germany, Japan and the Netherlands. Since 2019 flows of Chinese investment into the US have slowed significantly.

The US remains, by a large margin, the main destination for globally mobile direct investment. About a quarter of the total world stock of FDI, worth $10.5tn, is in the US. Subsidies offered by the Biden administration for ‘green’ industries, infrastructure and semiconductors have made the US even more attractive to foreign investors.

China runs the second largest stock of FDI, worth $3.8tn. The UK is in third place, with foreign-owned assets worth $2.7tn, more than Germany, Japan, France and Italy combined. The UK is a global hub for FDI, particularly in digital technology, financial services, life sciences, and as a location for headquarters. The British auto industry has been revitalised by foreign investment in the last 40 years, with major marques including Jaguar, Mini and Rolls Royce passing into foreign ownership and new automakers, such as Toyota and Nissan, setting up in the UK.

To get a clearer picture of performance of countries in attracting FDI we examined the inward stock of FDI relative to national GDP. Using this approach smaller, open economies, run very high levels of foreign ownership – Singapore’s stock of foreign-owned assets stands at 542%, Ireland and the Netherland’s at about 270%. Among major economies, the UK tops the league with the inward FDI to GDP ratio of 88%, compared to 41% for the US, 25% for Germany and 21% for China. Despite its prowess in manufacturing and technology, and its position as the world’s third-largest economy, foreign investors have not warmed to Japan. FDI is equivalent to just 5.4% of Japanese GDP.

Foreign investment into China grew rapidly from the turn of this century. China became more attractive as a destination for FDI, and given the scale of the Chinese economy, that meant a lot of foreign-owned factories opening in China. That enthusiasm is waning, with slower Chinese growth, high US interest rates and geopolitical tensions taking a toll. Russia’s invasion of Ukraine, and the ensuing western sanctions, have highlighted the risk that future action by China against Taiwan could trigger similar measures. Last month, official Chinese data showed foreign investment into China dropped to the lowest level in 30 years in 2022.

A more difficult economic and political environment has tempered, but not blunted investors’ appetite for investing overseas. Last year investors spent $1.3bn on foreign acquisitions and greenfield developments. For all the challenges, cross-border investment remains one of the great engines of modern globalisation.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index closed the week down 0.1% at 7,706.

Economics

FT analysis of OECD data suggests that the downturn in house prices in advanced economies “has largely petered out”
Credit rating agency S&P Global Ratings upgraded its forecast for US GDP growth from 1.5% to 2.4% this year
Minutes from the US Federal Reserve’s January meeting reveal that rate-setters were wary of cutting interest rates too quickly as the “economic outlook was uncertain and that they remained highly attentive to inflation risk”
US 30-year mortgage rates rose above 7% in February as robust economic data reduced the chances of interest rate cuts
UK business output rose more than expected in February as the S&P UK PMI index rose on strong growth in the service sector. The reading has eased concerns that the recession from the second half of 2023 will extend into this year
The UK public sector recorded a smaller-than-expected surplus of £16.7bn in January, meaning that the UK chancellor still has a narrow margin for manoeuvre in the upcoming Spring Budget
UK two-year government bond yields fell below 4.6% last week after the Bank of England governor Andrew Bailey said that interest rates may be cut before inflation reaches the 2% target
UK housing sales rose by 16% in the first six weeks of 2024 compared with the same period last year, indicating a pick-up in momentum in the housing markets as interest rates are expected to be cut this year
Birth rates in England and Wales fell to a new historic low of 1.49 children per woman in 2022
The UK’s energy regulator Ofgem announced that the energy price cap will fall by 12% in April to £1,690, but is yet to reach the pre-energy crisis level of around £1,200
European gas prices fell to pre-energy crisis level due to high levels of imports of liquified natural gas, warm weather and demand reduction
The S&P PMI activity index for the euro area rose to an eight-month high driven by a recovery in France. However, the index showed the economic downturn in Germany deepening
Euro area consumer confidence rose more than expected in February as inflation fell and unemployment remained at a record low
Euro area’s annual rises in collectively negotiated wages reached 4.5% in Q4 2023, down from 4.7% in the previous quarter, the first slowdown since Q2 2022
Germany’s central bank warned that the economy is likely to contract by 0.3% in Q1 2024 due to uncertainty over government policy, recent transport strikes, cautious consumers and weak industrial demand

Business

Chipmaker Nvidia’s market capitalisation jumped by $277bn last Thursday, the largest single-day increase for a publicly traded company, after reporting a surge in revenues on soaring corporate spending on artificial intelligence
Biotech company Moderna posted a net loss of $4.7bn in 2023 as demand for its COVID-19 jab faltered
Advertising group WPP reported a 70% fall in profits last year as marketing expenditure by technology, healthcare and retail clients fell
Food and drink manufacturer Nestlé reported a 1.5% fall in sales in 2023 as inflation hit consumer demand
Electric truck maker Rivian announced a cut of 10% in its labour force due to higher interest rates, geopolitical uncertainty and slower EV take-up

lobal and political developments

Donald Trump’s 20-point victory over Nikki Haley in the South Carolina primary appears to have cleared his way to the Republican nomination
The FT reported that EU member states agreed to impose new sanctions against Russia, specifically targeting Chinese and Indian companies accused of supporting Moscow’s war effort
Hungary’s ruling party Fidesz signalled that it is willing to ratify Sweden’s membership of NATO, removing the last opposition to Stockholm’s accession to the defence bloc

And finally… the Guinness World Record stripped Bobi of the record for oldest dog in the world, after doubts over his reported age of 30 years – tail-tell signs of deceit

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