The extent of Chinese FDI into European markets was also distorted by the delayed completion of ChemChina's $43bn takeover of Swiss agribusiness giant Syngenta, although the level of inward investment improved in 19 of the 32 European economies, against 14 in 2016. These inflows were at odds with the general trend last year, with global flows of FDI down by 27 per cent based on figures from the United Nations Conference on Trade and Development (UNCTAD). However, much of the decline was linked to significant falls in activity in both the UK and the US economies, albeit on the back of strong comparators in the previous year.
FDI is largely comprised of cross-border M&A and ‘greenfield’ investments in start-up projects abroad, thereby providing a pointer to the development of corporate supply chains and future trade patterns. The bad news from the UN is that the value of global greenfield projects was down by a third to $571bn, reflecting a sharp fall-away in activity in developing economies. North American greenfield activity was up 53 per cent and that’s before the Trump administration’s infrastructure bills have made their way through Congress.
What FDI flows tell us about the trajectory of equity markets is open to conjecture, but separate analysis UNCTAD suggests that flows outside the US will come under further pressure this year and next. The UN body’s Global Investment Trends Monitor floats the proposition that Donald Trump’s 'Tax Cuts and Jobs Act' could result in the repatriation of up to $2 trillion in overseas investment.
A change to the tax regime for US multinationals will see a shift from a system that bases the tax charge on profits derived globally, in favour of a territorial system, which taxes only those profits earned at home. Under the old system, tax liabilities on foreign profits became payable upon repatriation to the US, providing an incentive for US multinationals to keep funds locked up in foreign domiciles. It’s thought that up to $3.2 trillion has been squirrelled away abroad. How much of this is likely to make its way back home? The last piece of legislation that resulted in a large-scale repatriation of overseas funds was the 2005 Homeland Investment Act, which led to US companies returning around two-thirds of the aggregate amount held abroad.
Although less advanced economies have emerged as important sources of FDI, the UNCTAD analysis points out that “almost half of global investment stock is either located in the United States or owned by US multinationals”, so it’s easy to appreciate why repatriation on this scale could have a profound impact on the outward FDI position of the US “from the current $6.4 trillion to possibly as low as $4.5 trillion, with inverse consequences for inward FDI stocks in other countries”.
