The UK tops foreign investment

The UK received more foreign direct investment in 2005 than any other country, according to a new OECD report Trends and Recent Developments in Foreign Direct Investment. The UK attracted US$165 billion of inward investment – a record for the UK and three times the already-high level it achieved in 2004. This was due partly to the restructuring of Royal Dutch Shell and partly to several major cross-border takeovers of UK companies such as P&O, O₂ and Allied Domecq.

The figure also reflects a relatively open, transparent and non-discriminatory business environment in the UK towards foreign investment. The report expressed concern that the rules and standards of business conduct are by no means uniform in all countries and their companies, and highlighted the growing role of non-OECD countries as outward investors.

The OECD report views investment decisions as being a balance between risk and return: countries and industries with large or fast-growing markets, low production costs and high asset valuations stock markets are attractive to investors, whereas those facing political insecurity and poor public and corporate governance are less favoured.

Foreign direct investment included in the OECD figures covers mergers and acquisitions, green field investments, reinvested earnings, cross-border loans and capital transactions. The figures are converted to US dollars based on average exchange rates, benefiting from only minor currency fluctuations between US dollars, sterling and the euro since 2004. The last time M&A activity was at comparable levels was due to a market vogue in 2001 for high-tech companies and a spate of utilities privatisations. Large international M&A transactions in 2005 were much more evenly distributed across sectors.

Overall, foreign direct investment into OECD countries jumped 27% in 2005 to US$622 billion. OECD economies are forecast to stay buoyant through 2006. The prominence of Benelux countries in both lists reflects a large amount of pass-through investment via holding companies, and should therefore be treated with caution. Excluding them, France was the biggest outward investor in 2005, mainly due to a few very large foreign corporate takeovers, including the US$ 13.9 billion takeover of Belgian power generator Electrabel by French utility company Suez.

Top 10* OECD countries (based on OECD estimates)

US outward investment fell from its customarily high levels to almost zero (US$ 9.1 billion) in 2005, almost entirely due to a one-off reduction in the rate of tax on qualifying dividends from overseas, leading to elevated distributions to US parents from foreign subsidiaries and a corresponding reduction in reinvested earnings.

Among the newer OECD member countries, the Czech Republic was very successful, achieving US$ 11 billion of inward investment, its highest-ever level and well above the norm for an economy of its size. This is partly attributable to a major cross-border takeover in the telecom sector but also reflects the role of foreign capital in its fast-increasing productive capacity.

The Benelux, Nordic and Baltic countries, together with Poland were the location for 19 large cross-border acquisitions, a relatively large number given the size of the area’s economy.

Outside the OECD area, investment in and from China continues to increase, reaching a record US$ 72 billion of inward investment and around US$ 7 billion of outward investment, showing a broadening of Chinese interests towards hi-tech industries.

A number of other countries have reviewed and tightened their national practices for cross-border mergers and acquisitions in recent years, leading to accusations of protectionism. In some cases, this reflects a post 9/11 realignment of security priorities and concerns over the need to safeguard essential services. According to the report, the industry sectors around which this has centred are: energy and natural resources; chemicals, pharmaceuticals and medical equipment; defence and heavy industries; information and communication; and the financial sector.

Other factors are also at work: governments of sluggish economies have blocked attempted takeovers by foreign enterprises in response to media and public pressure to safeguard local jobs. There has also been a reluctance to allow domestic companies to be taken over by companies controlled or subsidised by foreign governments.

As the report observes: ‘Without contesting sovereign nations’ right to regulate, there is a risk that regulatory action may sometimes exceed what is needed to safeguard essential interests and be motivated by protectionist motives. The challenge for policy makers is to find ways of safeguarding essential interests while at the same time keeping their investment regimes transparent and non-discriminatory. Failure to do so may impose considerable economic costs on the host economy. In the broader international context, it could compromise efforts to proceed towards a mutually beneficial open investment environment’.