U.S. Is Top Investment Destination Despite Falling Inflows

The Wall Street Journal Worldwide foreign direct investment fell less sharply than feared last year but there are few signs of a rebound this year Containerships at the Port of Los Angeles. The U.S. was the top destination for businesses looking to expand internationally last year but the inflow of capital fell as companies around the world cut down on foreign investment amid rising uncertainty and borrowing costs. Foreign investment in the U.S. fell to $285 billion in 2022 from $388 billion in 2021, mainly due to a sharp fall in foreign purchases of American companies, according to United Nations data released Wednesday. The U.S. could notch up further gains in the near future as foreign companies take advantage of the Inflation Reduction Act, which offers subsidies for investing in renewable-energy projects and producing energy from renewable sources. The U.N. said it was too early to register the effects of the legislation in the data. Globally, new overseas investments by businesses fell 12% from 2021 to $1.3 trillion, and are unlikely to rebound strongly this year given that executives are “uncertain and risk averse,” the U.N. said. This made last year the worst for foreign investment since 2009 with the exception of 2020, when the Covid-19 pandemic struck. Still, the decline was smaller than the U.N. had feared given the scale of the economic uncertainties facing businesses, including the lingering effects of the pandemic, surging food and energy prices, and the U.S.-China economic rivalry. “The prospects for international investment looked extremely gloomy last year,” said Rebeca Grynspan, secretary-general of the U.N.’s Conference on Trade and Development. “In the end, international investment flows did suffer, but proved more resilient than expected.” Developed economies in general registered a 37% drop in investment flows. The European Union in particular recorded a large withdrawal of foreign investment, but the U.N. said that measurement was “distorted” by large movements involving Luxembourg, which is used by many businesses to reduce their tax bills. Excluding Luxembourg, the U.N. said new investments in the EU rose to $197 billion from $127 billion. While still well behind the U.S., China registered its highest-ever inflow at $189 billion, an increase of 5%. Much of that increase came from European businesses. This too could change. European policy makers have become more wary of Beijing’s economic ambitions and dominance in some global supply chains. In March, European Commission President Ursula von der Leyen floated the possibility of controls on outbound investment to China. The U.N. said an increasing number of countries are screening foreign investment for potential threats to national security in a widening number of sectors. In 2022, the total number of countries rose to 37 from 35, while nine countries with existing checks broadened their scope. In 2006, only three countries screened foreign investment for security reasons. The U.N. estimated that the number of cross-border mergers and acquisitions deals withdrawn because of regulatory or political concerns increased by a third from 2021. There were other signs that some governments have become more wary of global supply chains, which were created over recent decades as businesses split production across a number of countries, often in search of lower wages or other cost savings. The U.S. and some other governments are now placing more stress on the security of the supply of key components, such as computer chips, and reducing their reliance on suppliers in potentially hostile countries, a process known as friend shoring. The U.N. said investments in industries “that face supply-chain restructuring pressures” rose in both value and number, bucking the global trend. It noted that three of the five largest announced investment projects were in semiconductors. “Reshoring, friend-shoring and nearshoring are happening,” said James Zhan, Unctad’s director of investment and enterprise. In a separate report published last month, the U.N. said there have been growing signs over recent quarters that countries are trading more with countries with which they are politically aligned, and it expects that trend to intensify. Developing economies as a whole grabbed a record share of total investment flows as they rose 4% to $916 billion. Latin America and the Caribbean recorded the largest increase, a 51% jump to $208 billion, reflecting high demand for commodities and critical minerals. By contrast, Russia lost $19 billion of foreign investment as businesses withdrew from the country following its invasion of Ukraine. Start 14 Days Free Trial

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