Foreign direct investment inflows to Japan turned negative in 2006 for the first time since 1989, affected by divestments by large transnational companies, including Vodafone Group PLC, according to a U.N. development agency.
The sluggish result was in contrast to a surge in FDI inflows to other advanced economies amid an increasing number of cross-border mergers and acquisitions, as well as a steady uptrend in other part of Asia, including China, the U.N. Conference on Trade and Development said in its annual report to be released Wednesday.
FDI inflows to Japan fell to minus $6.5 billion last year on a net basis, after an inflow of $2.8 billion in 2005.
Although $2.3 billion in earnings was reinvested in Japan, it was overwhelmed by $8.6 billion in net equity unloading, according to UNCTAD’s World Investment Report 2007.
UNCTAD said the outcome reflected large-scale selloffs by foreign companies of their local affiliates to Japanese firms, citing Vodafone’s withdrawal from the mobile phone market. The British operator sold its Japan business to Softbank Corp.
The U.N. agency also pointed to large disinvestment by General Motors Corp. of the U.S. as a factor affecting Japan’s FDI figures. GM sold the bulk of its Suzuki Motor Corp. shares to lower its stake in the minicar maker.
In assessing the Japanese economy, UNCTAD said, “Economic expansion was still hampered by deflationary pressures and low productivity growth in nontradable goods and services.
“The decline in FDI inflows made it impossible to achieve the ambitious target to double Japan’s inward FDI stock by the end of 2006,” it said.
The sluggishness came in spite of a robust global investment trend.
FDI inflows jumped 38 percent around the world in 2006 from the previous year to $1.306 trillion for the third consecutive year of growth.
The growth was a result of “strong economic performance in many parts of the world,” with inflows increasing in all three categories of economies — developed, developing countries and the “transition economies” of Southeast Europe and the Commonwealth of Independent States, or former Soviet republics, the report says.
“The rise in global FDI flows was partly driven by increasing corporate profits worldwide and resulting higher stock prices that raised the value of cross-border mergers and acquisitions,” it adds. “These transactions were widely spread across regions and sectors.”
In North America, the number of cross-border M&As almost doubled as the mining sector led the way. In Europe, meanwhile, Britain was the main target country, with Spanish companies particularly active in acquisitions.
FDI inflows to developed countries surged 45 percent to $857 billion, with those to the United States marking a strong rebound to $175 billion to recover its position as the world’s largest single FDI host country.
Britain, although recording declines, came second on the list of leading recipients, followed by France as the European Union, whose 25 members include the two nations, posted 9 percent growth to $531 billion.
Upward momentum was maintained in Asia.
FDI inflows to South, East and Southeast Asia rose 19 percent to a record $200 billion. China retained its position as the largest FDI recipient in the region.
Inflows to mainland China alone were 4 percent lower at $69 billion for the first decline in seven years, affected primarily by reduced investments in the financial services industry. But Hong Kong attracted $43 billion.
Singapore posted a record $24 billion and India posted $17 billion.