EU plays big in FDI

EU member states more than tripled their foreign direct investments (FDI) in non-EU countries in 2011 with outflows of €369.9bn, reversing a two-year decline, though the amount is still below that of 2008 when FDI outflows reached €383.5bn.  This makes the EU a major source of investment for the rest of the world.

On the other hand, other countries see the EU as an attractive place to invest in.  In fact, in 2011 inward FDI more than doubled to reach €225.3bn, almost matching the 2009 figure when non-EU countries invested €233.6bn in the EU27.

Flows of FDI fluctuate considerably from one year to the next, partly as a function of economic fortunes. FDI flows generally increase during times of rapid economic growth, while disinvestment is more likely during periods of recession as businesses are more likely to focus on core activities in their domestic market.

The preferred partner in FDI flows, whether inward or outward, was the United States.  The US invested just under €115bn in the EU in 2011, whereas the EU invested almost €111bn in the US.  Both figures were a huge increase on the 2010 amounts.   The scale of these FDI flows shows the close economic ties between the USA and the EU.  Switzerland is the second-highest source of FDI for the EU and also for FDI by the EU.

The flight of capital from the EU to offshore financial centres accelerated again in 2011, reaching almost €59bn, after a lull in 2010.  The Eurozone crisis no doubt contributed to this rush for safety.

The Eurostat statistics also show some €0.1bn of foreign direct investment from non-EU countries in Malta, but no outflows from Malta to non-EU countries.  The latter, however, is because absolute values of less than €50m are not reported.

Foreign direct investment provides a major source of capital which brings with it up-to-date technology. It would be difficult to generate this capital through domestic savings, and even if it were not, it would still be difficult to import the necessary technology from abroad, since the transfer of technology to firms with no previous experience of using it is difficult, risky, and expensive.

Over a long period of time FDI creates many benefits, including transfers of general knowledge and of specific technologies in production and distribution, industrial upgrading, work experience for the labour force, the introduction of modern management and accounting methods, the establishment of finance-related and trading networks, and the upgrading of telecommunications services.

FDI in services affects the host country's competitiveness by raising the productivity of capital and enabling the host country to attract new capital on favourable terms. It also creates services that can be used as strategic inputs in the traditional export sector to expand the volume of trade and to upgrade production through product and process innovation.