Will FDI be Resilient in this Crisis?

Although FDI flows have tended to remain resilient during previous crises, they may not behave in a similar fashion during the current crisis. Why? In past crises, the stability of FDI flows was significantly associated with an increase in mergers and acquisitions (M&A), reflecting “fire-sale FDI”. In the present crisis, by contrast, M&A activity decreased significantly in the last quarter of 2008, and this trend may continue as long as the global crisis constrain the purchasing ability of foreign (acquiring) firms. These developments further illustrate that the nature of the current crisis differs considerably from previous ones, suggesting that certain key lessons from past crisis lessons might not apply in the current context.

The outlook for private capital flows to emerging market economies, and especially to Latin America, has deteriorated substantially in recent months. Net flows to the region are expected to decline to US$ 43 billion in 2009, down from US$ 89 billion in 2008. This implies a decline of approximately 75% from the record net flows in 2007 —US$ 183.6 billion (IIF, 2009). While all components of net capital flows are projected to decline, the largest drop is expected on net private debt flows —an estimated decline of US$ 40 billion in 2009.1