China Trumps U.S. for Foreign Investment
Move is Part of Longer-Term Switch Toward Investment in Developing Economies
McDonald's and Starbucks signs in Shenzhen, China, in August 2014. China became the world’s top destination for foreign investment last year. ENLARGE
McDonald's and Starbucks signs in Shenzhen, China, in August 2014. China became the world’s top destination for foreign investment last year. PHOTO: BLOOMBERG NEWS
By PAUL HANNON
Updated Jan. 29, 2015 5:09 p.m. ET

China became the world’s top destination for foreign direct investment in 2014, edging the U.S. out of that position for the first time since 2003, according to figures released Thursday by the United Nations Conference on Trade and Development.

Foreign businesses invested $127.6 billion in China, up from $123.9 billion in 2013, while their investments in the U.S. fell to $86 billion from $230.8 billion, Unctad said. The decline contributed to the U.S. slipping to third among all recipients of such investment, behind also Hong Kong.

China’s elevation is part of a longer-term trend in foreign investment away from developed and toward developing economies, which last year attracted 56% of all overseas investments by businesses, up from 52% in 2013 and double their share before the financial crisis of 2008.

The change comes after years in which the country has been gaining ground as an FDI destination, as its economy has expanded to become the world’s second largest.

“China has been steady with modest growth over the past few years, and it is expected to continue,” said James Zhan, director for investment and enterprise at Unctad. “There have been structural changes in inflows to China, from manufacturing toward services, and from labor-intensive to tech-intensive.”

But China might not have displaced the U.S. in 2014 were it not for Verizon’s purchase of $130 billion worth of shares in a joint venture from Vodafone of the U.K. The transaction counted as a reduction in foreign investment in the U.S. And with its economy set to grow more rapidly than most other developed economies, the U.S. once again could become the leading destination.

The U.S. was the only developed economy among the top five recipients of foreign investment.

Overall, overseas investments by businesses fell 8% from 2013 to $1.26 trillion, the lowest level since 2009, when the global economy was in recession following the onset of the financial crisis.

The continued weakness in foreign investment underscores the long-lasting nature of the economic damage caused by the financial crisis, as well as rising geopolitical tensions. Foreign investment in Russia collapsed in 2014 following the country’s March annexation of Ukraine’s Crimea region.

“Companies are still not yet in the mood and mode for expansion,” said Mr. Zhan.

Unctad said it doesn’t expect a significant recovery in foreign investment this year.

“The fragility of the world economy, with growth tempered by hesitant consumer demand, volatility in currency markets and geopolitical instability will act as a deterrent for investors,” Unctad said. “The decline in commodity prices will also lower investments in the oil and gas and other commodity industries.”

The U.S. wasn't alone among developed economies in suffering a decline in foreign investment during 2014. With the eurozone economy trapped in a long slump, businesses cut their investments in Germany by $2.1 billion and their investments in France by $6.9 billion. As the U.K. returned to rapid economic growth, foreign investment rose to $61 billion, making it the largest European destination for foreign investment.

ENLARGE
While developing countries as a whole attracted an increased share of total investment, some regions fared better than others. Asia led the way, with a 15% rise in foreign investment to an all-time high of $492 billion. By contrast, foreign investment in Latin America fell 19% to $153 billion after four years of increase, while foreign investment in Africa fell 3% to $55 billion.

But the region that suffered the largest decline outside the U.S. was Eastern Europe and the former Soviet Union, known by the United Nations as the “transition economies.” Concerns about the conflict in eastern Ukraine and Western sanctions against Russia contributed to a halving of foreign investment to $45 billion. Foreign investment in Russia alone fell 70%, while foreign businesses cut their investments in Ukraine by $200 million.

http://www.wsj.com/articles/china-tr...ent-1422550982