Economic & Business Focus: Foreign Investment Shifts Course

The 2004 rebound in foreign direct investment will gain momentum this year, but little of that money is headed for the United States.

Foreign direct investment (FDI) is flowing again after three years of global retrenchment. In 2003, worldwide FDI dropped for a third straight year -- to $560 billion, compared with its peak of $1.4 trillion in 2000 -- as investment in developed nations continued to decline. But developing countries registered a 9 percent increase in FDI inflows in 2003.

This growth was led by China, which took in $53.5 billion and displaced the United States as the top FDI recipient. Early data for 2004 indicates that the shift toward greater investment growth in developing nations continued last year, with a more modest rebound in developed countries.

For the first three quarters of 2004, China reported foreign direct investment of $48.7 billion, up 21 percent year-on-year. For the first seven months of last year, India reported a 90 percent increase in FDI inflows. In contrast, the flow of foreign investments into the United States has dropped sharply since its peak of $314 billion in 2000; U.S. inflows reached only $29.8 billion in 2003. In the first half of last year, they rose to $39.2 billion, up from $28.4 billion for the same period in 2003, but even that is a historically low level.

Still, U.S. companies resumed foreign investment during the past two years. In the first half of 2004, their direct investment abroad totaled $106 billion, compared with $152 billion for all of 2003. Forecasts indicate that outflows will be even greater this year.

In a 2004 survey conducted by the United Nations Conference on Trade and Development, direct-investment location experts predicted a rise in global FDI flows over the next four years, with China and India as the top destinations. In the developed world, they said, France and Canada will see the greatest growth in inflows. They also predicted that greenfield operations will account for the same share of FDI as mergers and acquisitions (M&A) will.

Keane Inc., a Boston-based business and IT services company with $1 billion in annual revenues, is one of the U.S. organizations expanding investment abroad. Keane established a greenfield site in Halifax, Nova Scotia, in 1996 and opened a second Canadian center in Markham, Ontario, in 2004. The company also acquired two Indian software development facilities in 2002. "Since this acquisition, we've added an additional facility in Gurgaon [India], and our head count in India has increased from approximately 400 employees to 1,700 employees today," reports John Leahy, senior vice president and CFO. Keane uses its India-based resources for some of its internal IT and business-process support in addition to substantial amounts of client work. "For 2005, I anticipate that our operations will continue to grow in the United States, Canada, India and the United Kingdom," Leahy says. "M&A continues to be a core component of Keane's growth strategy. We regularly evaluate a variety of investment opportunities to increase critical mass; add or enhance a particular technical capability; or deepen our expertise in key industries such as insurance, financial services and health care."