STU 01-01 : Special Topic - Boost for Belgian foreign direct investment (FDI) due to mergers and acquisitions [ Short Term Update 01-01 - 08/03/2001]

Belgian exports will be hit this year by the deceleration in world economic growth, which was already reflected by the net slowdown in world import demand at the end of last year. Even when taking into account the expected recovery in world trade from the second half of 2001 onwards, growth in Belgian export markets should significantly ease back. Moreover, the appreciation of the euro will reduce the price competitiveness of Belgian exports and would lead to loss of market share. As a result, the positive contribution towards real economic growth from external trade will decline.

Nevertheless, domestic demand should remain robust in 2001. Business investment should benefit from a rise in firms’ profitability due to the gain from the terms of trade (because of lower oil prices and the appreciation of the BEF). Private consumption will be sustained by substantial growth in household’s real disposable income as the expected deceleration in inflation will allow to regain part of the loss of purchasing power in 2000. Furthermore, households’ disposable income will also be supported by some personal tax cuts. Although the deterioration in the business cycle will lower the pace of employment growth, the higher labour-intensiveness, that has been observed during the last three years, will still give rise to a favorable employment outcome.

All in all, Belgian GDP is expected to decelerate from 3.9% in 2000 to 2.8% this year and to be less export-led than last year.

Taking into account the 2001 Budget and the macro-economic outlook presented above, and including the expected revenues from the UMTS licences (0.2% of GDP), the general government budget balance is expected to move from equilibrium in 2000 to a small surplus in 2001 (about 0.7% of GDP).

Inward and outward FDI have increased dramatically worldwide since the early 1990s. A number of major international mergers and acquisitions explain this pattern.

Foreign direct investment (FDI) is defined as an investment designed to produce management control of a resident entity (foreign affiliate) in one economy by an (parent) enterprise resident in another economy. FDI is a long-term financial commitment reflecting an investor’s ‘lasting interest’ in a foreign entity. An equity capital stake of at least 10% is normally considered a threshold for the investor’s lasting interest. Also, it comprises all other financial transactions between the parent enterprise and the foreign affiliate such as loans. It becomes a portfolio investment when less than 10% is invested in equity capital.

FDI can be decomposed as follows:

• equity capital: participations by new shareholders; creation (new branches) and extension (capital increase) of companies by existing shareholders; real estate
• loans: financial loans to affiliated companies, including short term loans; other financial transactions.
  This decomposition is valid for incoming as well as for outgoing flows, which are further decomposed into investments and disinvestments.

The capital account records the net flow of capital (pay-ments) between Belgium and other countries, involving FDI, portfolio investment and purchases and sales of bonds and commercial credit. For the past 10 years, the BLEU has always recorded a capital account deficit (or net capital outflow). This is largely due to portfolio investments. Direct investments, on the other hand, resulted always in net capital inflow, except for 1998 and, to a some smaller extent, to 1995. For the first time in a number of years, direct investments of the BLEU in foreign countries exceeded foreign investments into the BLEU in 1998.

Since 1986, the growth rate of investment flows to and from Belgium have increased more than the growth rate of GDP or foreign trade. This can be explained by the globalisation of the economy in general and the European single market in particular. A general rise in share prices also inflated the amounts involved in mergers and acquisitions (M&A’s). [More in the publication ...]

STU 01-01 was finalised on February 19th 2001.