Foreign Investors Took Time Off From Israel in 2009

Foreign direct investment in Israel fell by 64% in 2009 to only $3.9 billion, down from $10.9 billion in 2008. Israel fell from 54th place in 2008 to 80th in 2009 in terms of FDI.

Foreign direct investment in Israel fell by 64% in 2009 to only $3.9 billion, down from $10.9 billion in 2008. Israel fell from 54th place in 2008 to 80th in 2009 in terms of FDI. Global FDI also fell sharply in 2009 by 37%, from $1.77 trillion in 2008 to $1.11 trillion in 2009, but this was a much smaller drop proportionately than in Israel.

These figures were mentioned in the UN's "World Investment Report 2010: Investing in a Low-Carbon Economy," which was released on Thursday in Geneva, by Dr. Supachai Panitchpakdi, the secretary-general of the United Nations Conference on Trade and Development.

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The incoming flow of funds to Israel over the past six years showed great volatility. For example, FDI totalled $4.8 billion in 2005, but jumped to $15.3 billion in 2006 - a 219% increase. In 2007, the figure fell by almost half to $8.8 billion, but this was still well above the FDI level for 2005. To put these numbers into perspective, FDI in India was $34.6 billion in 2009 and $95 billion in China last year.

The big drops in recent years are the direct result of the world economic crisis and investors fleeing the riskier, developing markets. The contraction of credit and the higher uncertainty certainly have kept international investors closer to home - which may mean minimal returns, but also much lower levels of risk, if government bonds or bank deposits are the instruments.

Drs. Rony Manos and Jacob Yaron of the school of business administration at Israel's College of Management analyzed the data and forecast 2010 will be much better. After the big declines in global FDI over the past two years, the first half of 2010 has shown a recovery, which they expect to continue throughout the year. But the global recovery in such investments was mostly the result of merger and acquisition activity - not new investments.

The changes in figures with respect to high-tech investments were even more extreme, amounting to only $100 million in 2004, but reaching $5.1 billion in 2007. High-tech FDI then fell to $3.2 billion the next year in 2008, a 37% drop, and plunged even lower to just $1.4 billion in 2009. But the data from certain years can also be skewed as specific large deals, such as Warren Buffett's $4 billion purchase of Iscar Metalworking, add to the volatility of the figures.

Outward flows from Israel - i.e., investments by Israelis abroad - were similarly volatile. Locals sent $4.6 billion overseas for investment purposes in 2004, which dropped to $2.9 billion in 2005 and then climbed 434% in 2006 to $15.5 billion. The figures fell back to $8.6 billion the next year and then further, to $7.2 billion, in 2008. In 2009 outward flows dropped to only $1.2 billion.

Developing nations grab half

This year's UN report, the 20th anniversary edition, focused on investing in a low-carbon economy.

Developing and transition economies absorbed half of global FDI inflows in 2009 and accounted for a quarter of the global outflows, the UNCTAD report stated: "Their relative weight as both FDI destinations and sources is expected to increase further, as these economies lead the FDI recovery."

Services and the primary sector continue to capture an increasing share of FDI, as the historical shift away from manufacturing intensifies. FDI stock and assets continued to increase despite the impact of the crisis.

All regions experienced a decline in FDI inflow in 2009, with an upswing commencing in early 2010 in most cases.

"In developed countries, having been falling for the past two years, inward FDI is expected to rise in 2010," stated the report. But high levels of unemployment in developed countries have triggered concerns about the impact of investment abroad on employment at home.

The drop in foreign investment in Israel stems from the changes in high tech, said Dr. Amir Shoham of the College of Management. World FDI mostly is divided into three sectors: natural resources, developing new markets and cheap or efficient manufacturing - including high tech, he explained.

Companies have the tendency to postpone investments in high tech during crises, Shoham added, and this is the reason for the drop in FDI in Israel.

But in terms of the future, he said, certain firms are looking to invest in resources, whether natural or human, along with stable countries to invest in. This requires political and security stability along with a lack of corruption.

"If Israel wants to attract investments in the future, it must think about these things, too," said Shoham.