The current downturn in global economic and earnings momentum is dampening foreign direct investment, removing one of the key drivers of growth over the past decade, according to the latest NAFTA Quarterly, released today by Scotia Economics.

According to the report, in both Canada and the United States, FDI flows were running below last year’s levels during the first three quarters of 2001, despite several sizeable investments, most notably in Canada’s energy sector.

The overall value of North American FDI flows could well decline this year for the first time since 1991 — the midst of the last recession.

“Foreign direct investment, along with trade, has been a major engine of global growth,” says Adrienne Warren, senior economist at Scotia. “Now, however, falling export volumes and slowing cross-border investment are undercutting global production and importantly transmitting the slowdown across increasingly integrated national economies.”

The report also provides a detailed look at the emerging pattern of North American direct investment. The NAFTA economies have been an important source behind the rise in global capital flows during the past decade, accounting for close to one-quarter of the world’s $6.3 trillion stock of FDI in 2000.

However, the relative pattern of investments within the region has shifted substantially. “In contrast to the trend in goods and services trade, growth in intra-NAFTA FDI, averaging 9% annually between 1990 and 2000, has lagged the 11% annual rise in extra-NAFTA FDI,” says Warren. “Reduced trade barriers may have lowered FDI incentives by decreasing the need for a physical location to gain local market access.”

Both the US and Canada have become increasingly outward looking, with a rising share of their investments directed to developing Asia and Latin America.

The share of non-OECD countries in Canada’s external FDI has nearly doubled over the past decade to 23%. Mexico, though still a relatively small player, has experienced the fastest growth in capital inflows in the region.

“The rise in foreign investor confidence in Mexican industry has been underpinned by fundamental policy reforms which have lowered inflation, interest rates and the country’s external debt burden,” says Pablo Bréard, vice president International Research.