Global foreign direct investment (FDI) is still prevalent despite economic woes but is undergoing a major transition in response to the global crisis with the United Kingdom expected to see a drop of up to 25 percent in the next 12 months, according to a new report by the foreign investment advisory firm OCO Global (OCO).

OCO's report entitled, “A New Investment Paradigm” reviews key issues around foreign investment and explores some of the fundamental issues such as:

* The decreasing role of greenfield investment in favor of lower risk expansion modes such as M&A and Joint Ventures

* The growing importance and impact of FDI from Sovereign Wealth Funds, often originating from developing countries in the Middle East and Asia

* The rise of co-location and re-location from overheated capital cities in Europe and the

United Kingdom to Tier II cities such as Lyon, Nantes, Antwerp, Bologna, Liverpool, Leeds and Belfast. A similar trend is unfolding in the United States.

While analysts disagree on the severity of the impact on global FDI in the short term, the report indicates a consensus that there will be a downturn this year anywhere up to 30 percent in the worst affected sectors.

Mark O'Connell, CEO of OCO Global commented: “A soft landing this year for the UK could see drops of around 10 percent to 15 percent overall in FDI flows, with worse case scenarios in the 20 percent to 25 percent range. The UK is fortunate as it has strong propositions across a number of sectors including anti-cyclical ones such as clean tech and health care, which have provided a cushion. OCO forecast that by this time next year, FDI volumes in the UK will be on the increase again so the pain is relatively short term.”

The volumes and value of greenfield are unlikely to recover to 2007-2008 levels for at least three years. Cross border M&A was fastest to contract in response to the liquidity crisis; interestingly it is showing early signs of recovery in 2009.

“The FDI market, as we have come to understand it, in the last decade has experienced some radical changes in the last 12 months,” O'Connell says. “These changes have altered the leading sectors, source markets, types of projects and the drivers behind investment decisions. For the UK government, there is a delicate balance to strike in terms of retaining its leading position as a destination for foreign investment projects in Europe, while trying to reposition the UK sectors and competences further up the value chain.”

In the UK, there's already been an adjustment by the Regional Development Agencies led by UKTI in the last decade to attracting smaller, knowledge-driven type of investment and this has formed the basis of the UK's resilience. It's current competitiveness is also due in part to a floating currency making it attractive for U.S. and European investors. The report highlights that the FDI game continues to change and requires more radical interventions, fresh thinking and flexibility from government economic development organizations about the role and importance of FDI in their overall strategy.

“Assuming organizations can respond quickly to changes, the benefits of FDI in technology transfer and competitiveness should continue to outweigh some of the often cited disadvantages such as the smaller employment footprints and the risks associated with foreign ownership,” O'Connell says.

Visit www.ocoglobal.com/review/ to download the report.