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Title: UNCTAD VIRTUAL INSTITUTE TRAINING PACKAGE ON ECONOMIC AND LEGAL ASPECTS OF INTERNATIONAL INVESTMENT AGREEMENTS (IIAs) Module 1 Concepts, trends and economic aspects of foreign direct investment


1
UNCTAD VIRTUAL INSTITUTETRAINING PACKAGE ON
ECONOMIC AND LEGAL ASPECTS OF INTERNATIONAL
INVESTMENT AGREEMENTS (IIAs)Module 1Concepts,
trends and economic aspects of foreign direct
investment
  • Theme 4
  • Foreign Direct Investment in the World and in
    Africa Long-term Trends and Current Patterns
  • Kampala, 10-14 November 2008
  • Zbigniew Zimny
  • UNCTAD consultant

2
1. International production (and TNCs activities
including FDI) has grown very fast since the
mid-1980s and its importance in the world economy
has significantly increased
3
How it was three decades ago, according to
Dunning?
  • Production undertaken by enterprises which
    deliberately coordinate their operations
    (purchasing, production, finance, RD, marketing)
    on a global basis to make the most efficient use
    of their resources (material, technical,
    financial and managerial) is still more the
    exception than the rule.
  • Even on the eve of the Second World War, the
    value of such production was only one third that
    of international trade. In the mid-1950s and
    1960s the growth of such production outpaced that
    of trade, and in spite of trade liberalization
    and rising oil prices, by the 1976 it had
    exceeded that of trade.
  • Source J. H. Dunning, International
    Production and the Multinational Enterprise,
    1981, London, G. Allen and Unwin.

4
Since the mid-1980s world FDI has grown faster
than world GDP and exports
5
and its relative importance in the world economy
has significantly increased (FDI/GDP, FDI/GFCF
and sales of FA/exports)
6
FDI has become by far the largest source of
external financial resources flows to developing
countries(types of flows, 1990-2003, billions)
7
Summary of the increasing role of TNCs in the
world economy
  • FDI stock/GDP from 6 to 25
  • FDI flows/GFCF from 2 to 15-20
  • Sales of foreign affiliates (FA) in host
    countries/exports from parity to 2 times higher
  • TNCs account for some 2/3 of world exports 1/3
    parents exports from home countries and 1/3
    foreign affiliates exports from host countries
  • 1/3 of world trade is intra-firm trade of TNCs
  • FDI is the largest source of external finance for
    developing countries
  • TNCs dominate world industrial RD and are
    important in international technology transfer
    (4/5th internal to TNCs)
  • Value added of foreign affiliates accounts for
    11 of global GDP (compared to 5 in the early
    1980s). The share of foreign affiliates in global
    employment is estimated at 3

8
Individual host countries rely to varying degrees
on FDI and TNCs
  • ? HIGH RELIANCE
  • ? LOW RELIANCE

9
2. World FDI flows fluctuate with economic cycles
but as long as they are positive they increase
FDI stock and international production (that is,
production under the governance of TNCs), which
grows continuously
10
World FDI flows grow in the long term but
fluctuate with economic cycles
11
World FDI stock grows continuously
12
3. Cross-border MAs determine the global rhythm
and pattern of FDI flows and non-equity forms of
investment increasingly complement FDI in TNCs
activities and strategies
13
Cross-border acquisitions (MAs) drive global
FDI, determining its rhythm and fluctuations
14
MAs are particularly important for FDI of
developed countries
15
and less so for inward FDI of developing
countries, where greenfield FDI is larger
16
Notes on cross-border MAs
  • The values of MAs and FDI flows are not
    comparable the figures show only the broad
    correlation
  • The bulk of cross-border MAs takes place among
    developed countries
  • In the past MAs were dominated by the US TNCs.
    Nowadays they are widely used by TNCs from other
    countries
  • MAs are less popular form of FDI entry into
    developing countries, especially into Asia where
    most FDI is greenfield investment
  • They were quite popular in Latin America during
    the 1990s, when LA countries (notably Brazil and
    Argentina) implemented large-scale privatization
    programmes
  • MAs boom in the second half of the 1990s, which
    peaked in 2000, lifted world FDI flows to
    unprecedented levels
  • When the boom ended, FDI flows fell drastically
    and have recovered only in 2007 due to the
    recovery of cross-border MAs

17
Non-equity forms (NEFs) of FDI a neglected
dimension of international production
TRADITIONAL FORMS
EXAMPLES OF NEW FORMS
- Functional partnerships technology or
marketing - Strategic alliances -
Cross-licensing - Close customer-supplier
relationships - Contract manufacturing -
Outsourcing/off-shoring of corporate services
- Franchising (fast food, hotels, car rentals) -
Licensing - Management contracts (hotels) -
Partnerships in business consultancy or legal
services - Original equipment manufacturing
18
New NEFs explosive growth
  • ALL

1985 1995 1999
1000 9000 7000
  • Cross-border forms dominate, although their
    share decreased from 86 to 63
  • TECHNOLOGY

End of 1970s End of 1980s 1995 End of 1990s
150 500 700 500
  • Cross-border forms account for half of
    technology NEFs

19
4. The rapid growth of FDI in the recent past has
been driven largely by FDI in services and the
sectoral pattern of FDI has shifted towards
services
20
Shift towards services was gradual, but steady
  • During the 1950s, FDI was concentrated in the
    primary sector and manufacturing
  • FDI in manufacturing was of a market-seeking
    import-substitution type, motivated by access to
    large national markets (e.g. FDI in Brazil) or
    large regional markets (American FDI in Europe)
  • Services represented less than a quarter of FDI
    of major home and host countries at the beginning
    of the 1970s, 40 in 1985 and less than a half
    in 1990

21
During the 1990s and into the 21st century the
shift towards services accelerated in the world
22
and in both developed and developing countries
23
owing to dynamic services
  • Electricity - 24x increase in world FDI stock
    from 1990 to 2006
  • Telecommunications - 26x
  • Business services (excl. finance) - 15x
  • THE COMBINED SHARE OF THESE SERVICES IN SERVICES
    FDI STOCK INCREASED FROM 19 TO 40 at the
    expense of financial and trading services, the
    share of which fell from 64 48

24
Notes on the shift towards services
  • In absolute terms, FDI stock has grown in all
    sectors and almost all industries
  • Even in agriculture, hunting, forestry and
    fishing category, traditionally not important
    FDI industries, world inward FDI stock increased
    more than 2.5 times between 1990 and 2006, while
    that in manufacturing increased nearly 4.5 times
    and in extractive industries 5.5 times
  • Stock in services, however, increased 8 times

25
5. Changing geography of FDIA. Home countries
and TNCs from a club of few to many sources of
outward FDI
26
During the two decades after World War Two
  • Four countries dominated outward FDI stock with
    the US accounting for a half of it
  • Almost all FDI originated from developed
    countries

World outward stock of FDI, 1960,
Other developed
16
France
6
United States
Netherlands
50
10
United Kingdom
18
27
Whats new today?
  • More sources of FDI in developed countries
  • US remains the largest home country, but accounts
    for less than 1/5th of the stock
  • EU as a group is the largest source of FDI,
    accounting for 45 of it
  • Developed countries continue to dominate outward
    FDI but developing countries have emerged as a
    significant source of FDI

28
Notes on home country changes
  • The rise and fall of Japans role. Between 1980
    and 1994 Japanese outward stock increased 14
    times and its share of worlds stock from 3.5 to
    12. As a result of the prolonged economic
    stagnation the share declined to some 3. Japan
    remains large FDI home
  • Emergence of TNCs from developing countries. The
    share of these countries increased from 3 in the
    1970s and 1980s to 15 now. Almost all the
    increase came from Asia the Republic of Korea,
    Taiwan Province of China, Singapore, Hong Kong
    (China) and China. The growth of FDI from
    developing countries is set to continue
  • Growth of the EU FDI has come from both six
    original and new members of the EU

29
A snapshot of transnational corporations (TNCs)
firms that undertake FDI and international
production? The number of TNCs and their
foreign affiliates has grown rapidly? The
existing TNCs have expanded their foreign
production ? The leading TNCs are large and
attract attention, but in numbers most TNCs are
SMEs
30
The number of TNCs and their foreign affiliates
is growing rapidly
31
Most of the existing TNCs expand faster abroad
than at home
32
The worlds top 100 non-financial TNCs in 2006A
snapshot
  • 85 TNCs are based in the Triad (USA, EU and
    Japan)
  • 6 firms are based in developing economies
  • More than a half of top 100 TNCs are in
    traditional and new FDI industries
  • TRADITIONAL motor vehicles (13) petroleum (10)
    chemicals and pharmaceuticals (10) electrical
    and electronic equipment (9)
  • NEW telecommunications (8) electricity (6)
    retail trade chains (4) water (1)
  • The top 100 TNCs account for some
  • 10 per cent of the foreign assets
  • 16 per cent of the sales and
  • 12 per cent of the employment... ...of all
    TNCs!
  • MOST OF 79,000 TNCs ARE SMALL AND MEDIUM-SIZED
    FIRMS

33
Ten largest TNCs in the world, by foreign
assets, USD billions, 2006
        Foreign TNI
  Corporation Home country Industry assets
1 General Electric United States Electrical electronic equipment 442 53
2 British Petroleum United Kingdom Petroleum expl./ref./distr. 170 80
3 Toyota Motor Japan Motor vehicles 164 45
4 Royal Dutch/Shell United Kingdom, Netherlands Petroleum expl./ref./distr. 161 70
5 Exxonmobil United States Petroleum expl./ref./distr. 155 68
6 Ford Motor United States Motor vehicles 131 50
7 Vodafone United Kingdom Telecommunications 126 85
8 Total France Petroleum expl./ref./distr. 121 74
9 Electricite De France France Electricity, gas and water 112 35
10 Wal-Mart Stores United States Retail trade 110 41
34
Ten largest TNCs from developing (mostly Asian)
countries, by foreign assets, USD billions, 2006
(Billions of dollars and per cent) (Billions of dollars and per cent) (Billions of dollars and per cent) (Billions of dollars and per cent) (Billions of dollars and per cent) (Billions of dollars and per cent)
        Foreign assets TNI
  Corporation Home economy Industry bln Per cent
1 Hutchison Whampoa Hong Kong, China Diversified 70 82
2 Petronas - Petroliam Nasional Malaysia Petroleum 31 26
3 Samsung Electronics Republic of Korea Electrical electronic equipment 27 48
4 Cemex Mexico Cement 24 78
5 Hyundai Motor Republic of Korea Motor vehicles 20 27
6 Singtel Singapore Telecommunications 19 68
7 CITIC Group China Diversified 18 19
8 Formosa Plastic Group Taiwan Province of China Chemicals 17 41
9 Jardine Matheson Holdings Hong Kong, China Diversified 17 71
10 LG Corporation Republic of Korea Electrical electronic equipment 15 47
35
Asia dominates outward FDI stock of developing
countries
36
5. Changing geography of FDI(continued)B. Host
countries always more balanced distribution of
the world inward FDI stock, although the majority
of FDI goes to developed countries
37
Key changes among host countries between
1960s-1970s and now
  • In the 1960s almost all FDI originated from
    developed countries but 70 of it went to
    developed countries and 30 to developing
    countries
  • During the 1980s the share of developing
    countries in inward FDI stock increased to over
    40 to fluctuate around 30 during the 1990s and
    into 21st century
  • Over time the competition for FDI among countries
    has intensified as more and more countries opened
    up to FDI and actively have sought to attract it
  • During the 1990s China and transition economies
    entered the picture, India started to seek more
    FDI and Brazil returned to the FDI scene,
    overcoming the crisis of the 1980s.
  • The United States became the largest single host
    country (in the 1960s and 1970s it was Canada)

38
Global picture changing fortunes of host regions
in attracting FDI stock
39
6. FDI in developing countries and Africa
40
Developing countries until 1980 Latin America
was the largest host region among developing
countries and Brazil was the largest host
country. In 1970-75 Africa was close to Asia
41
After 1980 FDI inflows into all DC regions and
China grew, with some fluctuations
42
and with LA and Africa losing ground to Asia
(including to China)
43
Relative to the size of the economy, FDI in
Africa is not so small matches that of LA and is
higher than in Asia
44
Relative FDI makes small African host countries
large host countries
45
Africa in 2007 highest ever level of FDI inflows
FDI inflows in value and as a percentage of
gross fixed capital formation, 19952007
  • Driven by the booming global commodities-market
    rising profitability of investment and an
    increasingly FDI-friendly environment.
  • The growth of FDI inflows was spread across 35
    countries, and included many natural resource
    producers.

Source UNCTAD, World Investment Report 2008,
Transnational Corporations and the Infrastructure
Challenge.
46
Africa top 10 recipients of FDI inflows,
20062007
(Billions of dollars)
Source UNCTAD, World Investment Report 2008,
Transnational Corporations and the Infrastructure
Challenge.
47
Rates of return on inward FDI in developing
regions in 2006-2007 in Africa highest among
developing regions

Income on inward FDI grew by 31 in 2007, and the
rate of return on FDI in Africa has increased
steadily since 2004.
48
Africa Current patterns of FDI inflows by
sub-regions
  • All sub-regions except North and West Africa
    experienced growth in FDI in 2007, with the
    highest growth rate registered in Southern Africa
  • Six countries of North Africa attracted 42 of
    FDI to the region in 2007 compared with 51 in
    2006
  • While most countries of North Africa continued to
    do well, large inflows to Nigeria and South
    Africa plus Equatorial Guinea, Madagascar and
    Zambia, each receiving about 1 billion or more
    inflows in 2007, boosted FDI to sub-Saharan
    Africa
  • Consequently, 47 countries of sub-Saharan Africa
    accounted for 58 of African inflows in 2007, up
    from 49 in 2006
  • The top ten FDI-host countries in Africa
    accounted for over 82 of the region's FDI
    inflows in 2007
  • But what really matters is the relative (not
    absolute) size of FDI (relative to the size of
    the host economy)

49
Africa patterns of FDI inflows (continued)
Sources of recent FDI
  • Key TNCs investing in Africa have been from the
    United States and Europe, mainly from France,
    Italy and the United Kingdom, expanding in
    particular in natural-resource exploitation
  • There have also been TNCs from Africa,
    particularly from South Africa, Morocco and
    Libyan Arab Jamahiriya, investing in services,
    medium-scale manufacturing but also in primary
    sectors
  • TNCs from Asia have invested in the oil and
    mining industries (diamonds, gold, copper,
    nickel, zinc, uranium and other gem stones)

50
Africa some impacts of FDI on host economies
  • FDI in natural resource exploitation projects has
    contributed to accelerated export growth.
  • Owing to FDI, foreign-exchange reserves in the
    region as a whole grew by some 36 in 2007
    increases in some major oil-exporting countries
    such as Nigeria and the Libyan Arab Jamahiriya
    were particularly high.

51
Africa FDI policy measures in 2007
  • Ten countries introduced policy measures in 2007.
    Most of these measures made regulatory frameworks
    more favourable to FDI and TNCs.
  • Favourable measures were aimed mainly at
  • Improving admission procedures of foreign
    investors
  • Strengthening investment promotion
  • Improving registration and fiscal procedures for
    business start-ups.
  • In some cases, governments adopted less favorable
    measures, by, for example, restricting foreign
    ownership (Mozambique, Zimbabwe).

52
Prospects good times ahead for FDI in Africa?
FDI prospects in Africa, 20082010 (Per cent of
respondents)
Source UNCTAD, World Investment Report 2008,
Transnational Corporations and the Infrastructure
Challenge.
  • Concentration in the primary sector, driven by
    the commodity market boom
  • In 2008-2010, 15 of TNCs plan to increase FDI
  • BUT THE SURVEY WAS CONDUCTED IN THE FIRST HALF OF
    2008. WILL ITS PROJECTIONS HOLD DURING THE
    FINANCIAL CRISIS?
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