UNCTAD PUBLISHES WORLD INVESTMENT REPORT 1995
Press Release
TAD/1807
UNCTAD PUBLISHES WORLD INVESTMENT REPORT 1995
19951215 GENEVA, 15 December (UNCTAD) -- International investment by transnational corporations (TNCs) has superseded trade to become the most important mechanism for international economic integration. The rapidly rising levels of global investment by these corporations have significant implications for countries' economic performance, according to the World Investment Report 1995: Transnational Corporations and Competitiveness, published today by the United Nations Conference on Trade and Development (UNCTAD).The global sales of the 250,000 foreign affiliates of 40,000 TNCs today exceed $5 trillion. If the macroeconomic environment is right, foreign direct investment (FDI) will improve the competitiveness of transnational as well as indigenous firms, states the Report. This investment will, in turn, contribute to the economic performance of countries, a major factor in particular for countries struggling to catch up.
Foreign direct investment, which new data show is projected to grow at $230 billion this year, is coming not only from large TNCs, but increasingly also from smaller firms in both developed and developing countries that are becoming transnational. While the top 100 TNCs are all based in developed countries, 15 per cent of world FDI outflows now originate in developing countries, suggesting an emerging shift in the structure of FDI flows. (Today's report ranks the top 100 TNCs, as well as the top 50 from developing countries.)
The Report states that governments are fine-tuning their policies to attract FDI as a form of capital inflow that is also a vehicle for obtaining access to technology, skills, managerial and organizational practices and to international markets, which can boost growth and development.
Total flows of direct investment by TNCs to all countries in 1994 were well above the previous year's level at $226 billion ($208 billion in 1993), and are expected to amount to $235 billion this year. The United States was both the largest source and recipient of FDI.
For the second year in a row, China was the second largest recipient of FDI. Developing countries received 37 per cent of the total FDI inflows in 1994. Investment flows to developing countries rose to a record $84 billion in 1994 from $73 billion in 1993; they are predicted to reach $90 billion this year -- more than triple the 1989 level. Foreign direct investment has become
the single most important component of private external resource flows to these countries.
The largest TNCs in the world are becoming increasingly international, with investment abroad aimed at reaching markets for outputs and access to factors of production. These twin objectives underlie the organization of international production today more than ever before.
Governments have come to recognize the overall benefits of investments by TNCs. Accordingly, the mid-1990s are characterized by a general movement towards the liberalization and facilitation of inward FDI. Data of UNCTAD's Division on Transnational Corporations and Investment show that, between 1991 and 1994, 368 out of 373 changes in national FDI laws and regulations were in the direction of liberalization. These national measures are complemented by bilateral investment treaties. By mid-1995, over 900 such treaties existed (60 per cent of these date from the period since 1990); a new trend, UNCTAD points out, is the rapid rise of investment treaties between developing countries.
TNCs and World Trade
Intra-firm trade of TNCs has become a major factor in world imports and exports, the Report continues. The international production system within a TNC constitutes an internal market for the flow of goods and services -- a market to which the individual member firms of the system (parents and affiliates) have privileged access and firms associated with TNC systems have advantageous access. The size of this market worldwide was estimated in 1993 at $1.6 trillion, or about one third of world trade. The size of this intra-firm trading market has more than doubled during the past decade, and it is likely to continue to grow. In addition, inter-firm trade of TNCs accounts for almost another one third of world trade.
The imports and exports within TNCs and between them and other corporations are strengthening the economic linkages between nations. They represent a positive force for global growth as long as governments ensure that competition is maintained.
The efforts of TNCs to expand their sales and organize their production efficiently also create market opportunities for other firms in host and home economies, if these other firms are linked to TNC systems. Access to the sizeable markets worldwide served by TNCs gives them a competitive edge over their rivals.
The stock of global FDI in 1991-1993 grew about twice as fast as worldwide exports of goods and services, and is estimated to reach $2.5 trillion by the end of this year. The Report estimates that the global sales generated by this stock (i.e., the foreign affiliates of TNCs) were
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worth $5.2 trillion in 1992, exceeding global exports of goods and (non-factor) services worth $4.9 trillion. This shows how important international production has become for accessing markets and resources. In fact, in the case of the United States, an estimated four out of five dollars received for goods and services sold abroad are received for goods and services produced by foreign affiliates or sold to them by American firms.
National and International Policies
Given the contribution that FDI can make to development, governments are increasingly liberalizing and fine-tuning inward FDI policies to create the best possible enabling framework. At the same time, governments also recognize increasingly that outward FDI has become an important source of competitiveness for their firms. Accordingly, developed countries have since long liberalized their outward FDI policies, a process that is now beginning in the developing world as well, led by a few Asian and Latin American countries. This trend is new and likely to continue.
The report notes that governments must recognize that firms which are restricted from investing abroad in today's globalizing and liberalizing world economy are handicapped. Furthermore, if imports and inward FDI are being liberalized, they are doubly handicapped, in that firms must confront foreign competitors at home without a comparable opportunity to realize the benefits of their own overseas investments or from challenging competitors in their home markets. When liberalizing outward FDI, governments can turn this double handicap for their firms into a double advantage for their countries: they can benefit from allowing their own firms to exploit their competitive advantages abroad and from allowing foreign affiliates in their countries to develop overseas projects as well.
The Report documents the extent to which governments are competing with each other to attract FDI. Means range from vigorous investment-promotion campaigns to offering TNCs diverse types of incentives. Incentives competition, in particular, has become more intense. Some incentives can lead to waste of much-needed government financial resources and economic distortions. Governments should, therefore, undertake efforts to curtail excessive and distortive incentives competition.
Regional Highlights
Following are the highlights of regional trends in foreign direct investment in 1994.
United States, Mexico and Latin American and Caribbean Region: United States transnational corporations accounted for FDI outflows of $46 billion in 1994 and $69 billion in 1993. The United States also hosted inward FDI flows of $49 billion in 1994 ($41 billion in 1993).
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Transnational corporations are investing more than ever in new or existing businesses in the United States, to establish a presence in its domestic market or to acquire strategic assets, such as technology and know-how. The stock of FDI (on a historical cost basis) in the United States now stands at more than $500 billion. The largest flow to that country in 1994 was by TNCs of the United Kingdom, at $12 billion. The size of the stock held abroad by American TNCs reached $610 billion in 1994, more than a quarter of the worldwide stock of FDI. In other words, the United States' economy is becoming increasingly transnationalized.
A new and increasingly important characteristic of American FDI concerns NAFTA and Mexico. The Report points out that anticipation of NAFTA stimulated corporate restructuring: there has been a doubling of the outward FDI stock to Mexico ($8.3 billion in 1989 to $16.4 billion in 1994). At the same time, Mexican TNCs increased their investments north of the border, and the stock of their investments in the United States reached $1.2 billion by 1993, almost doubling to $2.2 billion in 1994. The integration of production between the United States and Mexico is intensifying, led by the automobile, electrical machinery and electronic equipment industries.
This intensification has been characterized by a reorganization of corporate networks through which foreign affiliates in Mexico have become integrated into a regional production structure. As a result, over a quarter of the trade between Mexico and the United States is undertaken today on an intra-firm basis, a share that has increased over time.
Foreign direct investment inflows to Mexico during the first half of 1995 fell to an estimated $2.6 billion from the level ($3.5 billion) reached in the first half of 1994. They nevertheless exceeded the levels reached in the first six months of 1992 and 1993 ($2.2 billion and $2.1 billion, respectively). The drop can be partly explained by the peso crisis and partly by a post-NAFTA effect. The European Union witnessed a similar effect in connection with the implementation of the Single Market with an initial rise and the subsequent drop of FDI flows. However, the combination of falling asset prices, increased competitiveness of Mexican exports and the return of relative stability to the economy could combine to increase FDI in Mexico by export-oriented TNCs, including their suppliers, according to the Report.
Latin America and the Caribbean (including Mexico) accounted for 24 per cent of all FDI inflows to developing countries in 1994, but the growth in FDI inflows was only 2 per cent last year, amounting to $20 billion.
Trends in FDI flows in the region are mixed: for example, inflows of FDI to Brazil rose to $2.2 billion in 1994 from $800 million in 1993, while FDI inflows to Argentina in 1994 fell to $1.2 billion from $6.3 billion in 1993. Flows to Chile more than doubled.
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These figures in part reflect the degree to which countries have peaked in terms of their privatization programmes, as illustrated by Argentina and Peru. Brazil has yet to implement a comprehensive privatization programme and, if it did, then it might attract significant FDI inflows: Brazil in 1994 owned 28 of the 50 largest Latin American public companies.
In 1993, each of the 40 largest TNCs (ranked by sales) in Latin America had, on average, operations in three Latin American countries. The 17 American TNCs in the top 40 accounted for 50 per cent of the group's total sales in 1993. The substantial FDI stock in Latin America and the Caribbean owned by North American TNCs could become a dynamic force for overall economic integration in the Western Hemisphere. A positive first step in this direction are regional liberalization initiatives that allow firms to rationalize operations in the hemisphere and reduce impediments to deeper and wider regional production networks.
Asian and Pacific Region: Japan is re-emerging as a prime source of FDI outflows, boosting these to $18 billion last year from $14 billion in 1993. Japanese firms are investing throughout Asia to counter their loss of competitiveness due to the yen's appreciation, and also to fend off trade frictions with other industrialized countries.
Meanwhile, FDI flows into Japan remain small, at $888 million in 1994, reflecting high costs in Japan, the Japanese recession and divestments by European firms in 1993 of $1.1 billion.
South, East and South-East Asia and the Pacific have secured the lion's share of TNC flows into developing countries. Transnational corporations are attracted to this region because of its economic growth, liberalized FDI policies, and privatization programmes open to foreign investors. China is becoming an ever more important factor in the global FDI equation. Flows into the country in 1993 and 1994 were $28 billion and $34 billion, respectively, and an even higher total is seen as quite probable this year.
Significantly, TNCs headquartered in China are emerging as important foreign direct investors. By the end of 1994, over 900 Chinese TNCs had established 4,600 foreign affiliates in 130 countries with annual average FDI outflows of $2.4 billion during 1990-1994. Hong Kong has absorbed a considerable portion of this FDI, with Chinese firms using it as a springboard for their transnational objectives.
China's attractiveness helped to secure total FDI flows to the South, East and South-East Asia and the Pacific region of $59 billion in 1994 ($48 billion in 1993). Considerable increases in FDI flows to countries of the ASEAN may be in the offing for 1996. Approvals of FDI projects grew by 186 per cent in Indonesia and 190 per cent in Thailand in 1994. They doubled in Malaysia, and rose by 329 per cent in the Philippines. Viet Nam has
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emerged as a major destination for FDI. As of mid-1995, foreign investors had pledged to invest $16.2 billion. Fast domestic growth and liberalization policies are key factors in this FDI surge.
Policy reforms since 1991 in India have generated increased international investor confidence. Foreign direct investment inflows rose from $155 million in 1991 to $947 million in 1994, and data for the first four months of 1995 show a total for this period of $708 million. If current policies are maintained, India should be able to attract significant amounts of FDI.
West Asia, defined here to include Turkey, Cyprus, the Persian Gulf States, Israel, Jordan and Egypt, with a combined population of 205 million people, has so far attracted modest FDI inflows at around $1.4 billion per year in recent years. The great bulk of this investment has gone to Turkey, Egypt and Israel.
Substantial opportunities are seen for FDI flows to numerous countries in the region; for example, Egypt has the potential of becoming a major pharmaceutical producer with a regional market that may approximate $5.6 billion in 1997. The Israeli economy is booming and may become an increasing magnet for FDI inflows and a possible source for outflows. The prospects for peace can be expected to encourage FDI in the region.
Lebanon is seen as deserving attention both because it could provide a bridge between foreign investors and Arab countries and because of its general locational advantages for finance and business.
Europe: The overall tempo of FDI from, as well as in, Western Europe in recent times has been quite sluggish. While FDI inflows and outflows have been quite high, the levels registered in the late 1980s have not yet been reached again.
Inflows to the European Union in 1994 were $71 billion and outflows were $106.5 billion. France was the largest recipient of inflows at $17 billion, followed by the United Kingdom at $10 billion. Transnational corporations of the United Kingdom were the largest national source of outflows of FDI in 1994 at $25 billion, followed by French and German TNCs at $23 billion and $21 billion, respectively.
While Japanese TNCs are highly active investors in Asia and American TNCs have increasingly been paying attention to this dynamic region, the Report notes that West European corporations have so far neglected this region. To some extent, western European TNCs have focused more on building investments within their region and in the United States, and more recently in Central and Eastern Europe, than in Asia. German TNCs, for example, had a 1993 FDI stock
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level in the region of $4.3 billion, which is half the level of German FDI in Spain; British firms had as much FDI stock in Australia as in the rest of Asia; and French firms had as much in Canada as in Asia.
However, there are signs that European firms are changing course. The dynamism and growth of the Asian region is likely to stimulate substantial FDI flows from West European corporations in the coming years, just as flows from the United States- and Japan-based TNCs into the region continue to rise.
Foreign direct investment competition in Asia is, therefore, set to intensify, both in terms of countries seeking to attract FDI and in terms of TNCs competing for investment opportunities. In this competition, firms from the developing countries in the region play a leadership role. In nine important Asian developing countries, the share in total inward FDI stock accounted for by the same countries rose from 25 per cent in 1980 to 37 per cent in 1993.
Central and Eastern Europe attracted around $6 billion (less than inflows to Singapore alone) in each of the last two years. At the beginning of 1995, the FDI stock in the region was about $22 billion, approximately the same level as that of Argentina alone. Fully 69 per cent of the total regional stock in 1994 was concentrated in three countries: the Czech Republic, Hungary and Poland. Privatization has played a key role in attracting FDI in the region, representing two thirds of inflows in the 1989-1993 period.
However, there remains a significant gap between investors' commitments and the actual implementation of the investments in the region. On average, only about half of the registered FDI projects have, so far, started operations. In countries like Belarus and Estonia, the divergence between the implementation of FDI and firm commitments is even greater, with only 34 per cent and 20 per cent, respectively, of committed investments being implemented. Foreign direct investment data on this region must, therefore, be interpreted with caution.
The Report stresses that TNCs can be helpful in the transition process in these countries. For example, they can help to overcome constraints faced by the region's firms in acquiring new technologies, skills and export markets. In Hungary, where 91 of the top 200 corporations have foreign ownership, sales of foreign affiliates rose 47 per cent over the 1992-1993 period, while domestic firms experienced an increase of just 3.5 per cent. Productivity measures suggest that in the Czech Republic, performance has increased far more significantly in foreign affiliates than among domestic firms. Volkswagen, for example, boosted output in the Czech automotive company Skoda by over 40 per cent in 1994.
Transnational corporations have also contributed to improvements in quality standards, increases in labour productivity and changes in work ethics
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in this region. Overall, the relatively good performance of foreign-owned enterprises is largely due to better access to capital, technology, know-how (including marketing and management skills) and international markets. It also reflects partly the ability of TNCs to combine their own competitive advantages with the prevailing competitive advantages of the erstwhile state-owned enterprises.
Transnational corporations have, in general, restructured more vigorously than domestically-owned firms, thus strengthening the competitiveness and profitability of their operations. Restructuring has had several painful side-effects, notes the report, the most apparent being significant lay-offs. But reductions in workforce are partly due to large-scale overstaffing during the years before the transition, the Report states. Still, care needs to be taken that such factors as negative side-effects of privatization and restructuring, excessive expectations and sovereign sensibilities do not lead to a backlash against FDI.
Africa: FDI inflows to the developing countries of sub-Saharan Africa amounted to about $3 billion per year in each of the past two years. This region has attracted less FDI than any other. However, the Report points out that the image of investment opportunities in the region is worse than a careful analysis of investment opportunities warrants.
The UNCTAD notes that significant investment opportunities do exist, and that FDI in Africa is profitable, in fact, at a level above the average of that of foreign affiliates in some other developing regions. The average United States foreign affiliate in Africa generated a higher amount of investment income in 1992 than the average affiliate in Europe and almost twice as much as an average affiliate in Canada. In addition, contrary to trends elsewhere, income per affiliate in Africa has tended to increase during the early 1990s compared with the late 1980s.
Countries in Africa have made many efforts to improve their attractiveness to foreign investors, states the Report. These include far-reaching economic policy reforms, including liberalization of the FDI regulatory framework. An important new factor that may influence prospects for FDI in Africa is the emergence of South Africa as a politically stable and economically dynamic country. That country may serve as an example for conflict resolution in other countries plagued by internal political conflict and may thus help them achieve the basic requirement of any good investment climate, -- political stability. South Africa itself has a potential to attract sizeable inflows of FDI. When its growth accelerates, it could become a regional growth pole and a dynamic market, inducing export-oriented FDI in neighbouring countries.
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