FOREIGN DIRECT INVESTMENT SOARS 40 PER CENT AS CORPORATIONS BECOME MORE GLOBAL
Press Release
TAD/1835
FOREIGN DIRECT INVESTMENT SOARS 40 PER CENT AS CORPORATIONS BECOME MORE GLOBAL
19960924 ADVANCE RELEASE GENEVA, 20 September (UNCTAD) -- Foreign direct investment (FDI) -- investment involving management control of a resident entity in one economy by an enterprise resident in another economy -- by transnational corporations (TNCs) soared in 1995, and the tempo appears to be continuing this year, according to the World Investment Report 1996: Investment, Trade and International Policy Arrangements, issued today by the United Nations Conference on Trade and Development (UNCTAD).Total FDI flows into developed and developing countries surged by 40 per cent in 1995, to reach $315 billion. Fully $100 billion of that volume went into developing countries, a gain of 15 per cent on 1994, and China alone took in over $38 billion. The new FDI data show that United States corporations as a group were the largest foreign investors in 1995, and the United States was the largest single host country for FDI. The FDI between Western Europe and the United States set new records and was dominated by mergers and acquisitions. The large volume of cross-border FDI is the product of an estimated 39,000 TNCs with about 270,000 foreign affiliates that now have a combined FDI stock of over $2.7 trillion. The top 100 TNCs alone now account for about one-third of the total stock. They are all headquartered in developed countries.
Inflow of FDIs are highly concentrated. The smallest 100 recipient countries received only 1 per cent of total investment. The top 10 largest recipient countries accounted for 68 per cent of the $315 billion of inflows. Firms in the United States, Germany, United Kingdom, Japan and France (in that order) dominated FDI outflows, with two-thirds of the global 1995 total of $318 billion.
Developed Countries
Overall, FDI into the developed countries rose 53 per cent to $203 billion last year, while FDI outflows from those countries gained 42 per cent to $271 billion. The United States accounted for a high percentage of global FDI, as United States firms made foreign investments of $96 billion, while FDI into the United States amounted to $60 billion.
The United States does more trade with Asia than with Western Europe, but there are more FDI flows from the United States to Western Europe. The UNCTAD states that, in absolute terms, that is likely to continue to be the case for some time, but the rates of increase in FDI flows from the United States towards Asia are now greater than those inflows towards Western Europe, with recent annual rates of respectively 6.6 per cent and 4.3 per cent.
The level of United States FDI into Asia now, and the rate of FDI growth, point to rapid intensification of United States business links to that region. Those linkages may strengthen as a result of regional integration efforts pursued in the framework of Asia Pacific Economic Cooperation (APEC). But the Report notes that United States corporate linkages to Western Europe continue to be more substantial and are also growing rapidly and, accordingly, it is still the case that, "the Asian century has not yet begun for the United States".
Japanese firms continue to expand their FDI, but the full scale of their investments is difficult to track, as a considerable volume may be originating today from Japanese affiliates in foreign countries. The investments, for example, of a Japanese-owned firm in Hong Kong in Bangladesh are reflected in the data in terms of FDI from Hong Kong, not from Japan in Bangladesh.
Mergers and acquisitions (M&As) accounted for $229 billion of all 1995 FDI and for a very high proportion of total FDI between developed countries. The United States was the country with the largest M&As transactions -- United States firms alone spent $38 billion in cross-border M&As, or 90 per cent of the equity component of FDI outflows from that country. Foreign firms accounted for $49 billion of FDI through M&As into the United States. Japanese foreign investments through M&As tripled in 1995, yet still totalled only $4.5 billion.
Western Europe had the highest level of cross-border M&As of all regions (around $50 billion). Intra-European Union transactions accounted for most of that total. German, Swiss, French and United Kingdom firms have been involved in some very large foreign acquisitions in the past year, and this foreign acquisition trend shows no sign of slowing.
Developing Countries
Total FDI into developing countries rose 15 per cent to $100 billion. It has thus become the single largest item in net private capital flows to those countries, accounting for 54 per cent of the total. Although FDI to the 48 least developed countries rose 29 per cent in 1995, it only amounted to $1.1 billion.
An increasing amount of FDI into developing countries comes from corporations headquartered in developing countries, a trend that is likely to
- 3 - Press Release TAD/1835 20 September 1996
continue, according to UNCTAD. More uncertain is the degree to which FDI to developing countries will become more evenly spread. 65 per cent of all FDI to developing countries went to Asia. While the Report suggests that FDI inflows to China may fall below $30 billion in the next few years, it finds reason to believe that this would be mainly a temporary adjustment rather than a response to a change in general economic factors. China will remain one of the top FDI destinations in the world.
More generally, 58 per cent of all remaining FDI flows to developing countries went into just 10 developing countries other than China. For example, FDI into Indonesia, Malaysia, Philippines and Thailand alone, by contrast, rose from $8.6 billion in 1994 to $14 billion in 1995. Despite increases in absolute dollar terms, levels of FDI flows into both south Asia and into west Asia remain quite modest, at $2.7 billion and $2.5 billion respectively.
About 27 per cent went to Latin America, with two-thirds of this accounted for by just four countries. Mexico attracted $7 billion in FDI inflows, while Brazil, Argentina and Chile attracted an estimated $4.9 billion, $3.9 billion and $3.0 billion, respectively, in 1995. Over the past couple of years, annual FDI flows to Africa have been around $5 billion only, and remain concentrated on a few countries. According to the Report FDI to Africa will increase. It notes that a rising number of African countries are making considerable efforts to improve the regulatory framework to attract FDI, including through the conclusion of bilateral investment treaties.
In 1995, the total inflow level into central and eastern Europe was nearly double the 1994 volume at $12.8 billion. The FDI flows to Hungary and the Czech Republic tripled last year to $3.5 billion and $2.5 billion, respectively; FDI to Poland rose from $1.9 billion to $2.5 billion, while flows to the Russian Federation doubled to $2 billion. Most of the flows came from European Union-headquartered TNCs.
The Largest TNCs and their Future Plans
Again this year, UNCTAD lists the biggest TNCs in developed and developing countries in terms of their foreign assets. Again, Royal Dutch Shell of the United Kingdom/Netherlands leads the list, with foreign assets of $63.7 billion and total assets of $102.0 billion in 1994. Ford of the United States is second with $60.6 billion of foreign assets and total assets of $219.4 billion, while Exxon of the United States is third with foreign assets of $56.2 billion and total assets of $87.9 billion.
United States firms account for one-third of the top 100 TNCs. The number of Japanese TNCs in the list is rising, with just 11 in 1990 and 19 in 1994. The world's largest 100 TNCs -- just 0.3 per cent of all TNCs -- have dominant positions in FDI flows and international production.
- 4 - Press Release TAD/1835 20 September 1996
The Report also lists the largest TNCs headquartered in developing countries, which are becoming more important in global investment. Many of the largest are headquartered in Asia, and all of the top 50 are headquartered in either Asia or Latin America. The list is headed by Daewoo of the Republic of Korea, Hutchison Whampoa of Hong Kong, and Cemex of Mexico. Much of the FDI by developing country TNCs is directed to other developing countries.
A key element in the work for the Report is a survey of the largest 100 TNCs on their future FDI plans. Continued strong investment growth is projected. North American TNCs continue to view Europe as the most important investment location for the future, especially in high-technology and consumer-goods industries. European TNCs see the United States as the prime location for their FDI engagements. Meanwhile, Japanese TNCs see Asia as their top prospective FDI priority. No slowing of FDI flows by the largest developing country TNCs is anticipated either.
The trade-investment relationship has become more complex, but also opens up new opportunities, states the Report. Where once the issue was whether trade leads to FDI, or FDI leads to trade, now the question is increasingly: where do firms locate their value-added activities and why? The decision where to locate is a decision where to invest and where to trade. Once a location decision has been made, investment and trade flows are determined simultaneously. Today's report focuses on that key subject, looking at the effects of FDI on trade in different sectors, from natural resources, to manufacturing, and to services.
International Arrangements Evolve
The report provides a detailed review of the current developments in bilateral, regional and multilateral arrangements and negotiations on FDI. The question of a possible future multilateral framework was addressed at the ninth session of the United Nations Conference on Trade and Development (UNCTAD IX) (Midrand, South Africa, 1996), where it was agreed that UNCTAD should play a leading role in identifying and analysing issues and development implications of initiatives in that area. The Report is a contribution in that respect. It analyses two basic policy approaches to the further development of international arrangements on FDI. One sees the continuing evolution of bilateral, regional, interregional and specialized multilateral arrangements; that approach has served well so far to encourage the growth of FDI. The other approach sees the negotiation of a comprehensive multilateral investment agreement.
* *** *
NOTE: For more information, please contact Karl P. Sauvant, Chief, Research and Policy Analysis Branch, Division on Transnational Corporations and Investment, UNCTAD, on telephone 41 22 907 57 07, fax 41 22 907 01 94 or e-mail: karl.sauvant@unctad.org.