PRESS CONFERENCE BY FRANCE ON INTERNATIONAL INVESTMENT

3 February 1997

Press Briefing

PRESS CONFERENCE BY FRANCE ON INTERNATIONAL INVESTMENT

19970203 FOR INFORMATION OF UNITED NATIONS SECRETARIAT ONLY

At a headquarters press conference sponsored by the Permanent Mission of France this morning, Fabrice Hatem, Head of the Study Centre on International Investment, stated that a recent survey of managers of transnational corporations had revealed that foreign direct investment was expected to continue its expansion over the next five years.

Introducing a report entitled International Investment Trends Toward the Year 2000, which was sponsored by the Ministry of Economic Affairs of France, the United Nations Conference on Trade and Development (UNCTAD) and Arthur Andersen France, Mr. Hatem said that the large increase in flows of foreign direct investment thus far in the decade had culminated in a record $315 billion for 1995.

Because of the increasing role of transnational corporations in the world economy, attracting foreign direct investment had become a major goal of government agencies charged with the promotion of economic development. In order to focus their policies, government agencies had to determine the major host countries for such investment, and in which economic sectors it would concentrate. Accordingly, the Government of France had surveyed more than 300 transnational corporation managers and had interviewed more than 100 in preparation of the report.

Corporate managers stated that they anticipated a substantial rise in international investment flows over the next five years. Some 60 per cent of those questioned said that their companies would "markedly increase" foreign direct investment in the next five years, while 33 per cent said they would "increase" it. Those investment flows would also see a shift in priorities, as investment increasingly concentrated on emerging markets. In developed countries, increased foreign investment was expected as corporations underwent restructuring and modernization.

Over the last five years, only a minority of transnational corporations had achieved more than 60 per cent of sales abroad, Mr. Hatem said. A large majority of companies now anticipated a major shift of sales from domestic to foreign markets. Companies wanted to capture growth in emerging markets. Also, companies wanted to be worldwide -- not just national -- leaders in their "core business".

Increased overseas sales could be realized two ways -- through exports or through overseas production. Transnationals were increasingly emphasizing foreign production, both for local markets and for re-export. Foreign

production was expanding partly to achieve reduced costs, but primarily to generate sales in local markets.

Foreign direct investment over the next five years would be realized two ways, he said. Joint ventures would be employed as the best means of sharing risks and competencies. Also, local partners are best aware of local markets. The second preferred technique would be through mergers and acquisitions.

In the early 1980s, foreign direct investment had been concentrated in developed countries -- principally in Europe and North America. Now, emerging markets, particularly in Asia, were attracting such investment. For the future, transnationals anticipated increased investment in Eastern Europe, Latin America and Asia.

Levels of foreign investment in Western Europe and the United States were expected to remain constant, he said. Investment in Western Europe was expected to focus on industries undergoing restructuring: defence, finance and insurance. In terms of business functions, transnationals were concentrating their foreign direct investment on "downstream" activities that were easily moved abroad -- distribution, marketing and sales. Final assembly production had also become very internationalized. Core functions -- fundamental research and decision-making -- were less internationalized.

A correspondent asked how countries decided in which foreign markets they would invest. Mr. Hatem responded that the primary motivation was access to markets. Investment decisions were much more predicated upon the market of a country, than on its natural resources. The quality and flexibility of manpower was more important to transnationals than its relative cost.

Asked to define what he meant by "flexible" manpower, Mr. Hatem said that transnationals were looking for skilled workers that they could hire and layoff easily.

To a question on foreign direct investment in Asia, he said that China was by far the most important investment target. Indonesia, Thailand and Malaysia were also cited as among the most attractive. India was experiencing low levels of foreign direct investment, but those flows were increasing rapidly as a result of privatization and de-regulation in the telecommunications and energy sectors.

Viet Nam was a very interesting case, he continued. Government regulations had changed, and transnationals were looking at the country as a base of low-cost, low value-added projects. But according to UNCTAD, foreign direct investment in Viet Nam in 1995 had amounted only to some $150 million. Poor infrastructure and complex administrative requirements were hampering investment.

France Press Conference - 3 - 3 February 1997

To a question on the role of investment banks, Mr. Hatem said that 1995 had seen a world record $1 trillion worth of mergers and acquisitions. Transnationals would increasingly rely on that type of activity to develop their businesses abroad, he said.

What was the prognosis for foreign direct investment in Cuba, particularly in light of United States government regulations such as the Helms-Burton law? Mr. Hatem said that, so far, Cuba was attracting very low levels of investment, principally in the tourism sector. Cuba had a low profile in terms of "risk analysis". Cuba was simply "not on the map" regarding substantial foreign direct investment.

Elsewhere in Latin America, foreign investment was being attracted by low inflation and ongoing privatization -- especially in energy and power generation. Presently, the stock of foreign direct investment in Latin America stood at $200 billion -- some 10 per cent of the global total. Chile, Brazil, Argentina and Mexico accounted for nearly three quarters of investment in Latin America. Transnational managers contacted for the survey indicated that Latin America would be given increased importance by foreign investors, he said.

In Africa, foreign direct investment was largely limited to North Africa and southern Africa. Transnationals had expressed quite positive judgements regarding future investment trends in Morocco, Tunisia and South Africa.

What was the role of government-investment promotion agencies in the process? a correspondent asked. Mr. Hatem said that those agencies emphasized investments in infrastructure and land. Mergers and acquisitions did not require their services. Also, most foreign direct investment was being directed towards distribution in the service sector, not in production and manufacturing -- the traditional area of activity for investment promotion agencies. There was a great deal of competition today between territories seeking to attract foreign capital, he added.

To a question on the effect of foreign debt on investment, Mr. Hatem said that countries with high debt were demonstrating financial weakness, which increased their level of risk.

When questioned on the definition of "internationalization", Mr. Hatem said that levels could be measured several ways -- through structure of ownership, sales, or assets. The UNCTAD had developed an index of internationalization which blended statistics on sales, assets and employment. According to that index, Western Europe was the most internationalized region, followed by the United States and then Japan.

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