PRESS BRIEFING ON 1998 WORLD INVESTMENT REPORT

Press Briefing

PRESS BRIEFING ON 1998 WORLD INVESTMENT REPORT

George Kell, an economist in the Executive Office of the Secretary- General, told correspondents at a Headquarters press briefing today to launch the 1998 World Investment Report, that once again, foreign direct investment (FDI) had hit new record levels in all major country groupings.

Mr. Kell went on to say that those record levels were important because there had been financial crises and many questions about how corporations would react to that had been raised. The good news was, however, that corporations had not pulled out as fast as investment bankers or portfolio managers had done. They continued to invest and the process of international production systems continued to deepen.

Khalil Rahman, Chief of the United Nations Conference on Trade and Development (UNCTAD) Office in New York, introducing the presenters of the report which also included Professor Robert Lipsey of the City University of New York (CUNY) and Director of the National Bureau of Economic Research, told correspondents that the Report, the eighth in the series, was the most authoritative source of information and analysis related to trends in FDI. This year's report assumed a particular salience at a time when the process of globalization was under close scrutiny both within the United Nations and outside.

Mr. Kell said the overall distribution of flows was more or less in line with what had been observed previously. Developed countries continued to absorb the lion's share -- two thirds of all inflows -- and they accounted for 90 per cent of all global outflows. Developing countries, however, had been quick in catching up overall. Considering that in 1990 they only accounted for 17 per cent of FDI inflows, by 1997 the figure stood at 37 per cent -- $149 billion. That was probably four or five times the total of official development assistance (ODA).

Mergers and acquisitions in the North had been the single most determining factor in shaping FDI flows, Mr. Kell went on to say. "The news here is big corporations do get bigger." American corporations had been heavily involved, especially in Europe, in a few selected sectors such as telecommunications and pharmaceuticals. The UNCTAD had come up with a very interesting index which was called the transnationality index. It measured the extent to which corporations went global or transnational. That index had been showing an ongoing increase over the years indicating that global production systems were deepening and widening geographically.

Addressing the situation in Asia, Mr. Kell said that region in 1997 had experienced $87 billion in inflows. That was an increase over 1996. China alone accounted for 50 per cent, which was about one third of all flows going to developing countries. The five economies most affected by the financial

crisis in South-East Asia had shown a remarkable stable trend in the sense that FDI remained unchanged for the group as a whole. That was the case even though it had gone down for some countries, Indonesia in particular. In other countries, however, it increased tremendously, doubling in the Republic of Korea and Thailand.

Continuing, Mr. Kell said that "the story here is really that corporations continue to believe that fundamentals are sound, that long-term prospects are good and that short-term behaviour of investors has not been affected by short-term financial flows". The question to be asked was "has there been a shift away from these countries to other regions like Latin America for example?" The answer there was really that the scope for substitution appeared to be very limited because the different types of investment were seeking different advantages.

Citing specific examples, Mr. Kell identified resource-seeking FDIs which were clearly location specific and asset-seeking FDIs where there was an inducement because of better cost performance in certain countries due to devaluation and lower asset prices. "When you think about market-seeking investments, there of course a negative impact has occurred as demand in these economies has gone down. These types of investment may have been postponed or some of them even cancelled."

Turning to Latin America, Mr. Kell said that region was the star performer for 1997 with an absolute new record of $58 billion in inflows. That was an increase of almost 30 per cent over 1996. Brazil, for the second time in a year, was the absolute leader with $16 billion in FDIs, followed by Mexico with $12 billion and Argentina with $6 billion. Clearly macroeconomic performance was sound in those countries. Privatization and regional integration had continued to function as major inducements for FDIs. The United States was the main source accounting for $24 billion, which was almost 50 per cent, followed by Germany, France and Spain.

The UNCTAD forecasted that those levels would remain more or less unchanged, Mr. Kell continued. The news there really is twofold: on the one hand, the threat of financial contagion had not yet had a negative impact on investment inflows. Maybe there was even a lesson from South-East Asia: even if there were short-term cyclical downturns, major corporations were unlikely to respond immediately in the short-term to that.

Turning to Africa, Mr. Kell told correspondents that the region as a whole continued to be marginalized, attracting slightly less than $5 billion in inflows. Nigeria and Egypt were the two countries that attracted nearly 50 per cent of that total. Natural resource exploitation continued to be the single most important determinant. It would, however, be a gross mistake to lump together all 54 African countries.

There were some very good performers in Africa in terms of foreign direct investment and there were even some success stories, Mr. Kell

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continued. A handful of countries, such as Botswana, Tunisia, Ghana, Mozambique and Uganda had succeeded in attracting considerable FDI. In relative terms measured for instance as FDI/per capita, those countries had far higher ratios than many other major economies. There were therefore signs of hope for Africa in that respect.

A correspondent wanted to know about FDI and Hong Kong. Mr. Kell said the key in that context was really Hong Kong being part of China and how that country continued to perform. The UNCTAD had also predicted a downturn in investment going to China. The question was to what level. The level for 1997 was $45 billion. The UNCTAD predicted a drop to $40 billion. Some private forecasters were more pessimistic, suggesting figures far lower than that.

Mr. Kell said there was clearly a lot of uncertainty out there and it was not clear how all the factors would play out or how growth in China would evolve. All of that was subject to interpretation right now. Would China have the 10 per cent which the Government was aiming at or would it not. There were signs of some overcapacity in some sectors of investment. There was also increased competition from some countries which had devalued. The export competitiveness of FDI in China had been negatively affected.

Also responding to the issue of China, Robert Lipsey said Hong Kong investment data was always questionable. Hong Kong acted to a large degree as a conduit including investment into China. The inflow into Hong Kong had often looked too large to have much to do with Hong Kong itself. As it was now part of China more officially, much of that role could disappear. A lot depended on Hong Kong's role as a financial centre since it had not been a major destination for manufacturing FDI.

Addressing the issue of Latin America's continued growth, a correspondent raised questions about reports that next year Venezuela and Brazil would experience recessions and the growth of Latin America would also be very slow. Also, the International Atomic Energy Agency (IAEA) reported in London that the demand for oil would go down dramatically next year, far below initial projections. That drop in oil demand would hit Venezuela, Mexico, Colombia and Ecuador, the correspondent continued. He wanted to know whether those observations fitted with the report's projections.

Mr. Kell said that according to the latest surveys by UNCTAD, the mood was a very upbeat one. If there were any lessons to be learned from the South-East Asian financial turmoil, it was that FDI was reacting very differently from short-term capital flows.

Most FDIs were long-term investments, even if they were only mergers and acquisitions and take-overs, Mr. Kell continued. There was a commitment on the part of investors to stay there for at least a couple of years depending on the type of investment. With that horizon of investment in mind, short-term cycles had to be discounted. However, if a major recession

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emerged, the whole picture would no doubt change. No-one could forecast that and "we will keep our fingers crossed that will not happen".

Commenting on the underlying trend of globalization in the report, a correspondent wanted to know what the process would mean for people all over the world and the type of changes it would make to their lives. Mr. Kell said what was being discussed was FDI. Globalization was not being addressed in an abstract context. What was talked about was the investment behaviour of big corporations. The reality of today was that all Governments were seeking FDI. It brought employment, income, technology and was a major avenue in approving standards of living. The fact that Governments now competed for FDI showed that they all by now had really embraced that message.

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