1998 WORLD INVESTMENT REPORT IS TIMELY CONTRIBUTION TO GLOBAL UNDERSTANDING OF IMPORTANCE OF FOREIGN DIRECT INVESTMENT, UNCTAD SAYS
Press Release
TAD/1861
1998 WORLD INVESTMENT REPORT IS TIMELY CONTRIBUTION TO GLOBAL UNDERSTANDING OF IMPORTANCE OF FOREIGN DIRECT INVESTMENT, UNCTAD SAYS
19981109 ADVANCE RELEASE GENEVA, 9 November (UNCTAD) -- As globalization is gaining in importance and in complexity, the 1998 World Investment Report of the United Nations Conference on Trade and Development (UNCTAD), its eighth annual edition, provides a set of keys for unlocking knowledge about one of the principal economic dimensions of globalization. It explains the central role played by foreign direct investment (FDI) in globalization; it examines, region by region, the trends that are shaping international long-term business investment; and it opens doors to insights on the shifts in public policies and corporate strategies that determine where foreign investment is going, and why.Globalization and the increasing liberalization of trade and investment are having a profound effect on both economic and social development, as well as business and commerce. The effect cannot be grasped without understanding FDI trends and determinants.
A summary of the findings in the new report on the major strategic shifts in the determinants of FDI follows.
FDI Numbers
The FDI numbers tell a now familiar story since 1985. With only one interruption, in 1991, year after year the volume of FDI flows has risen since 1985. The year 1998 will prove to be no exception. World FDI inflows gained by 19 per cent in 1997, to $400 billion, and world FDI outflows increased by 27 per cent to $424 billion. The Report projects that they may rise to between $430 billion and $440 billion this year. On this scale, there just can be no doubt that FDI is a major engine of globalization.
Totals of foreign assets, foreign sales and foreign value -- added of the rising number of transnational corporations (TNCs) -- show that FDI is both a major stimulus to globalization and that, conversely, its growth is a direct result of globalization and economic liberalization. FDI last year grew in all regions of the world.
The tempo of globalization is captured by noting, for example, that the 1997 FDI inflows of $400 billion were almost double the total seen in 1990 and
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some seven times the amount recorded in 1980. Flows to developing countries amounted to $149 billion in 1997, representing 37 per cent of all global FDI, compared to just $34 billion, representing only 17 per cent of all FDI, at the start of this decade.
Sales of the foreign affiliates of TNCs also continue to grow faster than world trade. Thus, as the overall FDI volume expands, so international production is contributing on a rising scale to the interdependence of the world economy.
To highlight this key feature of globalization, the Report estimates that the value of global sales by foreign affiliates of TNCs rose by more than $600 billion last year to around $9.5 trillion. Their value-added production is close to 7 per cent of global gross domestic product (GDP), compared to under 5 per cent in the mid-1980s.
Today, we are talking of a universe of around 53,000 TNCs, with a conservative estimate of around 450,000 foreign affiliates, whose FDI stock rose by over 10 per cent last year to reach an estimated $3.5 trillion. The value of assets of these affiliates in 1997 was at least treble the volume of the FDI stock as many of their operations are locally financed.
Mergers and Acquisitions
The report notes that mergers and acquisitions (M&As) are of mounting importance in the world FDI market. They are now a major driver of FDI, and this reflects the prevailing strategies of many TNCs: divesting non-core activities and strengthening competitive advantages through acquisitions in core activities. One consequence is greater industrial concentration in the hands of a few firms in each business sector.
Trade liberalization, deregulation and privatization have stimulated M&As activity. Majority-owned M&As accounted for $236 billion of 1997 FDI, representing 58 per cent of all FDI, up from a level of just below 50 per cent in 1996. There were 58 transactions individually valued at over $1 billion each. TNCs from developed countries accounted for 90 per cent of these M&As.
It is also important to note, on the theme of mounting globalization of investment and the increasing importance of cross-border business transactions, that TNCs are achieving their goals of strategic positioning and restructuring through a rising volume of international inter-firm agreements. Many of these agreements focus on technology.
FDI and Financial Crisis
It might seem surprising that the Report is projecting a rising level of FDI in a year that has seen dramatic events in the world's financial markets,
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setbacks for numerous economies, and metres of press reports on how gloomy the world economy is today. But TNCs have a much longer perspective than do most investors in international bonds and equities.
According to UNCTAD, it is important to clarify for the public some confusion that exists between portfolio foreign investments and FDI. "Today, you can sit at your desk, make a few clicks on the mouse of your computer and, as a result, buy and sell bonds and equities issued by governments and corporations around the globe. By comparison, FDI is complex. It involves a long-term commitment to a business endeavour and a substantial deployment of human and financial resources. You cannot conduct FDI with computer mouse clicks. This helps to explain why FDI flows tend to be less volatile than short-term portfolio flows."
Indeed, the time horizons for investments and returns on investments are long term. For example, the mining of natural resources, or the establishment of plants that are parts of integrated international production networks, has the effect of reducing "herd" investing behaviour. Divestment of assets -- if that is desired -- is more complicated and takes much longer in FDI than is the case for portfolio investment.
Biggest TNCs
The report contains the ranking of the world's 100 largest TNCs in terms of foreign assets and the 50 largest from developing countries. The World Investment Report is the only annual report to monitor the world's largest corporations in this way, and we report on a universe of 100 corporations, whose combined foreign assets rose 6 per cent from 1995 to 1996 to exceed $1.8 trillion.
Noteworthy is the fact that total foreign assets of the top 50 from developing countries have been rising much more rapidly than those of the world's top 100 TNCs. The gain for the top 50 from developing countries was 31 per cent to $104 billion in 1996. Since UNCTAD first introduced the top 50 developing country list, in 1993, the increase has been 280 per cent.
One of the Report's most important findings is that the world's largest TNCs are becoming more transnational. This is measured by looking at foreign assets, sales and employment relative to data on the same variables in the home countries of these corporations. The level of transnationality is increasing.
In other words, more and more of the business of the world's biggest firms is taking place beyond the borders of their home countries. More of their sales and their assets are overseas. The transnationality of business provides another significant indicator of how the process of globalization is increasing.
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Regional Trends
Some of the key regional issues included the following:
-- Among the developed countries, the increasingly dominant characteristic is the rising level of trans-Atlantic M&As -- these are rising in volume at a very fast pace today. FDI by North American and West European firms is accelerating. Meanwhile, there is a levelling-off of outflows from Japan. There was also a significant rise of inflows to Japan, although these still only amounted to $3 billion last year.
-- Central and Eastern Europe last year saw a significant rise in FDI, from a low level. It is clear, especially outside of FDI into natural resources, that the countries doing best are also those that have attained the most progress in their transition towards stable and growing market economic systems.
-- Latin America, of all the developing regions of the globe, saw the highest increase in FDI inflows. This was in response to a combination of positive factors, from successful privatizations to perceptions of sound macroeconomic policies, significant real growth rates, and attractive environments for foreign investment.
-- FDI flows to Africa reflected real differentiation between those countries that enjoy political stability, are securing growth and are enhancing their investment environment on the one hand and other countries. There are a number of "front runners" (such as Botswana, Equatorial Guinea, Ghana, Mozambique, Namibia, Tunisia and Uganda) that are attracting high levels of FDI. The 1998 Report shows that, perhaps to the surprise of many people, rates of return on foreign investments into Africa have consistently been high.
-- In Asia, despite the financial crisis, FDI inflows have remained strong and outflows have been significant. The Report has an interesting section on China, which in 1997 attained a record inflow of $45 billion -- almost one third of all FDI into developing countries. Is the FDI boom into China over? The Report does not say yes; but, it suggests that a combination of factors may lead to a slowdown of inflows in 1998, even though China is expected to continue to attract high volumes.
Determinants of FDI
Traditional factors determining foreign investment remain important, from the existence of a hospitable pro-investment environment, to opportunities to exploit natural resources, to the availability of low cost labour, and to the chance to access a growing and large market.
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But, and this is a key message: shifts are taking place in the considerations by TNCs of where to locate new foreign investments. Increasingly, firms are seeking investment locations that offer people-made advantages, what the Report call "created assets", from technological advantages to particular labour skills. TNCs are seeking to maximize the potential of globalization and technological advances to strengthen their ability to coordinate their expanded international production networks in order to become still more globally competitive.
By the term "created assets", UNCTAD means assets that can be tangible like the stock of financial and physical assets, such as communication infrastructure or marketing networks. It also means intangibles based on knowledge, such as managerial and technological skills in countries and competencies to organize income-generating assets productively.
The UNCTAD concludes that the rise in the importance of "created assets" is the single most important shift among the economic determinants of FDI location in a liberalizing and globalizing world economy. Possessing such assets is critical for firms' competitiveness in a globalizing economy. Countries that develop such assets become more attractive to TNCs.
Conclusion
In a world that is changing rapidly, the expansion of FDI is a formidable force. It is being driven to a considerable degree by a growing array of international agreements. The UNCTAD is seeking to help developing countries to participate effectively in the development of investment discussions and negotiations. It is paying special attention to identifying the interests of developing countries and ensuring that the development dimension is understood and adequately addressed in international investment agreements.
Rarely before has there been so much activity undertaken by national governments and international organizations in the realm of investment negotiations. The number of bilateral investment agreements is expanding. Taxation, for example, is an important matter in investment. Thus, as of the end of 1997, there were 1,794 double taxation agreements in effect covering 178 countries.
There can be no question that many of the policy issues entwined in forging international agreements on FDI are complex. The 1998 Report will be a timely contribution to global understanding of how important FDI has become.
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