PRESS BRIEFING BY GEORG KELL OF EXECUTIVE OFFICE OF SECRETARY-GENERAL ON 1999 WORLD INVESTMENT REPORT

Press Briefing

PRESS BRIEFING BY GEORG KELL OF EXECUTIVE OFFICE OF SECRETARY-GENERAL ON 1999 WORLD INVESTMENT REPORT

At a press conference at Headquarters this afternoon, Georg Kell, of the Executive Office of the Secretary-General, briefed correspondents on the 1999 World Investment Report. Subtitled “Foreign Direct Investment and the Challenge of Development”, and compiled by the United Nations Conference on Trade and Development (UNCTAD), the report launched this afternoon is the ninth such annual survey. With Mr. Kell were Professor Robert Lipsey, Director of the United States National Bureau of Economic Research, and Khalil Rahman, Chief of UNCTAD’s New York Liaison Office.

The report, said Mr. Kell, offered the most comprehensive tracking available of transnational corporations (TNCs) and of global trends in foreign product investment. The relevant figures would be found in the 500-plus pages of the report, he said. But for the benefit of correspondents, he would run quickly through some of the major trends and then open the floor to questions.

First, regarding globalization and international production systems, recent figures and trends confirmed once again that TNCs were the principal drivers of globalization. Today, some 60,000 TNCs with half a million foreign affiliates accounted for 25 per cent of global output. Together, they accounted for two thirds of world trade, and intra-firm trade alone was one third of global trade. Sales of foreign affiliates now stood at $11 trillion, far in excess of global trade ($7 trillion).

A second interesting global trend indicated that the broad tendency towards liberalization of regulatory regimes had continued in 1998. Out of the 145 changes that took place, 94 per cent were in favour of more foreign direct investment (FDI) and supported liberal measures.

Third, said Mr. Kell, there were some very broad overall trends. Compared to 1997, 1998 saw an absolute new record in FDI inflows. There was actually an increase of 40 per cent: global outflows now stood at $644 billion. The lion’s share of that increase was due to a sharp rise in mergers and acquisitions, especially between the European Union and the United States. Developed countries had thus taken a greater share both as sources of FDI outflows (accounting for 92 per cent of global FDI outflows), and attracting 72 per cent of all inflows.

Developing countries saw a modest overall decline of FDI inflows, from $173 billion to only $166 billion. However, that decline was fairly modest, bearing in mind that 1997 had been a record year, and

also considering that other financial flows were far more volatile. Indeed, in many instances FDI had proved to be a stabilizing force. He drew correspondents’ attention to the table on page 10 of the report, which illustrated the growing importance of FDI as a source of financing for development.

Turning to regional trends, Mr. Kell said that Latin America had seen a slight increase in FDI inflows, from $68 billion to $72 billion. Brazil had attracted a record of $28 billion, followed by Mexico with $10 billion. In Asia, which had experienced an overall decline of 11 per cent, the picture was mixed. Some countries, such as the Republic of Korea and Thailand, had gained, while others had lost ground. The big wild card, he said, was China. Projections for that country for the current year were that it would experience a significant decline, probably from $45 billion to $35 billion, which would represent a drop of one fifth.

Africa had also seen a small decline, largely due to privatization measures (now slowing down) in South Africa. However, the rest of the continent experienced a small increase, and there were good indications that the situation might be improving. A recent survey carried out with investment promotion agencies indicated that prospects for a number of countries had significantly improved, notably Botswana, South Africa, Nigeria, Uganda, Cote d’Ivoire, Mozambique, Namibia and Tunisia. Another interesting finding to emerge from the new report was that potential in Africa was no longer limited to natural resource extraction, but was found increasingly in sectors such as telecommunications, food, tourism and textiles.

The report also gave a very comprehensive overview of the role of FDI in development. It warned that a laissez-faire attitude towards FDI was unlikely to maximize its positive contribution: an integrated approach was required in order to maximize FDI’s positive role while minimizing possible negative impact –- such as crowding out of domestic corporations or adverse impacts on the environment.

Finally, he said, the report contained a very good chapter on corporate social responsibility. It explained why big TNCs were under increasing pressure to respond to concerns in areas such as human rights, environment and labour. The report also made a strong case in support of Secretary-General Kofi Annan’s call -– expressed at the World Economic Forum –- for a global compact between the United Nations and the business world, resulting in the business world’s adoptations of universal principles.

Mr. Kell then asked Professor Lipsey to elaborate on the very substantive section of the report devoted to the role of FDI in development. Professor Lipsey said the question of exactly what role FDI played in development was a fairly complex one. That was partly because FDI inflows were associated with various government policies which by themselves might have a very favourable impact on development. There were strong indications, he said, that a combination of government policies that encouraged FDI, but also encouraged trade and generally open policies, would tend to promote development. However, if there was a favourable effect on development, it was extremely

difficult to tell how much of it was the effect of a relatively open economy and open trade, and how much of it was specifically a function of FDI. But there were strong reasons for believing that larger inflows of FDI had a favourable impact on development. Multinational firms had much higher productivity than firms in general. They were the locus of concentrated human knowledge about how to do business as well as technological knowledge of various sorts, so that there was reason to believe that their introduction to a country would rub off on local firms, and even that their presence itself raised the technological level of a country.

A correspondent, noting that India had been one of the largest recipients of FDI in recent years, asked why the country had of late been unable to maintain earlier inflow levels.

Mr. Kell replied that India was qualified in the report as under- utilizing the potential for FDI. In 1998, India had attracted only $2.2 billion worth of FDI, compared to $3.3 billion in 1997. So there had indeed been a significant decline in India. The reasons for that were manifold, and were related to domestic regulatory regimes and so forth, all of which were outlined in detail in the report. It was mostly a question of the host government’s structures and strategies for inducing FDI to flow to a country. But there had been staggering inroads in some areas, particularly hi-tech areas: they were small in numbers in terms of equity invested, but potentially very significant in terms of spillovers. In comparison with other countries, India’s performance in areas linking FDI to actual economic purchasing power and gross domestic investment put the country at the lower end of the scale.

A correspondent said that some countries whose standard of living was among the highest in the world, such as New Zealand, were “fairly hefty recipients” of FDI. He asked whether that too was an indication that you could be a “branch economy” and still have living standards as high as the highest in the world.

Mr. Kell said that the report contained a table giving the “transnationality index” for individual countries. It showed the extent to which each country participated in global investment flows, and the extent to which their domestic investment was complemented by foreign investment. New Zealand was on top of the list in the developed world. It was not alone. Other small economies -– for example Sweden or Switzerland –- were all characterized by a very high ratio of foreign investment to domestic investment. But the report also offered an interesting table showing the degree of transnationality of developing countries. Trinidad and Tobago was the leader in that category, but other small economies also ranked quite high. However, one certainly could not deduce from it a general implication of a correlation between FDI-openness and standard of living.

Asked for further information about FDI forecasts for Latin America, particularly following the crisis in Brazil, Mr. Kell said it was “quite amazing” to see that FDI flows into that continent had increased despite financial turmoil and the danger that had accompanied

the devaluation in Brazil. Everyone knew that Latin America had so far managed to weather the storm, but FDI –- especially to Brazil and Mexico -– had actually risen. In many instances, it had virtually become the indicator of confidence in the medium- to long-term prospects of those countries. But he acknowledged that much of that FDI had taken the form of mergers and acquisitions, meaning that there had been no new inflow of capital: existing stocks were simply taken over. However, such moves were quite often complemented by additional investment, and perhaps reinvestment of earnings. So the Latin American picture was quite lively, quite dynamic. Indeed, it was quite remarkable that FDI in the region had been so stable. For 1999, UNCTAD also predicted a further increase towards the region as a whole.

Asked about Cuba, Mr. Kell said that that was a “very special story”. It had more to do with worldwide political developments. Europe had been very active in Cuba, but there were still many political questions determining the extent to which other countries could or should invest in Cuba.

Professor Lipsey added that he knew very little about the situation in Cuba, but agreed that political factors were extremely important. They included government attitudes not only towards investment but towards business in general. If a government was hostile to private business, it might sometimes draw in foreign firms, but it would not get large amounts of investment because there was no confidence in the future of such investments. Political rather than economic issues were paramount there.

A correspondent asked about the FDI picture in Africa, particularly as it affected East Africa and Kenya.

Mr. Kell reiterated that overall there were very positive indications. Apart from South Africa, FDI inflows to Africa as a whole had increased. They had dropped significantly in South Africa largely because 1997 had witnessed a major privatization programme in that country. In East Africa and Kenya, as the report indicated, there had been an overall decline. But other countries in sub-Saharan Africa had recorded increases. Recent surveys indicated that prospects were quite promising. In conjunction with recent and ongoing changes of policies which had often represented major barriers, particularly in countries like Nigeria, there was now a new climate of hope that FDI could play a more important role.

* *** *