PRESS BRIEFING ON WORLD INVESTMENT REPORT 2000

Press Briefing

PRESS BRIEFING ON WORLD INVESTMENT REPORT 2000

“Globalization is marching on”, said Georg Kell, Senior Officer and Economic Analyst in the Executive Office of the Secretary-General this morning, at a Headquarters press briefing held to launch the World Investment Report 2000: Cross-border Mergers and Acquisitions and Development by the United Nations Conference on Trade and Development (UNCTAD). Other participants were Khalil Rahman, Chief, UNCTAD’s New York Office, and Tim Wall, Information Officer, Development and Human Rights Section, Department of Public Information (DPI), moderator of the press conference.

Mr. Kell said that the current Report was the tenth anniversary of the World Investment Report, one of the few United Nations publications in the economic and social field read outside the United Nations. Overall, the Report explained how the global market was taking shape and how transnational corporations were the major actors in it.

The world’s largest corporations were becoming bigger, he continued, and the biggest among them were becoming more transnational, which meant that a growing share of their value-added activities was generated outside their home country. Mergers and acquisitions had become the dominant force in shaping foreign direct investment flows [“Foreign direct investment” is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another country, and involves a long-term relationship reflecting an investor’s lasting interest in a foreign entity].

1999 saw absolute records in foreign direct investment flows everywhere, he said, and overall levels had reached $860 billion. Expectations are that foreign direct investment flows for 2000 will exceed $1 trillion. Only 20 years ago they stood at $60 billion and 10 years ago at $210 billion. Foreign direct investment flows had consistently outpaced trade growth and gross domestic product (GDP) growth. The global system of production was both deepening and broadening. There were now 63,000 transnational companies with about 700,000 affiliates. Their growing importance in the world economy could be measured by their share of foreign direct investment stock in GDP. That figure stood at 2 per cent in 1980, and today it is above 14 per cent.

Foreign direct investment, however, remained highly concentrated, with only 10 countries receiving 70 per cent of the flows and 10 developing countries absorbing 80 per cent of the flows to developing countries. The growth trend of liberalization also continued. Almost all regulatory changes undertaken by governments favored foreign direct investment and the number of bilateral investment treaties was growing rapidly –- they now numbered almost 1,700. Countries continued to compete to attract the foreign direct investment, he said.

Regionally, developed countries continued to dominate the scene both as recipient of foreign direct investment and as source of it, he said. The United Kingdom had overtaken the United States as the major source of foreign direct investment. Foreign direct investment to developing countries increased to $207 billion, but their overall share in foreign direct investment had declined

Investment Report Briefing - 2 - 3 October 2000

to 23 per cent. There were new records in South and South-East Asia and Latin America in foreign direct investment growth. Overall foreign direct investment flows to Africa had increased from $8 to $10 billion, and expectations were that an upward trend would continue. Overall, however, Africa accounted only for 1.2 per cent of overall foreign direct investment flows and the picture of marginalization remained unchanged.

The Report had analyzed mergers and acquisitions in great detail, he said, and had asked the question whether mergers and acquisitions was a threat to national sovereignty, among other things, and whether it was better or worse than “greenfield” investments [direct investments in a project, as opposed to acquiring an interest in an existing company or project]. The reasons for mergers and acquisitions were: technology, communication cost, deregulation, and increased competition, and the fact that companies saw the market place increasingly as an integrated market. Mergers and acquisitions were now the dominant form of foreign direct investment.

Those trends raised questions about ownership and impact on domestic economies, he continued. By assessing the pros and cons of mergers and acquisitions versus greenfield investments, the Report concluded that under normal circumstances in the short-run, greenfield investments had more beneficial impact on domestic economies in terms of competition policy, employment, skill transfer and linkages. But, over time, as direct and indirect effects converged, it did not really matter whether the original mode of entry was one of mergers and acquisitions or greenfield investments. It boiled down to the original motive -- was it a long term investment or did it thrive on fleeting advantages? Implications on competition policies did matter, however. Now that there was a global market, wasn’t it time to consider a global approach to competition policy, also called the orphan of international policy making?

To a correspondent’s question about why mergers of big information suppliers sometimes fell through, Mr. Kell said that it was a complex area in which the players were constantly changing. European companies had a foothold in the United States market. Some mergers flew, some didn’t, he said, and in terms of shareholder value, those being acquired were not always benefiting from it. Integration was deepening across the Atlantic and no other sector was as dynamic in terms of competition and privatization.

To another question he said that British companies had become the most active in investing abroad. The last majority of companies becoming transnational were based in the United Kingdom. Germany was also very active. Access to capital had been facilitated by liberalization of the financial market. United Kingdom outflow foreign direct investment increased from $120 billion in 1998 to $200 billion in 1999, a quarter of total foreign direct investment flows, while United States outflows stayed stable at $150 billion.

Asked by another correspondent to reflect on the factor of dependency, he said that all countries were competing for foreign direct investment. Motivation for investment could vary, but long-term capital investment had an interest in building markets for the future. The perception was a positive one, and the United Nations was looking at business as part of the solution. The most pressing challenge of poverty was to have access to economic opportunity.

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Countries who needed foreign direct investment most, however, didn’t receive it, because small economies were not strong enough to be heard. The fundamental challenge was how to motivate long term, solid investments in small economies.

Khalil Rahman said that the global economy was expanding in a very nervous fashion. When mergers and acquisitions became dominant as a way of transfer of investment across borders, the nervousness was reverberating throughout the economy, including the financial markets, resulting in volatility. It was almost a Darwinian landscape. Some sort of predictability was necessary. Mega- companies couldn’t be allowed to run the whole show. The global market place needed global rules. Competition policies were one window through which to look at it, but it had also to be looked at collectively in a comprehensive way.

To a correspondent’s question about modest flows of foreign direct investment in Central and Eastern Europe, Mr. Kell said that there had been some marginal increase. It had to do with privatization, which had played out in the first wave, and perceptions of instability.

Addressing the situation in China, Mr. Kell said that that country had done remarkably well in 1999, attracting $40 billion, almost half of all the foreign direct investment flows going to Asia. In the current year the figure would be as high, if not higher. There was some wait and see concerning China’s accession to the World Trade Organization (WTO).

To another correspondent’s question, he said that the value of mergers and acquisitions as a share of foreign direct investment had increased dramatically, especially in developed countries, where it was nearly 100 per cent. Elaborating about the issue of greenfield investments versus mergers and acquisitions, he said that a mergers and acquisitions company after two to three years faced the same questions as a greenfield investor faced, such as reinvestments and expansion.

Asked about specific measures to improve competitive policies internationally, Mr. Kell said that the Report remained general on it, but called for more multilateral efforts.

The matter of the low euro, or fluctuations in the currency exchange rates, had low impact in the medium term on overall foreign direct investment, he said in response to a question, because the investment was a strategic decision.

Tim Wall announced that the next report from the UNCTAD, on least developed countries, would come on 12 October. The Conference on least developed countries would take place in Brussels early next year.

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