NEW FDI PATTERN EMERGING, SAYS UNCTAD, RESHAPED BY SERVICES ECONOMY, NEW INDUSTRIES

NEW FDI PATTERN EMERGING, SAYS UNCTAD, RESHAPED

BY SERVICES ECONOMY, NEW INDUSTRIES

(Reissued as received.)

GENEVA, 28 October (UNCTAD) -- The share of the services sector in total foreign direct investment (FDI) stock[1] now amounts to some 60 per cent at the global level, compared to less than 50 per cent a decade ago, according to new estimates released by the United Nations Conference on Trade and Development (UNCTAD) today.  At the same time, a new pattern of services FDI has emerged, with financial and trading services, the traditional bulwarks of services stock, ceding ground to new industries.

The overall rise in services stock –- which applies to both developed and developing countries, and to both inward and outward investment –- is mirrored by a decline in the share of manufacturing in FDI inward stock, from more than 40 per cent in 1990 to 35 per cent today. The share of the primary sector also fell, from 10 per cent to 6 per cent.

Finance and trading stock decreased from 65 per cent of all inward services stock in 1990 to 45 per cent in 2001, while that of the new FDI service industries –- including power generation and distribution, telecommunications and business services -– rose from 17 per cent to 44 per cent.

The growth of FDI in services reflects two factors, UNCTAD finds:  the rise of the services economy in developed countries, where it now accounts for an average two thirds of gross domestic product (GDP); and the opening up to FDI in services of all groups of economies.  As many services are neither tradeable nor storable, but must be produced where they are consumed, FDI is the dominant means of delivering them to foreign markets.  In addition, host-country regulations often require local establishment for the delivery of services.

and communication technologies that make services, especially information-intensive ones, more tradeable across borders and allow the

The fact that services affiliates abroad are increasingly established by manufacturers in support of trade and other operations abroad also helps the ascendance of services in FDI.[2]  Their expansion is further fuelled by information emergence of international services production networks.  Among the “up-and-coming” services industries are power generation and distribution (electricity, gas and water), telecommunications, and business services, such as machinery and equipment rental, computer-related activities, research and development, and advertising.

In all industries, developed countries continue to dominate outward FDI stock; developing countries and the countries of Central and Eastern Europe account for less than 10 per cent of the total in many industries.  Outward FDI from these two groups of countries is fuelled by services FDI, in particular trade-supporting and niche FDI in services:  trading and finance affiliates, and business activities serving emigrants from developing home countries.

In absolute terms, FDI stock has grown in all sectors and almost all industries.  Even in agriculture, hunting, forestry and fishing, traditionally not an important FDI, inward FDI stock more than doubled between 1990 and 2001.  Inward stock in services, however, quintupled.

In the primary sector, FDI is determined primarily by resource endowments, not by the industrial characteristics that affect investment in manufacturing and services.  In resource-intensive activities, FDI is concentrated in countries that have high-quality, low-cost resources in abundance.  While developing countries are rich in natural resources and attract considerable FDI, few internationally competitive firms in the primary sector come from these countries.

In the manufacturing sector, the two industries with the largest FDI -– chemicals and electronics –- accounted for one third of manufacturing FDI inward stock in 1990 and 30 per cent in 2001.  As manufacturing is a mature sector, none of its individual industries is as dynamic in terms of FDI growth as many services industries.  Thus, the shares of almost all manufacturing industries in total FDI stock have fallen over the years in developed and developing countries alike.

The traditional concentration of FDI services stock on financial and trading services reflected the early international expansion of trading companies (e.g. Japanese sogo shoshas[3] and Western European traders) and transnational banks following their customers abroad.  Although these trends continue, these industries are not as dynamic as other services industries, such as power generation and distribution (which registered a 13-fold increase in inward FDI stock between 1990 and 2001), telecommunications (including storage and transport -– a nearly 15-fold increase), and business activities[4] (ninefold).  Other dynamic services include health services (including social services) and education, where stock has increased, respectively, by 12 and five times over the same period; nonetheless, the absolute size of the stock in these activities is still very small.

FDI in most industries not only originates in developed countries but is also invested primarily in them, typically because this is where the markets are.  But there are some notable exceptions:  in construction, for example, the FDI stock in developing countries exceeds that in developed countries, and the picture is similar in electricity, gas and water, where the stock size is not very different in the two country groups.  In most manufacturing industries, the stock in developing countries is still several times smaller than in developed countries. But the gap is shrinking:  developing countries’ manufacturing stock has risen from one fifth that of the industrial world in 1990 to one half in 2001.  Food, beverages and tobacco, wood, machinery and equipment, and especially coke and petroleum products were among the industries to see the biggest reduction in this gap.

For more information, please contact:  UNCTAD Press Office -- tel.: +41 22 907 5828; e-mail:  press@unctad.org; Web site:  www.unctad.org/press; or M. Fujita; tel.:  +41 22 907 6217; e-mail:  masataka.fujita@unctad.org

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[1]Stock refers to the external financial assets (outward stock) and liabilities (inward stock) of companies, in contrast to flows, which refer to financial transactions conducted within a particular year.  FDI stock is the value of the share of foreign affiliates' capital and reserves (including retained profits) attributable to their parent enterprise, plus the net indebtedness of affiliates to the parent enterprise.  However, in most cases, stock represents simply accumulated flows.

[2]For example, 30 per cent of foreign affiliates established by Japanese manufacturing transnational corporations by 2001 were in the services sector.

[3]Trade accounts for one tenth of all Japanese outward FDI.

[4]Business activities include real estate.  In the case of Hong Kong, China, they also include holding companies.