PRESS CONFERENCE ON WORLD INVESTMENT REPORT 2005

PRESS CONFERENCE ON WORLD INVESTMENT REPORT 2005

While established, capital-rich countries have long been the supplier of foreign direct investment (FDI) in the world, the share from emerging economies was increasing rapidly, Georg Kell, Executive Head of the Global Compact, told correspondents yesterday at a Headquarters press conference. 

He was accompanied by Kai Hammerich, Director-General of “Invest in Sweden” and the President of the World Association of Investment Promotion Agencies, to launch the 2005 World Investment Report: Transnational Corporations and the Internationalization of R&D, published by the United Nations Conference on Trade and Development (UNCTAD).

The two-way flow of FDI signalled the start of a new role for developing countries in international business; a development likely to mature in 5 to 10 years’ time.  “The fact that we have these two-way streets of investment will open up strategic alliances between corporations in developed and developing countries that will be different in nature and scope from those of the past”, said Mr. Hammerich.

Correspondents were told that, after three years of gradual decline, FDI had picked up again, with UNCTAD estimating the current stock of FDI at $9 trillion in the past year.  The rise was due exclusively to the significant increase of FDI to developing countries -- over $230 billion, amounting to almost 40 per cent of total FDI.  High inflow of FDI to a particular country signified the existence of market-building opportunities and good growth prospects. 

China, including Hong Kong, was at the forefront of that phenomenon, receiving the largest share of FDI flows to the developing world -- $94 billion.  Meanwhile, relatively high growth rates and increased stability in Latin America had led to a 44 per cent increase in FDI to that region ($70 billion).  Brazil and Mexico were the top FDI recipients there, whereas flows declined in Bolivia and Venezuela.

In contrast, the flow of FDI to Africa remained unchanged from last year, reflecting the continent’s limited participation in the world economy.  Africa received only 3 per cent of the world’s total FDI -- with only 2 per cent going to least developed countries.  The flow of FDI into Africa, said Mr. Kell, was commodities-driven, for instance by the high price of oil and other natural resources, and not largely directed at market building, as in the case of East Asia.  Meanwhile, international market access measures, such the United States’ “African Growth and Opportunity Act” and Europe’s “Everything but Arms” initiative, seemed not to have motivated any major economic activity there.

On the subject of the increasing investment activities of Southern transnational corporations in other regions of the world, Mr. Hammerich said that they came from Hong Kong and other parts of China, while South Africa, Brazil and Mexico were catching up on a large scale.  Their investments were focused on buying access into commodity resource regions, he said.

In addition, the theme of this year’s World Investment Report was the internationalization of research and development, and marked the first time that such a theme had been studied.  Towards that end, an UNCTAD capability index had been created, also for the first time.  “Many developing countries, in particular in Asia, are no longer the workplace of the world but are also focusing on attracting operations of high added value such as research and development”, said Mr. Hammerich.  “These countries are becoming sources not only of labour but also skills and technologies.”  He cited consistent Government policies on innovation education and strategic investment in human capital as reasons for the rapid growth of FDI flows to that region.

Among those playing a dual role of recipient and supplier of FDI, Mr. Hammerich named China, India, Russia, Malaysia, Brazil, Mexico, South Africa and Turkey as countries to note.  Asked to expand on his comment regarding the kind of role they would be playing in 5 to 10 years’ time, he said that more of them would become overseas investors, having expanded as much as possible in their own countries by then.  Current trends indicated specific areas of focus, including the establishment of research and development centres in the area of information and communication technology.

In response to a question regarding the effects of political tension on FDI, Mr. Kell pointed out that the overall trend remained one of liberalization.  A majority of countries sought to attract technological know-how and market access through joint ventures and other forms of ownerships and alliances, aided by regulatory changes at national levels which had solidly been taking place over the past decade. 

Asked to comment on the decrease of FDI to several countries in continental Europe, Mr. Kell said that differences in the degree to which developed economies were able to keep apace with technological change could render one country or another as a more attractive investment partner.  The United Kingdom and the United States stood as successful examples in that regard, attracting FDI through a phenomenon that the speakers called “an internationalization of their economies”.

A question then arose regarding the motivations behind the provision of FDI, where the questioner gave examples of Arab countries, Iran and countries of the former Soviet Union, who were recipients of FDI despite not being “politically secure” and contrasted that with the case of Bolivia and Venezuela, where FDI was on the decline.  The questioner asked if FDI flows were guided by the market or if they resulted from the machinations of consulting firms or bodies such as the World Bank and the International Monetary Fund. 

Mr. Kell said that directing the flow of FDI was rational like any other business-led, opportunity-seeking behaviour, and was governed by risk and opportunity calculations.  An acceptance of greater political risks could occur when the opportunity premium rose above the risk premium, as in the case of Africa during the period of the oil price surge.  But he conceded that, in cases where investments went toward market-building and market-seeking, institutional and political stability, as well as the relative friendliness of the intended recipient, became important factors in the equation.

Asked if there were any negative implications of FDI on future growth, Mr. Kell replied to the contrary, saying that FDI was an equalizer over time.  Historically, FDI was characterized by long-term commitment and had been more stable than financial flows, recalling the 1997 East Asian economic crisis where financial investors withdrew from stricken economies in contrast to foreign direct investors who tended to remain behind.  Mr. Hammerich added that FDI had a balancing effect on the world economy, with developing economies becoming more frequent recipients.

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For information media • not an official record