1. UNCTAD VIRTUAL INSTITUTE TRAINING PACKAGE ON ECONOMIC AND LEGAL ASPECTS OF INTERNATIONAL INVESTMENT AGREEMENTS (IIAs) Module 1 Concepts, trends and economic aspects of foreign direct investment
Theme 4
Foreign Direct Investment in the World and in Africa: Long-term Trends and Current Patterns
Kampala, November 2008
Zbigniew Zimny
UNCTAD consultant

2. 1. International production (and TNCs activities including FDI) has grown very fast since the mid-1980s and its importance in the world economy has significantly increased

3. How it was three decades ago, according to Dunning?
“[Production] undertaken by enterprises which deliberately coordinate their operations (purchasing, production, finance, R&D, marketing) on a global basis to make the most efficient use of their resources (material, technical, financial and managerial) is still more the exception than the rule.
Even on the eve of the Second World War, the value of such production was only one third that of international trade. In the mid-1950s and 1960s the growth of such production outpaced that of trade, and in spite of trade liberalization and rising oil prices, by the 1976 it had exceeded that of trade”.
Source: J. H. Dunning, International Production and the Multinational Enterprise, 1981, London, G. Allen and Unwin.

4. Since the mid-1980s world FDI has grown faster than world GDP and exports…

5. …and its relative importance in the world economy has significantly increased (FDI/GDP, FDI/GFCF and sales of FA/exports)

6. FDI has become by far the largest source of external financial resources flows to developing countries (types of flows, , $ billions)

7. Summary of the increasing role of TNCs in the world economy
FDI stock/GDP: from 6% to 25%
FDI flows/GFCF: from 2% to 15-20%
Sales of foreign affiliates (FA) in host countries/exports: from parity to 2 times higher
TNCs account for some 2/3 of world exports: 1/3 parents’ exports from home countries and 1/3 foreign affiliates’ exports from host countries
1/3 of world trade is intra-firm trade of TNCs
FDI is the largest source of external finance for developing countries
TNCs dominate world industrial R&D and are important in international technology transfer (4/5th internal to TNCs)
Value added of foreign affiliates accounts for 11% of global GDP (compared to 5% in the early 1980s). The share of foreign affiliates in global employment is estimated at 3%

8. Individual host countries rely to varying degrees on FDI and TNCs
 HIGH RELIANCE
 LOW RELIANCE

9. 2. World FDI flows fluctuate with economic cycles but as long as they are positive they increase FDI stock and international production (that is, production under the governance of TNCs), which grows continuously

10. World FDI flows grow in the long term but fluctuate with economic cycles

11. World FDI stock grows continuously

12. 3. Cross-border M&As determine the global rhythm and pattern of FDI flows and non-equity forms of investment increasingly complement FDI in TNCs activities and strategies

13. Cross-border acquisitions (M&As) drive global FDI, determining its rhythm and fluctuations

14. M&As are particularly important for FDI of developed countries …

15. … and less so for inward FDI of developing countries, where greenfield FDI is larger

16. Notes on cross-border M&As
The values of M&As and FDI flows are not comparable: the figures show only the broad correlation
The bulk of cross-border M&As takes place among developed countries
In the past M&As were dominated by the US TNCs. Nowadays they are widely used by TNCs from other countries
M&As are less popular form of FDI entry into developing countries, especially into Asia where most FDI is greenfield investment
They were quite popular in Latin America during the 1990s, when LA countries (notably Brazil and Argentina) implemented large-scale privatization programmes
M&As boom in the second half of the 1990s, which peaked in 2000, lifted world FDI flows to unprecedented levels
When the boom ended, FDI flows fell drastically and have recovered only in 2007 due to the recovery of cross-border M&As

17. Non-equity forms (NEFs) of FDI: a neglected dimension of international production
TRADITIONAL FORMS
EXAMPLES OF NEW FORMS
- Functional partnerships: technology or marketing
- Strategic alliances
- Cross-licensing
- Close customer-supplier relationships
- Contract manufacturing
- Outsourcing/off-shoring of corporate services
- Franchising (fast food, hotels, car rentals)
- Licensing
- Management contracts (hotels)
- Partnerships in business consultancy or legal services
- Original equipment manufacturing

18. New NEFs: explosive growth
ALL:
1985
1995
1999
1000
9000
7000
Cross-border forms dominate, although their share decreased from 86% to 63%
TECHNOLOGY
End of 1970s
End of 1980s
1995
End of 1990s
150
500
700
Cross-border forms account for half of technology NEFs

19. 4. The rapid growth of FDI in the recent past has been driven largely by FDI in services and the sectoral pattern of FDI has shifted towards services

20. Shift towards services was gradual, but steady
During the 1950s, FDI was concentrated in the primary sector and manufacturing
FDI in manufacturing was of a market-seeking import-substitution type, motivated by access to large national markets (e.g. FDI in Brazil) or large regional markets (American FDI in Europe)
Services represented less than a quarter of FDI of major home and host countries at the beginning of the 1970s, 40 % in 1985 and less than a half in 1990

21. During the 1990s and into the 21st century the shift towards services accelerated in the world …

22. … and in both developed and developing countries

23. …owing to “dynamic” services
Electricity - 24x increase in world FDI stock from 1990 to 2006
Telecommunications - 26x
Business services (excl. finance) - 15x
THE COMBINED SHARE OF THESE SERVICES IN SERVICES FDI STOCK INCREASED FROM 19% TO 40% at the expense of financial and trading services, the share of which fell from 64% 48%

24. Notes on the shift towards services
In absolute terms, FDI stock has grown in all sectors and almost all industries
Even in “agriculture, hunting, forestry and fishing” category, traditionally not important FDI industries, world inward FDI stock increased more than 2.5 times between 1990 and 2006, while that in manufacturing increased nearly 4.5 times and in extractive industries 5.5 times
Stock in services, however, increased 8 times

25. 5. Changing geography of FDI A
5. Changing geography of FDI A. Home countries and TNCs: from a club of few to many sources of outward FDI

26. During the two decades after World War Two…
Four countries dominated outward FDI stock with the US accounting for a half of it
Almost all FDI originated from developed countries
World outward stock of FDI, 1960, %
Other developed
16%
France 6%
United States
Netherlands
50%
10%
United Kingdom
18%

27. What’s new today? More sources of FDI in developed countries
US remains the largest home country, but accounts for less than 1/5th of the stock
EU as a group is the largest source of FDI, accounting for 45% of it
Developed countries continue to dominate outward FDI but developing countries have emerged as a significant source of FDI

28. Notes on home country changes
The rise and fall of Japan’s role. Between 1980 and 1994 Japanese outward stock increased 14 times and its share of world’s stock from 3.5% to 12%. As a result of the prolonged economic stagnation the share declined to some 3%. Japan remains large FDI home
Emergence of TNCs from developing countries. The share of these countries increased from 3% in the 1970s and 1980s to 15% now. Almost all the increase came from Asia: the Republic of Korea, Taiwan Province of China, Singapore, Hong Kong (China) and China. The growth of FDI from developing countries is set to continue
Growth of the EU FDI has come from both six original and new members of the EU

29. A snapshot of transnational corporations (TNCs) – firms that undertake FDI and international production  The number of TNCs and their foreign affiliates has grown rapidly  The existing TNCs have expanded their foreign production  The leading TNCs are large and attract attention, but in numbers most TNCs are SMEs

30. The number of TNCs and their foreign affiliates is growing rapidly

31. Most of the existing TNCs expand faster abroad than at home

32. The world’s top 100 non-financial TNCs in 2006 A snapshot
85 TNCs are based in the “Triad” (USA, EU and Japan)
6 firms are based in developing economies
More than a half of top 100 TNCs are in traditional and new FDI industries
TRADITIONAL: motor vehicles (13); petroleum (10); chemicals and pharmaceuticals (10); electrical and electronic equipment (9)
NEW: telecommunications (8); electricity (6); retail trade chains (4); water (1)
The top 100 TNCs account for some
10 per cent of the foreign assets;
16 per cent of the sales; and
12 per cent of the employment of all TNCs!
MOST OF 79,000 TNCs ARE SMALL AND MEDIUM-SIZED FIRMS

33. Ten largest TNCs in the world, by foreign assets, USD billions, 2006
Foreign
TNI
Corporation
Home country
Industry
assets % 1
General Electric
United States
Electrical & electronic equipment
442 53 2
British Petroleum
United Kingdom
Petroleum expl./ref./distr.
170 80 3
Toyota Motor
Japan
Motor vehicles
164 45 4
Royal Dutch/Shell
United Kingdom, Netherlands
161 70 5
Exxonmobil
155 68 6
Ford Motor
131 50 7
Vodafone
Telecommunications
126 85 8
Total
France
121 74 9
Electricite De France
Electricity, gas and water
112 35 10
Wal-Mart Stores
Retail trade
110 41

34. (Billions of dollars and per cent)
Ten largest TNCs from developing (mostly Asian) countries, by foreign assets, USD billions, 2006
(Billions of dollars and per cent)
Foreign assets
TNI
Corporation
Home economy
Industry
$ bln
Per cent 1
Hutchison Whampoa
Hong Kong, China
Diversified 70 82 2
Petronas - Petroliam Nasional
Malaysia
Petroleum 31 26 3
Samsung Electronics
Republic of Korea
Electrical & electronic equipment 27 48 4
Cemex
Mexico
Cement 24 78 5
Hyundai Motor
Motor vehicles 20 6
Singtel
Singapore
Telecommunications 19 68 7
CITIC Group
China 18 8
Formosa Plastic Group
Taiwan Province of China
Chemicals 17 41 9
Jardine Matheson Holdings 71 10
LG Corporation 15 47

35. Asia dominates outward FDI stock of developing countries

36. 5. Changing geography of FDI (continued) B
5. Changing geography of FDI (continued) B. Host countries: always more balanced distribution of the world inward FDI stock, although the majority of FDI goes to developed countries

37. Key changes among host countries between 1960s-1970s and now
In the 1960s almost all FDI originated from developed countries but 70% of it went to developed countries and 30% to developing countries
During the 1980s the share of developing countries in inward FDI stock increased to over 40% to fluctuate around 30% during the 1990s and into 21st century
Over time the competition for FDI among countries has intensified as more and more countries opened up to FDI and actively have sought to attract it
During the 1990s China and transition economies entered the picture, India started to seek more FDI and Brazil returned to the FDI scene, overcoming the crisis of the 1980s.
The United States became the largest single host country (in the 1960s and 1970s it was Canada)

38. Global picture: changing fortunes of host regions in attracting FDI stock

39. 6. FDI in developing countries and Africa

40. Developing countries: until 1980 Latin America was the largest host region among developing countries and Brazil was the largest host country. In Africa was close to Asia

41. After 1980 FDI inflows into all DC regions and China grew, with some fluctuations…

42. … and with LA and Africa losing ground to Asia (including to China)

43. Relative to the size of the economy, FDI in Africa is not so small: matches that of LA and is higher than in Asia

44. “Relative” FDI makes small African host countries large host countries

45. Africa in 2007: highest ever level of FDI inflows
FDI inflows in value and as a percentage of
gross fixed capital formation, 1995–2007
Driven by the booming global commodities-market; rising profitability of investment; and an increasingly FDI-friendly environment.
The growth of FDI inflows was spread across 35 countries, and included many natural resource producers.
Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.

46. Africa: top 10 recipients of FDI inflows, 2006–2007
(Billions of dollars)
Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.

47. Rates of return on inward FDI in developing regions: in in Africa highest among developing regions
Income on inward FDI grew by 31% in 2007, and the rate of return on FDI in Africa has increased steadily since 2004.

48. Africa: Current patterns of FDI inflows by sub-regions
All sub-regions except North and West Africa experienced growth in FDI in 2007, with the highest growth rate registered in Southern Africa
Six countries of North Africa attracted 42% of FDI to the region in 2007 compared with 51% in 2006
While most countries of North Africa continued to do well, large inflows to Nigeria and South Africa plus Equatorial Guinea, Madagascar and Zambia, each receiving about $1 billion or more inflows in 2007, boosted FDI to sub-Saharan Africa
Consequently, 47 countries of sub-Saharan Africa accounted for 58% of African inflows in 2007, up from 49% in 2006
The top ten FDI-host countries in Africa accounted for over 82% of the region's FDI inflows in 2007
But what really matters is the relative (not absolute) size of FDI (relative to the size of the host economy)

49. Africa: patterns of FDI inflows (continued)
Sources of recent FDI
Key TNCs investing in Africa have been from the United States and Europe, mainly from France, Italy and the United Kingdom, expanding in particular in natural-resource exploitation
There have also been TNCs from Africa, particularly from South Africa, Morocco and Libyan Arab Jamahiriya, investing in services, medium-scale manufacturing but also in primary sectors
TNCs from Asia have invested in the oil and mining industries (diamonds, gold, copper, nickel, zinc, uranium and other gem stones)

50. Africa: some impacts of FDI on host economies
FDI in natural resource exploitation projects has contributed to accelerated export growth.
Owing to FDI, foreign-exchange reserves in the region as a whole grew by some 36% in 2007; increases in some major oil-exporting countries such as Nigeria and the Libyan Arab Jamahiriya were particularly high.

51. Africa: FDI policy measures in 2007
Ten countries introduced policy measures in Most of these measures made regulatory frameworks more favourable to FDI and TNCs.
Favourable measures were aimed mainly at:
Improving admission procedures of foreign investors;
Strengthening investment promotion;
Improving registration and fiscal procedures for business start-ups.
In some cases, governments adopted less favorable measures, by, for example, restricting foreign ownership (Mozambique, Zimbabwe).

52. Prospects: “good times“ ahead for FDI in Africa?
FDI prospects in Africa, 2008–2010
(Per cent of respondents)
Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.
Concentration in the primary sector, driven by the commodity market boom
In , 15% of TNCs plan to increase FDI
BUT THE SURVEY WAS CONDUCTED IN THE FIRST HALF OF WILL ITS PROJECTIONS HOLD DURING THE FINANCIAL CRISIS?