Presentation on theme: "UNCTAD VIRTUAL INSTITUTE TRAINING PACKAGE ON ECONOMIC AND LEGAL ASPECTS OF INTERNATIONAL INVESTMENT AGREEMENTS (IIAs) Module 1 Concepts, trends and economic."— Presentation transcript:
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 investmentTheme 4Foreign Direct Investment in the World and in Africa: Long-term Trends and Current PatternsKampala, November 2008Zbigniew ZimnyUNCTAD 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 higherTNCs account for some 2/3 of world exports: 1/3 parents’ exports from home countries and 1/3 foreign affiliates’ exports from host countries1/3 of world trade is intra-firm trade of TNCsFDI is the largest source of external finance for developing countriesTNCs 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
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 correlationThe bulk of cross-border M&As takes place among developed countriesIn the past M&As were dominated by the US TNCs. Nowadays they are widely used by TNCs from other countriesM&As are less popular form of FDI entry into developing countries, especially into Asia where most FDI is greenfield investmentThey were quite popular in Latin America during the 1990s, when LA countries (notably Brazil and Argentina) implemented large-scale privatization programmesM&As boom in the second half of the 1990s, which peaked in 2000, lifted world FDI flows to unprecedented levelsWhen 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 FORMSEXAMPLES 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:198519951999100090007000Cross-border forms dominate, although their share decreased from 86% to 63%TECHNOLOGYEnd of 1970sEnd of 1980s1995End of 1990s150500700Cross-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 manufacturingFDI 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 2006Telecommunications - 26xBusiness services (excl. finance) - 15xTHE 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 industriesEven 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 timesStock 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 itAlmost all FDI originated from developed countriesWorld outward stock of FDI, 1960, %Other developed16%France6%United StatesNetherlands50%10%United Kingdom18%
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 stockEU as a group is the largest source of FDI, accounting for 45% of itDeveloped 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 homeEmergence 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 continueGrowth 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 economiesMore than a half of top 100 TNCs are in traditional and new FDI industriesTRADITIONAL: 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 some10 per cent of the foreign assets;16 per cent of the sales; and12 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 ForeignTNICorporationHome countryIndustryassets%1General ElectricUnited StatesElectrical & electronic equipment442532British PetroleumUnited KingdomPetroleum expl./ref./distr.170803Toyota MotorJapanMotor vehicles164454Royal Dutch/ShellUnited Kingdom, Netherlands161705Exxonmobil155686Ford Motor131507VodafoneTelecommunications126858TotalFrance121749Electricite De FranceElectricity, gas and water1123510Wal-Mart StoresRetail trade11041
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 assetsTNICorporationHome economyIndustry$ blnPer cent1Hutchison WhampoaHong Kong, ChinaDiversified70822Petronas - Petroliam NasionalMalaysiaPetroleum31263Samsung ElectronicsRepublic of KoreaElectrical & electronic equipment27484CemexMexicoCement24785Hyundai MotorMotor vehicles206SingtelSingaporeTelecommunications19687CITIC GroupChina188Formosa Plastic GroupTaiwan Province of ChinaChemicals17419Jardine Matheson Holdings7110LG Corporation1547
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 countriesDuring 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 centuryOver time the competition for FDI among countries has intensified as more and more countries opened up to FDI and actively have sought to attract itDuring 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
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 ofgross fixed capital formation, 1995–2007Driven 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 regionsIncome 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 AfricaSix countries of North Africa attracted 42% of FDI to the region in 2007 compared with 51% in 2006While 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 AfricaConsequently, 47 countries of sub-Saharan Africa accounted for 58% of African inflows in 2007, up from 49% in 2006The top ten FDI-host countries in Africa accounted for over 82% of the region's FDI inflows in 2007But 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 FDIKey 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 exploitationThere 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 sectorsTNCs 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 boomIn , 15% of TNCs plan to increase FDIBUT THE SURVEY WAS CONDUCTED IN THE FIRST HALF OF WILL ITS PROJECTIONS HOLD DURING THE FINANCIAL CRISIS?