1. 1 WTO Symposium on cross-border supply of services Geneva, 28-29 April 2005 FDI in Services Anne Miroux Head, Investment Issues Analysis Branch UNCTAD, Division on Investment, Technology and Enterprise Development Phone: +4122 9071167; Fax: +4122 9170498 E-mail: anne. miroux@unctad.org This presentation is based on UNCTAD, World Investment Report 2004: The Shift Towards Services (Geneva: UNCTAD, 2004), UN Sales Publication No. E.04.II.D.33, also at www.unctad.orgwww.unctad.org

2. 2 Background - FDI trends The shift towards services Offshoring

3. 3 FDI is recovering Global inflows of FDI, 1990-2004, by region, $ billions Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).

4. 4 … led by the developing countries Inflows of FDI to developing countries, 1995-2004, by region, $ billions Source: UNCTAD, World Investment Report 2004: The Shift Towards Services. (see www.unctad.org/wir) and UNCTAD Press /PR/2005/002www.unctad.org/wir

5. 5 The recovery in 2004 was driven by: Stronger global economic growth Improved corporate profitability Higher stock valuations Higher levels of cross-border M&As Continuing liberalization and improvement of investment environment

6. 6 Indicators of FDI and international production $ billions, current prices Source: UNCTAD, World Investment Report 2004: The Shift Towards Services (see www.unctad.org/wir).

7. 7 The importance of commercial presence/mode 3 in the delivery of services Mode 3 sales of services are clearly larger than cross border sales (mode 1) of services. In 2001, for instance, the sales of services by affiliates of US multinationals in foreign markets amounted to $432 billion while US exports of services amounted to $276 billion 1 (a 1.6 to 1 ratio). 1/ US Bureau of Economic Analysis

8. 8 The shift towards services

9. 9 Sectoral distribution of FDI inward stock 19902002 9% 42% 49% 6% 34% 60% 41% 10% 49% 6% 32% 62% 7% 46%47% 55% 7% 38% Source: UNCTAD, World Investment Report 2004: The Shift Towards Services (see www.unctad.org/wir). World Developed Countries Developing Countries

10. 10 Note: Data should be interpreted with caution. The world total was extrapolated on the basis of data covering 48 countries in 1990 and 61 countries in 2002, or latest year available. They account for over four-fifths of world inward FDI stock in 1990 and 2002. The world total in 1990 includes the countries of Central and Eastern Europe, although data by sector and industry are not available for that region. a A large share of investment in this industry is in Hong Kong (China), which accounted for 58% of developing economies and 22% of the world total. Hong Kong (China) data include investment holding companies.

11. 11 What services attract the most FDI? Traditional Industries: –Financial services (40% in 1990, 29% in 2002) –Trading (25% in 1990, 18% in 2002) Emerging Industries : –Telecommunications (3% in 1990, 11% in 2002) –Electricity (1% in 1990, 3% in 2002) –Business services (13% in 1990, 26% in 2002)

12. 12 Additional features of the shift of FDI towards services Shift towards services in all country groups Shift is fastest in developed countries Wide variations among individual economies –Inward stock: More than 80%: Denmark, Hong Kong (China), Switzerland 30% or less: Bangladesh, Sweden, Venezuela –Outward stock: More than 70%: Austria, Colombia, Denmark Less than 40%: Australia, Croatia, Sweden

13. 13 Drivers «Tradability revolution » – advances in ICT Trade and investment liberalization High demand for certain skills (growth of IT industries) Responses to increased competition Cost reduction and quality improvements through: –consolidation –focus on core activities –shift to lower-cost locations

14. 14 Potential benefits for developing countries Financial resources Improvement of services provided Transfer of soft technology (knowledge, information, expertise, organizational skills) Employment generation Transfer of hard technology (infrastructure) Enhancement of systemic and export competitiveness

15. 15 Potential costs and risks for countries: the importance of policies Potential abuse of monopolistic/oligopolistic market power, especially in basic services Systemic risk in banking and other financial services Contingent risks in socially or culturally sensitive areas Need for appropriate policies at the national and international levels: Regulation of monopolistic/oligopolistic markets Supervision of banking/finance Protection of socially or culturally sensitive areas

16. 16 Offshoring of services

17. 17 Offshoring vs. outsourcing Location Internalized production Externalized production ("outsourcing") Domestic Production kept in- house at home Production outsourced to third-party service provider at home Foreign ("offshoring") Production by foreign affiliate "Captive offshoring" Production outsourced to third-party service provider abroad

18. 18 The big picture The services tradability revolution Allows for an international division of labour in the production of services Open policy environment plus competitive pressures Total offshoring market: $32 bn (2001) – but potential is high

19. 19 U.S. firms lead the offshoring trend… 55-65% of export-oriented service FDI projects are undertaken by U.S. firms …but other companies are following: 40% of top European firms have offshored services 23% of Japanese IT companies have offshored services, especially to China Indian companies among the top in the offshoring of IT services

20. 20 Top destinations for export-oriented FDI projects in services, 2002-2003 (Number) Offshoring is not a North-South issue Ireland & Canada among top recipients of offshored services But it offers opportunities for developing countries - Indias services exports: $0.5 bn to $12 bn in past decade Call centres Shared service centres IT servicesRegional HQs India (60)India (43)India (118)US (80) Canada (56)Ireland (19)U.K. (73)U.K. (64) U. K. (43)Singapore (8)China (60)China (38) China (30)Hungary (7)Singapore (35)Hong Kong, China (37) Ireland (29)U.K. (7)Germany (34)Singapore (36) Developed country share: 54%35%46%60%

21. 21 A win-win-win proposition … Companies Concentration on core competencies Increase competitiveness Recipient countries Export earnings New jobs and skills upgrading Technology transfers Potential for linkages Countries of origin Lower costs of services for consumers Export opportunities Structural change: move to higher-value activities In brief: all the opportunities (and costs) associated with the emerging international division of labour in the services sector

22. 22 …if policy challenges are met Recipients countries - Telecommunications, skilled labour, quality of suppliers -Regulatory framework (including privacy protection) -Investment promotion (including after care) where FDI becomes important -Prudential regulation -Integration into development strategies – leverage export oriented activities for growth and development (e.g. linkages) Countries of origin - Protectionism is not the answer - Instead: adjustment policies (especially to take care of employment impact). Not easy (see DCs) International community -Maintain open and enabling framework for offshored services

23. 23 In sum: Offshoring is an important phenomenon, driven by the tradability revolution It is still in its infancy, although the tipping point may be approaching rapidly It is the cutting edge of the international division of labour It can be of benefit to all groups of countries if policy challenges are met

24. 24 Thank you very much!