Foreign direct investment (FDI)(1) by transnational corporations (TNCs)(2)
may reach a record of between US$430-440 billion in 1998, after rising considerably in
1997: 19 per cent in terms of world inflows (US$400 billion) and 27 per cent in terms of
outflows (US$424 billion). The 1998 increase is projected despite slower world economic
growth and the crises in financial markets, states the United Nations Conference on Trade
and Development (UNCTAD).
Data released today show that the foreign assets held by TNCs, their foreign sales and
their foreign value added, all rose to new records in 1997. FDI is becoming both a major
stimulus to globalization and, at the same time, its growth is a direct result of
globalization and economic liberalization, according to the new World Investment
Report 1998: Trends and Determinants (WIR98)(3),
released by UNCTAD.
In a comprehensive analysis of investment trends, WIR98
shows how the landscape of global business is changing rapidly. Major factors behind the
accelerating tempo of FDI are soaring levels of cross-border mergers and acquisitions
(M&As), increasing numbers of privatizations and strong efforts by countries to
attract FDI. The world's 100 largest TNCs alone now account for over US$2 trillion in
foreign sales and 6 million foreign employees.
Increases in FDI in 1998 will probably be concentrated in
developed countries, as well as Latin America and the Caribbean, states WIR98.
FDI and portfolio flows: As WIR98 points out, direct investment abroad is a
complex venture. It involves a long-term commitment to a business endeavour and
substantial deployment of human and financial resources. This helps to explain why FDI
flows tend to be less volatile than short-term portfolio flows. Todays report
underscores this by noting the following factors that account for the greater overall
stability in FDI flows:
TNCs look to FDI to yield long-term profits from
the production of goods and services, while portfolio foreign investors are more
interested in shorter-term financial returns;
Longer-term market, structural and growth
potential factors tend to motivate FDI, making FDI strategies less prone to short-term
volatility in financial markets;
Specific interests of TNCs, such as the
acquisition of natural resources, or specific production plants, reduce "herd"
investing behaviour in the FDI arena;
Divestment of assets is more complicated and takes
much longer in FDI than is the case for portfolio investment.
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Largely due to the Asian financial crisis, however, FDI flows
into Asia and the Pacific may at best remain the same as in 1997. This would be the first
time since 1985 that FDI flows into this region did not rise. Within this region it is
probable that there will also be some moderation in FDI into China, after six years of
rapid gains that saw total FDI inflows in 1997 reach US$45 billion representing almost
one-third of total FDI flows to all developing countries.
Predicting FDI flows to the countries in East and South-East Asia that have faced the
greatest financial difficulties over the last year is particularly difficult. While there
are numerous negative factors, there are also some distinct positive considerations. WIR98
points out, for example, that calculated in US dollar terms costs, for all firms, of
establishing and expanding production facilities in these countries have declined.
Key new trends in approaches by TNCs
The forces driving globalization are changing the ways in which TNCs pursue their
objectives for investing abroad. Technology and innovation have become critical to
competitiveness (for example, receipts and payments of royalties and license fees related
to technology by TNCs have been rising at double-digit rates).
WIR98 notes that trade and investment
liberalization and privatization have been driving forces. But, at the same time,
technological advances have strengthened the ability of firms to coordinate their expanded
international production networks in their quest for competitiveness.
UNCTAD Secretary-General Rubens Ricupero points out in the 'Overview' to the report that
shifts are taking place in the considerations by TNCs of where to locate new foreign
investments. Traditional factors, such as the existence of a pro-FDI regime, natural
resources, market growth prospects and market size, as well as labour market conditions,
continue to remain important. But increasingly firms are also seeking investment locations
that offer people-made advantages, so-called "created assets", from
technological advantages to particular labour skills.
WIR98 declares that possessing such assets is critical for firms' competitiveness in a
globalizing economy. Countries that develop such assets become more attractive to TNCs:
"It is the rise in the importance of created assets that is the single most important
shift among the economic determinants of FDI location in a liberalizing and globalizing
world economy," says the Report.
How vital it is for countries seeking FDI to be sensitive to these basic shifts is
underscored by the new data in the report. In 1997, FDI grew in all regions of the world,
i.e. developed, developing and in Central and Eastern Europe. The overall annual world
inflows of US$400 billion is almost double the total seen in 1990 and some seven times the
amount recorded in 1980. Flows to developing countries amounted to US$149 billion in 1997,
representing 37 per cent of all global FDI, compared to just US$34 billion, representing
only 17 per cent of all FDI, at the start of this decade.
The biggest TNCs & key data
oday's report ranks the world's 100 largest TNCs in terms of their foreign assets, with
General Electric of the United States just edging out Royal Dutch Shell of the United
Kingdom and The Netherlands for first place. It also ranks the 50 largest TNCs in
developing countries, with Daewoo Corporation of the Republic of Korea clearly the largest
by a considerable margin. The lists show that the world's largest TNCs are becoming
increasingly transnational, thus less dependent on their home country in terms of assets,
sales and the location of their employees.
The significance of TNCs in globalization is reflected in the
fact that the world stock of FDI, constituting the capital base of operations of TNCs rose
by over 10 per cent in 1997 to reach an estimated US$3.5 trillion. This stock is owned by
at least 53,000 TNCs, large and small, which in turn control at least 450,000 foreign
affiliates. The value of assets of these affiliates in 1997 was at least treble the volume
of the FDI stock, with many of the operations locally financed.
he value of global sales by foreign affiliates of TNCs rose from $8.9 trillion in 1996 to
$9.5 trillion in 1997. Their value added production amounted to close to 7 per cent of
global gross domestic product (GDP) in 1997, compared to 5 per cent in the mid-1980s.
Sales of the foreign affiliates are growing faster than world trade. And, as the overall
FDI volume expands, so international production is contributing on a rising scale to the
interdependence of the world economy.
International mergers & acquisitions soar
One of the most striking trends in globalization is the growing importance of cross-border
M&As. These are now a major driver of FDI and this activity reflects the prevailing
strategies of most TNCs: divesting non-core activities and strengthening competitive
advantages through acquisitions in core activities, states WIR98. One consequence
is greater industrial concentration in the hands of a few firms in each business sector.
Trade liberalization (including the financial services
agreement reached last year in the World Trade Organization) and deregulation and
privatization in some key areas (for example, telecommunications) have stimulated the
M&A activity. Majority-owned M&As accounted for US$236 billion of 1997 FDI, rising
to 58 per cent of all FDI from a level of just below 50 per cent in 1996. There were 58
transactions individually valued at over US$1 billion each. TNCs from developed countries
accounted for 90 per cent of these M&As.
TNCs are achieving their goals of strategic positioning and
restructuring not only through M&As, but through a rising volume of cross-border
inter-firm agreements. Many of these agreements focus on technology. WIR98
stresses that such agreements are particularly important for enhancing the technological
competitiveness of firms. Their number has increased from an annual average of less than
300 in the early 1980s to over 600 in the mid-1990s (more than 8,000 inter-firm agreements
in technology-intensive activities have been concluded since 1980).
New agreements shape globalization
Globalization is being shaped, among others, by a growing array of bilateral, regional and
multilateral economic agreements. Secretary-General Ricupero states that UNCTAD is seeking
to help developing countries participate effectively in international investment
discussions and negotiations: "UNCTAD is paying special attention to identifying
the interests of developing countries and ensuring that the development dimension is
understood and adequately addressed in international investment agreements."
WIR98 notes that rarely before has there been so much activity undertaken by
national governments and international organizations in the realm of investment
negotiations. The number of bilateral framework agreements is expanding. The number of
bilateral investment agreements stood at over 1,500 by the end of 1997. And there were
1,794 double taxation agreements in effect covering 178 countries at the end of the same
year.
At the same time, the report notes that the recent negotiation of new international
investment agreements has brought to the fore a number of basic considerations, including:
- Whatever the fate of various initiatives, many countries see
that it is necessary for them to examine the implications and appropriateness of
international investment agreements.
- It is increasingly evident that these agreements are difficult
to negotiate as they touch, at least in principle, on the entire range of issues related
to production and the production process as well as social and cultural factors. Complex
issues of national policy are therefore raised, in both developed and developing
countries.
- Effective agreements have to be balanced. This raises the need
to take into account the diverse circumstances of countries at different stages of
development: one of the main challenges for the international community, and especially
UNCTAD, is how to ensure that the development objective is given effect and translated
into the structure, content, and implementation of international investment agreements.
- If broad consensus is to be forged in international agreements
on investment, it is becoming clear that the concerns of all peoples likely to be affected
need to be taken into account in negotiations; thus representatives of civil society need
to be included in the process.
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1. Foreign direct investment
is defined as an investment involving management control of a resident entity in one
economy by an enterprise resident in another economy. FDI involves a long-term
relationship reflecting an investor's lasting interest in a foreign entity. 2. Transnational corporations comprise parent
enterprises and their foreign affiliates: a parent enterprise is defined as one that
controls assets of another entity or entities in a country or countries other than its
home country, usually by owning a capital stake. An equity capital stake of at least 10
per cent is normally considered as a threshold for the control of assets in this context.
3. The World Investment
Report, 1998 (Sales No. E.98.II.D.5) may be obtained by the public at the
price of US$45, from United Nations Publications/Sales Section, Palais des Nations,
CH-1211 Geneva 10, Switzerland, fax: +41 22 917 0027, e-mail: unpubli@un.org, Internet:
http://www.un.org/publications; or from United Nations Publications, Two UN Plaza, Room
DC2-853, Dept. PRES, New York, N.Y. 10017, U.S.A., telephone: +1 212 963 83 02 or +1 212
963 34 89, email: publications@un.org |