UNCTAD VIRTUAL INSTITUTETRAINING PACKAGE ON ECONOMIC AND LEGAL ASPECTS
OF INTERNATIONAL INVESTMENT AGREEMENTS (IIAs)
Module 1Concepts, 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, 10-14 November 2008
Zbigniew ZimnyUNCTAD consultant
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
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.
Since the mid-1980s world FDI has grown faster than world GDP and
exports… Index of world FDI outflows, GDP and exports (in current prices). 1980-2007,
per cent, 1980=100
0
500
1000
1500
2000
2500
3000
3500
4000
FDI outflows GDP Exports
…and its relative importance in the world economy has significantly increased
(FDI/GDP, FDI/GFCF and sales of FA/exports)
The ratio of FDI stock to GDP, 1985-2006 (per cent)
0
5
10
15
20
25
1985 1990 1995 2000 2006
The ratio of FDI inflows to GFCF, 1985-2006 (per cent)
0
5
10
15
20
25
1985 1990 1995 2000 2006
The ratio of sales of foreign affiliates to world exports, 1985-2006 (per cent)
0
50
100
150
200
1985 1990 1995 2000 2006
FDI has become by far the largest source of external financial resources flows to developing
countries(types of flows, 1990-2003, $ billions)
Total resource flows
Priva
te fl
ow
s
Commercial banks loans
350
300
250
200
150
100
50
0
-50
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
Portfolio flows
FDI inflows
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%
Individual host countries rely to varying degrees on FDI and TNCs
HIGH RELIANCE LOW RELIANCE
Host countries with high reliance on FDI, UNCTAD Transnationality Index, 2005, %
0 20 40 60 80 100
PanamaSweden
New ZealandHonduras
Bosnia and HerzegovinaIreland
JamaicaNetherlands
ChileCzech Republic
HungarySlovakia
Macedonia, TFYRBulgaria
Trinidad and TobagoEstonia
LuxembourgSingapore
BelgiumHong Kong, China
Host countries with low reliance on FDI, UNCTAD Transnationality Index, 2005, %
0 2 4 6 8 10 12 14
PeruTurkey
SloveniaBrazilChina
Russian FederationGermany
AlbaniaGreece
ItalyIndonesia
PhilippinesTaiwan Province of China
United StatesBarbados
Saudi ArabiaKorea, Republic of
IndiaBelarus
Japan
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
World FDI flows grow in the long term but fluctuate with economic cycles
World FDI inflows, 1998-2007, ($ mln)
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
2000000
1998 2000 2002 2004 2006
World FDI inflows, 1988-1995, ($ mln)
0
50000
100000
150000
200000
250000
300000
350000
400000
1988 1990 1992 1994
World FDI inflows, 1979-1987, ($ mln)
0
20000
40000
60000
80000
100000
120000
140000
160000
1979 1981 1983 1985 1987
World FDI stock grows continuously
World inward FDI stock, 1980-2007, billions of dollars
0
2000
4000
6000
8000
10000
12000
14000
16000
Years 1980-2007
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
Cross-border acquisitions (M&As) drive global FDI,
determining its rhythm and fluctuations Global FDI inflows and cross-border M&As, 1987-2006, billions of dollars
0
200
400
600
800
1000
1200
1400
1600
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Cross-border M&As FDI inflows
M&As are particularly important for FDI of developed countries …
Developed countries: FDI inflows and cross-border M&As, 1987-2006, billions of dollars
0
200
400
600
800
1000
1200
1400
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Cross-border M&As FDI Inflows
… and less so for inward FDI of developing countries, where greenfield
FDI is largerDeveloping countries: FDI inflows and cross-border M&As, 1987-2006, billions of dollars
0
50
100
150
200
250
300
350
400
Cross-border M&As FDI Inflows
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
TRADITIONAL FORMS EXAMPLES OF NEW FORMS
Non-equity forms (NEFs) of FDI: a neglected dimension of international
production
- Franchising (fast food, hotels, car rentals)
- Licensing
- Management contracts (hotels)
- Partnerships in business consultancy or legal services
- Original equipment
manufacturing
- Functional partnerships: technology or marketing
- Strategic alliances
- Cross-licensing
- Close customer-supplier relationships
- Contract manufacturing
- Outsourcing/off-shoring of
corporate services
New NEFs: explosive growth1985 1995 1999
1000 9000 7000
• ALL:
• Cross-border forms dominate, although their share decreased from 86% to 63%
End of 1970s End of 1980s 1995 End of 1990s
150 500 700 500
• TECHNOLOGY
• Cross-border forms account for half of technology NEFs
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
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
During the 1990s and into the 21st century the shift towards services accelerated in
the world …
World: sectoral composition of FDI inward stock, %, 1990
Primary9%
Services50%
Manufact.41%
World: sectoral composition of inward FDI stock, %, 2006
Manufact.29%
Primary8%
Services63%
… and in both developed and developing countries
Developed countries: sectoral composition of inward FDI stock, %, 2006
Primary8%
Services63%
Manufact.29%
Developed countries: sectoral composition of inward FDI stock, %, 1990
Primary10%
Services49% Manufact.
41%
Developing countries: sectoral composition of inward FDI stock, %, 1990
Primary8%
Services48%
Manufact.44%
Developing countries: sectoral compostion of inward FDI stock, %, 2006
Primary8%
Services66%
Manufact.26%
…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%
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
5. Changing geography of FDI
A. Home countries and TNCs: from a club of few to many sources of outward
FDI
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, %
United States
50%
United Kingdom18%
Netherlands10%
France6%
Other developed16%
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
World outward stock of FDI by home countries and regions, 2007, %
France9%
Netherlands5%
United Kingdom11%
United States18%
Japan3%
Other EU19%
Other20%
DCs15%
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
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
The number of TNCs and their foreign affiliates is growing rapidly
The number of parent companies of TNCs in the world from the early 1990s until now
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Early 1990s Late 1990s Now
The number of foreign affiliates of TNCs in the world, early 1990s and now
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
Early 1990s Late 1990s Now
Most of the existing TNCs expand faster abroad than at home
0 10 20 30 40 50 60 70 80 90 100
Daimler ChryslerHitachi
General MotorsToyota
MatsushitaFord
RenaultBayerBMW
VolkswagenBASF
IBMHewlett Packard
SonyFiat
SiemensExxon MobilRoyal Dutch
VolvoBP
NestlePhilips
Transnationalization index of 22 selected TNCs, 1985 and 2006, %
2006
1985
The world’s top 100 non-financial TNCs in 2006A 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
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/ShellUnited Kingdom,
Netherlands Petroleum expl./ref./distr. 161 70
5 Exxonmobil United States Petroleum expl./ref./distr. 155 68
6 Ford Motor United States Motor vehicles 131 50
7 Vodafone United Kingdom Telecommunications 126 85
8 Total France Petroleum expl./ref./distr. 121 74
9 Electricite De France France Electricity, gas and water 112 35
10 Wal-Mart Stores United States Retail trade 110 41
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 Republic of Korea Motor vehicles 20 27
6 Singtel SingaporeTelecommunications 19 68
7 CITIC Group China Diversified 18 19
8 Formosa Plastic Group Taiwan Province of China Chemicals 17 41
9 Jardine Matheson Holdings Hong Kong, China Diversified 17 71
10 LG Corporation Republic of Korea
Electrical & electronic equipment 15 47
Asia dominates outward FDI stock of developing countries
Outward stock of FDI by developing regions, 2007, $ bln and %
Africa, 73, 3% Latin America, 493, 22%
Asia, 1,722, 75%
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
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)
Global picture: changing fortunes of host regions in attracting FDI stock
The geographical composition of the world inward FDI stock, 1967, 1980, 1990, 2000 and 2007, %
0%
20%
40%
60%
80%
100%
1967 1980 1990 2000 2007
EU-15 USA Other developed Developing Transition
6. FDI in developing countries and Africa
Developing countries: until 1980 Latin America was the largest host region
among developing countries and Brazil was the largest host country. In 1970-75
Africa was close to AsiaCumulated FDI inflows by region, 1970-1975
and 1976-1980
0
5000
10000
15000
20000
25000
Africa Latin America Asia China
1970-1975 1976-1980
After 1980 FDI inflows into all DC regions and China grew, with some fluctuations…
FDI inflows into developing countries, 1980-2007, billions of dollars
0
100
200
300
400
500
600
Africa Latin America Asia net of China China
… and with LA and Africa losing ground to Asia (including to China)
FDI inflows into developing countries, 1980-2007, % share in developing countries inflows
0%
20%
40%
60%
80%
100%
Africa Latin America Asia net of China China
Relative to the size of the economy, FDI in Africa is not so small: matches that of LA and is higher
than in Asia
The ratio of inward FDI stock to GDP, developing regions, 1998-2007, %
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Africa
Latin America
Asia
The ratio of FDI inflows do domestic investment, developing regions, 1997-2007, %
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Africa
Latin America
Asia
“Relative” FDI makes small African host countries large host countries
Top 15 host countries of Africa, FDI stock, 2007, billions of dollars
0 10 20 30 40 50 60 70 80 90 100
NamibiaChad
ZambiaCôte d' Ivoire
United Republic of TanzaniaLibyan Arab Jamahiriya
Equatorial GuineaAlgeriaAngolaSudanTunisia
MoroccoEgypt
NigeriaSouth Africa
Top 15 host countries in Africa by FDI stock/GDP, 2007, %
0 20 40 60 80 100 120 140
EgyptMozambiqu
MoroccoLesothoZambiaCongo
Cape VerdeNamibiaDjibouti
MauritaniaChad
TunisiaGambia
EquatorialSeychelles
Africa in 2007: highest ever level of FDI inflows
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.
FDI inflows in value and as a percentage of gross fixed capital formation, 1995–2007
Africa: top 10 recipients of FDI inflows, 2006–2007
(Billions of dollars)
Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.
Rates of return on inward FDI in developing regions: in
2006-2007 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.
• 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)
Africa: Current patterns of FDI inflows by sub-regions
Africa: patterns of FDI inflows (continued)
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)
Sources of recent FDI
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.
Africa: FDI policy measures in 2007
Ten countries introduced policy measures in 2007. 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).
Prospects: “good times“ ahead for FDI in
Africa?
Concentration in the primary sector, driven by the commodity market boom
In 2008-2010, 15% of TNCs plan to increase FDIBUT THE SURVEY WAS CONDUCTED IN THE FIRST HALF OF 2008.
WILL ITS PROJECTIONS HOLD DURING THE FINANCIAL CRISIS?
FDI prospects in Africa, 2008–2010(Per cent of respondents)
Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.