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    Need for export in Developing Countries

    THE INDIAN INSTITUTE OF PLANNING AND

    MANAGEMENT

    Export Procedure &Documentation

    Assignment:

    Need For Exports For Developing Countries

    Session: Spring Summer 04-06

    Section: PA2

    Submitted By:

    Abhilasha Chowdhury (01)

    Abhishek Kohli (03)

    Aruneet M Thacore (14)Madhur Prabhakar()

    Shalini Gupta (56)

    Shreya Bhansali (60)

    Sudhanshu Tiwari ( )

    Export Procedure & Documentation/IIPM/SS-2004-06/PA2 1

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    TABLE OF CONTENT

    EXECUTIVE SUMMARY ................................................................................................. 3

    EXPORT-LED GROWTH STRATEGY ............................................................................ 4

    INTERNATIONAL TRADE .............................................................................................. 6

    ROLE OF TRANSNATIONAL CORPORATIONS IN EXPORTS ................................. 7

    ROLE OF SMALL AND MEDIUM ENTERPRISES .................................................... 10

    EXPORT-ORIENTED FDI ............................................................................................. 12

    BIBLIOGRAPHY ............................................................................................................. 14

    Export Procedure & Documentation/IIPM/SS-2004-06/PA2 2

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    EXECUTIVE SUMM ARY

    As a group, developing countries have become much more important in world trade, andtheir trade relationships have changed markedly from the traditional north-south pattern.

    Developing countries now account for one-third of world trade, up from about a quarterin the early 1970s, and many have substantially increased their exports of manufacturesand services relative to traditional commodity exports. The share of manufactures indeveloping country exports has risen to80 percent; moreover, trade between developingcountries has grown rapidly, with 40 percent of their exports now going to otherdeveloping countries.

    However, the process of integration has been uneven. Progress has been very impressivefor a number of developing countries in Asia and, to a lesser extent, in Latin America,which have become successful participants in global trade and attracted the bulk offoreign direct investment in developing countries. This includes China and India since

    they initiated reforms and some of the middle- and higher-income countries in Asia thatwere themselves poor in the 1970s. But progress has been less rapid for many othercountries, particularly in Africa and the Middle East. The poorest countries have seentheir share of world trade decline substantially and risk further marginalization. Thesepoorer countries comprise about 75 developing and transition economies, includingvirtually all of the least developed countries and the heavily indebted poor countries. Incontrast to the successful integrators, they depend disproportionately on production andexports of traditional commodities. The reasons for their marginalization are complex,including deep-seated structural problems, weak policy frameworks and institutions, andprotection at home and abroad.

    These trends point to the need to liberalize trade further, particularly in those areas ofimportance to poorer developing countries. These areas include not only traditional onesas such as textiles, clothing, and agriculture, but also manufacturing and services,involving access to both industrial and developing country markets. Although borderprotection, including tariff and non tariff measures, has declined substantially over thepast three decades, it remains significant in both industrial and developing countries,particularly in areas such as agriculture and labor-intensive industrial products wheredeveloping countries have comparative advantage.

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    EXPORT-LED GROWTH STRATEGY

    Export-led growth is a term used loosely to refer to a strategy comprising theencouragement of and support for production for exports. The rationale lies in the beliefof many economists that trade is the engine of growth, in the sense that it can contribute

    to a more efficient allocation of resources within countries as well as transmit growthacross countries and regions. Exports, and export policies in particular, are regarded ascrucial growth stimulators. Exporting is an efficient means of introducing newtechnologies, both to the exporting firms in particular and to the rest of the economy, andexports are a channel for learning and technological advancement. Moreover, the growthof exports plays a major part in the growth process by stimulating demand andencouraging savings and capital accumulation, and, because exports increase the supplypotential of the economy, by raising the capacity to import.

    Mercantilist economists believed that the wealth of a country should be measured by theextent of the accumulation of precious metals and placed a great emphasis on achieving

    trade surpluses. Classical economists, on the other hand, argued that trade was welfareimproving because it led to an efficient use of resources in each country, in the sense thatcountries would produce and export the products in which they have a comparativeadvantage, and import the products in which they have a comparative disadvantage. Itcould even be said that the purpose of trade, from a classical point of view, is imports.Exports are simply the way to pay for imports. In this sense, there is also an emphasis onthe importance of exports, although of different nature.

    As a development strategy, the classical belief was that development could be transmittedthrough trade. Classical economists justified the benefits of exports with the traditionalargument of comparative advantage. Accordingly, opening up a country's market to the

    international markets allows a country more efficient production and allocation ofresources as the country can concentrate on the production of goods in which it has acomparative advantage based on its factor endowments. Thus, world trade markets allow producers and consumers of the participating countries to benefit from lower prices,higher-quality products, more diverse supply of goods, and higher growth. The export-ledgrowth model seemed initially to have been vindicated with the success of Asia's miraclecountries, which achieved extraordinarily high growth between the 1970s and mid-1990s,supposedly through export promotion. Since the eruption of the Asian crisis, however,some sectors have expressed increasing doubts as to the feasibility of export-led growthfor many developing countries (Felipe 2003).

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    Recent decades have brought about other important justifications for export promotion.Some of these are:

    Participating in trade, especially export production and promotion, exposes acountry to the latest and most advanced production and marketing techniques, anda "learning-by-doing" process that brings about dynamic innovation andtechnological diffusion into the economy. It also drives a country to higherproduction and to economies of scale, which lead to increasing returns (Felipe2003).

    Many development economists use the "two-gap or three-gap" models of Taylor(1993) to justify the need to earn foreign exchange via exports. According to thesemodels, the investment-savings gap and the foreign exchange gap are majorobstacles to the growth and development of many developing countries. Since

    countries need precious foreign exchange for their development needs (capitalgoods, industrial raw materials, oil, and food), export earnings are a more efficientmeans to finance these needs than foreign debt since the latter is vulnerable toadverse exogenous shocks and currency risks that may lead to debt defaults.

    A similar argument (McCombie and Thirlwall 1994) claims that large balance-of-payment deficits, spurred by large import propensities or elasticities, may be ahindrance to growth for many developing countries. Thus, moderate trade deficits,or trade surpluses, are more desired. This, of course, implies that export growthshould be in pace with, or ahead of, import growth.

    Felipe (2003) also argues that export-led strategies allow an expansion of aggregatedemand without much inflationary pressure and without the danger of a wage-pricespiral, compared with strong domestic demand injections. This partly stems from the realappreciation of the currency that result from large export earnings, which tame inflationand allow real wages to rise

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    INTERNATIONAL TRADE

    Export is the legitimate transportation of domestic or nationalized goods and servicesfrom a country intended for use or consumption rendered abroad. Exports can be any

    good that is shipped out of a government's border for commercial purposes. Exports areusually carried out under specific conditions.

    International trade is the exchange of goods and services across international boundaries.In most countries, it represents a significant share of GDP. While international trade hasbeen present throughout much of history (see Silk Road, Amber Road), its economic,social, and political importance has been on the rise in recent centuries. Industrialization,advanced transportation, globalization, multinational corporations, and outsourcing areall having a major impact. Increasing international trade is the usually primary meaningof "globalization".

    Traditionally trade was regulated through bilateral treaties between two nations. Forcenturies under the belief in Mercantilism most nations had high tariffs and manyrestrictions on international trade. In the 19th century, especially in Britain, a belief infree trade became paramount and this view has dominated thinking among westernnations for most of the time since then. In the years since the Second World Warmultilateral treaties like the GATT and World Trade Organization have attempted tocreate a globally regulated trade structure.

    Communist and socialist nations often believe in autarky, a complete lack of internationaltrade. Fascist and other authoritarian governments have also placed great emphasis onself-sufficiency. No nation can meet all of its people's needs, however, and every state

    engages in at least some trade.

    Free trade is usually most strongly supported by the most economically powerful nationin the world. The Netherlands and the United Kingdom were both strong advocates offree trade when they were on top, today the United States, the United Kingdom and Japanare its greatest proponents. However, many other countries - including several rapidlydeveloping nations such as India, China and Russia - are also becoming advocates of freetrade. Traditionally agricultural interests are usually in favor of free trade whilemanufacturing sectors often support protectionism. This has changed somewhat in recentyears, however. In fact, agricultural lobbies, particularly in the United States, Europe andJapan, are chiefly responsible for particular rules in the major international trade treaties

    which allow for more protectionist measures in agriculture than for most other goods andservices.

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    ROLE OF TRANSNATIONAL CORPORATIONS IN

    EXPORTS

    Transnational corporations (TNCs) are playing a pervasive role in the exports ofdeveloping countries, UNCTAD finds in the World Investment Report 2002 (1), releasedtoday. In a number of countries they account for a substantial share of all exports, andthis is especially true of winner countries those boasting the largest gains in marketshare over the past decades. Their export growth is directly or indirectly linked to theexpansion of TNCs international production systems. But although more and morecountries are targeting export-oriented FDI, high shares in exports are not enough, as theReport points out: exports must also be upgraded and involve local value added if thisinvestment is to yield longer-term development gains. While the list of the worlds topexporting countries is dominated by developed countries, developing countries andeconomies in transition accounted for the principal gains in world export market shares

    between 1985 and 2000 (figure). Moreover, in countries that have boasted substantialincreases in exports of non-resource-based manufactures, TNCs have played a major role, primarily through their foreign affiliates but also by way of non-equity links. TheUNCTAD report includes six case studies China, Costa Rica, Hungary, Ireland, Mexicoand the Republic of Korea for which it examines this phenomenon down to the firmlevel (table 1). In Costa Rica, Hungary and Mexico, for example, the top three TNCexporters account for 29%, 26% and 13%, respectively, of total exports. In Mexicoscase, the affiliates of the five transnational auto manufacturers brought in $27 billion ofthe countrys exports in 2000.

    In most of the countries with the largest gains in export market shares, the role of TNCsin those exports has increased over time. In China, the share of foreign affiliates inexports rose from 17% in 1991 to 50% in 2001. In the Republic of Korea, strong exportgrowth was achieved without a strong presence of foreign affiliates, although non-equityrelationships with foreign TNCs played a key role. At the same time, the export repertoireof the winner countries has generally shifted, from primary to manufacturing productsand from low- to medium- and high-technology manufactures. The role of TNCs isparticularly important for those products that have seen the fastest growth in world trade between 1985 and 2000. They are mostly to be found in non-resource-basedmanufactures, particularly in the electronics, automotive and apparel industries.

    TNCs role in exports varies greatly between countries, however, from 4% in Japan to80% in Hungary (table 2). That role also goes beyond the most dynamic manufacturing products to encompass increasingly internationally traded services as well as naturalresources and agriculture. In Kenya, for example, rapid growth in the exports of flowershas made the country the leading flower supplier of the European Union, with foreignaffiliates producing most of these exports.

    A key factor behind the shifts in export competitiveness is changing corporate strategies.These are leading to a specialization within the international production systems of

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    TNCs, with different activities being performed in locations that offer the best conditionsin terms of costs, resources, logistics and market access. As a result, trade in parts andcomponents is assuming greater significance. In response to a search for more cost-efficient production systems, these changes are also generating new exports fromdeveloping countries and economies in transition.

    Several concurrent trends are responsible for the transformation of international production systems, the Report finds. On the one hand, barriers to internationaltransactions are falling, spurred by globalization, liberalization and technologicalinnovation, including speedier transportation (see e-brief of 20 August). This intensifiescompetitive pressures, forcing corporations to become more efficient and tointernationalize their operations. In the process, many TNCs are focusing more on theircore activities and contracting out other functions to independent firms, if not opting outof production altogether. These changes are resulting in new forms of international production systems and networks, ranging from linkages through FDI to non-equitylinkages, posing both opportunities and challenges for developing countries.

    Countries are scaling up their efforts to attract and benefit from export-oriented FDI. Theintense competition for such investment is leading countries to adopt a more targetedapproach to FDI promotion, particularly in the framework of their own developmentobjectives. The basis for successful targeting is a good understanding of a locationsrelative strengths and weaknesses and of the corporate strategies driving locationdecisions. As a rule-of-thumb, the Report suggests that countries wishing to target export-oriented FDI should consider an approach involving an analysis of existing trade andindustry patterns; consultations with existing investors; an analysis of what competinglocations are exporting and what they have attracted in terms of export-oriented FDI; andan identification of other factors that may attract export-oriented FDI (such asmembership in free trade areas, preferential trade schemes, clusters of economic activityand industrial parks). UNCTAD emphasizes that any effort to promote export-orientedFDI needs to be well integrated into a countrys overall development strategy.

    Sustained competitiveness requires continuous upgrading towards higher value-addedactivities. On their own, and in the absence of an adequate policy environment, TNCsmay not undertake such upgrading. Specific promotional measures therefore need to becomplemented by broader efforts to strengthen a locations endowments of skills andtechnological capabilities and to promote linkages between exporting foreign affiliatesand domestic suppliers. Keeping these broader issues in mind is important to ensure thatexport-oriented FDI results in development benefits for the host country. At the top ofthe agenda should be the development of domestic capabilities, as this helps not only toattract quality FDI but also to upgrade existing activities, says Rubens Ricupero,Secretary-General of UNCTAD.

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    Table 1. The role of foreign affiliates in the exports of six selected economies

    Economy (Year)Total exports2000(US$ billions)

    Share of foreign affiliates intotal exports (%)

    Top three TNC exportersin 2000

    Exports 2000 (US$billions)

    China (2001) 279.6 50Samsung ElectronicsIBM

    Nokia

    1.51.5

    1.1

    Costa Rica (2000) 6.7 50IntelDole FoodDel Monte

    1.70.20.1

    Hungary (1999) 25.5 80VolkswagenIBM

    Philips Electronics

    3.22.2

    2.0

    Ireland (1998) 52.5a 90bIntel (1998)Dell Computer(1998)Microsoft (1998)

    4.84.32.4

    Mexico (2000) 180.4 31cIBMDaimlerChryslerGeneral Motors

    9.66.96.7

    Republic of Korea(1999)

    150.4 15Amkor TechnologyNokiaChip PAK

    4.72.42.4

    Source: UNCTAD, World Investment Report 2002.

    a: Manufactured goods exports only. Total exports were US$ 64.6 billion.b: Share in manufactured goods exports.c : Top 35 foreign affiliate exporters only.

    Table 2. Shares of foreign affiliates in the exports of selected host economies,selected yearsa

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    Economy Year Share in export

    Developed countries:

    Austria1993 23

    1999 26

    Canada1994 46

    1995 44

    Finland1995 8

    1999 26

    France1996 22

    1998 21

    Ireland b1991 74 b

    1999 90 b

    Japan1988 4

    1998 4

    Netherlands 1996 44

    Portugal1996 23

    1999 17

    Sweden 1990 21

    1999 39

    United States1985 19

    1999 15

    Developing economies:

    Argentina1995 14

    2000 29

    Bolivia1995 11

    1999 9

    Brazil1995 18

    2000 21

    Chile

    1995 16

    2000 28

    China1991 17

    2001 50

    Economy Year Share in export

    Colombia1995 6

    2000 14

    Costa Rica 2000 50

    Hong Kong (China)1985 10b

    1997 5b

    India1985 3

    1991 3

    Malaysia1985 26

    1995 45

    Mexico1995 15

    2000 31

    Peru1995 25

    2000 24

    Republic of Korea 1999 15b

    Singapore1994 35b

    1999 38b

    Taiwan Province of China 1985 17

    1994 16

    Central and Eastern Europe:

    Czech Republic1993 15b

    1998 47b

    Estonia 2000 60

    Hungary1995 58

    1999 80

    Poland1998 48

    2000 56

    Romania 2000 21

    Slovenia 1999 26

    Source: UNCTAD, World Investment Report 2002.

    ROLE OF SMALL AND MEDIUM ENTERPRISES

    The export potential of small and medium-sized firms has been a growing subject ofinterest. Why should todays export promotion strategies focus on SMEs, rather than onlarge or micro enterprises?

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    Strong growth potential. Only a small percentage of SMEs in developing countriesare now engaged in export trade, yet they account for approximately 40% of exportearnings. The current trend points strongly towards a sustained growth in this share,supported by expanding output and employment. Recognizing their growth potential,

    most governments in developing countries are giving priority to SMEs through policysupport and other incentives.

    New legal framework. The WTO Agreement has created a framework for a moreopen global trading system, which has implications for smaller firms. An appropriateexport strategy could provide the corresponding internal framework to enable smaller businesses to engage more successfully in external trade and meet internationalcompetition. By reducing tariff and non-tariff barriers and ensuring non-discriminatorytreatment in foreign markets, the smaller exporters have been offered the same marketaccess that was previously available to larger companies with resources to set up localoperations to beat the tariff walls.

    Lower transport and communications costs. Technological developments incommunications and reduced international transport costs make it easier for smaller firmsto enter international markets. An export promotion strategy could facilitate market entryby assisting smaller firms to acquire technical know-how and familiarize themselves withnew cost-saving innovations. SMEs, who have no in-house servicing facility, benefitsignificantly in terms of lower overall trade service cost and higher competitiveness.

    Shifting comparative advantage. Globalization of trade, investment and productionhas substantially altered comparative advantages between large and small firms. Thesmaller enterprises that have responded flexibly and adapted to the new environment

    often linking with new partners and forming new alliancesare positioned for stronggrowth. These types of smaller firms generally enjoy advantages over large enterprises:they are usually able to preserve better labour relationships, bring a personal touch totheir operations, cater to specialized market segments and have smaller capital investmentrequirements. The constant market pressure to stay competitive also spurs them to beinventive, innovative and flexible in their business operations. This makes it much easierfor them to adjust quickly to changing economic conditions and market requirements.

    In other words, small enterprises may be better positioned to adapt to changes in the1990s than larger enterprises. In the United Republic of Tanzania, successful new productlines have emerged due to trade liberalization, including oil presses and expellers, water

    pumps, storage tanks and drill presses. Similarly, small textile producers in Sri Lankahave become more export-oriented in response to trade liberalization measures initiatedin 1997, through the planned development of skills and institutions, which has improvedproduct quality.

    The primary responsibility for SME competitiveness, of course, is with the firmsmanagement. There is ample need, however, for trade promotion support. Some privatesector and SME associations, which played mainly an advocacy role in the past, have

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    gradually introduced market information and training services that complement publicsector efforts. They can and should do more, as businesses are receptive to their generallymarket-driven approach. Many governments have set up technical support institutions formanagement training, product design, quality control, packaging, loan guarantees andtrade promotion. Their success is often contingent upon the degree of their commercial

    orientation, to well-trained staff, equipment and financial resources. Public authoritiesneed also to bear in mind that delays, poor services and high costs for infrastructure willcut the competitive edge of their SMEs.

    The general weakness of trade promotion and export development of SMEs in manycountries in all developing regions is a pervasive concern that demands sustainedattention. Institutions that design export promotion strategies face a critical choice:whether to adopt an all-embracing approach or, given resource limitations, to focus on particular sectors. With few exceptions, national trade promotion organizations havechosen to adopt a broad approach in the past. With their resources spread too thinly, thisapproach has reduced the effectiveness of many export promotion programmes. The

    changing trade environment demands a second look at the prevailing trade promotionstrategies for SMEs.

    SMEs are becoming increasingly aware of the growing competition at home and abroad.They especially require information on markets, buyers, suppliers, prices, traderegulations and business procedures in the target market.

    Trade information and commercial intelligence gathering require market research andinformation analysis skills as well as experience with modern information technology.For most SMEs this turns out to be a tall order.

    In an attempt to differentiate a product, create a brand image or meet the latestconsumer preferences, SMEs need to undertake product development, re-design oradaptation. This call for expertise that is in short supply everywhere, especially indeveloping countries.

    SMEs must consider how to upgrade product quality and packaging to internationallyacceptable standards.

    EXPORT-ORIENTED FDI

    Several participants emphasized the fact that FDI offers important development benefitsto host economies, including access to capital, technology, knowledge, markets andsupply sources. Thus, the debate is no longer about whether or not FDI should bepromoted, but rather how to maximize the benefits and reduce the associated risks withFDI. Export-oriented FDI in the developing world remains highly concentrated, and

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    benefits from such investment flows cannot be taken for granted. It therefore remains achallenge for the international community as a whole to find ways to spread benefitsmore evenly.

    A number of policy challenges were addressed, including how to:

    Promote export-oriented FDI in countries that remain de-linked from the globaleconomy;

    Avoid enclave-like situations with limited linkages between foreign and localfirms;

    Secure development gains from the off shoring of services;

    Integrate investment promotion efforts into broader development strategies; and

    Assist developing countries in improving their investment climates, and todisseminate investment opportunities.

    The debate underscored the importance of active policies in all these areas, recognizing

    the responsibility of both host and home countries.The experience of those countries that have been most successful in leveraging FDI forexport competitiveness showed that an appropriate policy and institutional setting isneeded to complement market forces. Particular reference was made to the need forstable, predictable and reliable investment frameworks, efficient infrastructure (e.g. ICTand transportation) and efforts to develop appropriate skills. Proactive investmentpromotion has often also been instrumental. Several interventions warned of the risk oftoo much competition for export-oriented FDI. While views on the effectiveness ofincentives differed, some speakers warned against treating foreign investors morefavorably than domestic ones. Others advocated policies that would allow a high road todevelopment rather than a race to the bottom.

    The need to avoid harmful protectionism by home countries was repeatedly underlined.Trade restrictions in countries at all levels of development continue to hamper thepotential for export-led growth and development in strategic areas for developing countryexports. Trade liberalization needs to be complemented with efforts to build productivecapabilities. The provision of special incentives to companies that undertake investmentsthat help to reduce poverty in developing countries was used by some Governments.Trade preferences applied by developed countries have also triggered export-orientedproduction in some LDCs.

    Export opportunities emerging in the area of services were highlighted. Speakers saw

    considerable potential for more developing countries to benefit from off shoring, as longas the national and international environments remain conducive. Evidence of off shoringfrom both the United States and Europe suggested major improvements in thecompetitiveness of companies that have explored such activities. Many developingcountries have comparative advantages in this area abundant, competitive labor and lowcost skills. Given companies need for diversity in terms of skills, languages, time zonesand regional presence, countries that may be considered not to be competitive withregards to exports of goods may be in a more favorable situation in the case of services.

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    International restructuring whether in goods or services typically requires adjustmentprocesses in the developed countries. The off shoring of services should not be differentin this regard. Undoubtedly, the speed at which things may evolve may call for greaterattention to the potential impact on workers immediately affected.

    Beyond the question of attracting FDI, it was noted that FDI makes the best contributionto development if domestic capabilities are developed and competitive. The promotion ofcloser links between foreign affiliates and local companies was identified as a key policytool to leverage export-oriented FDI. Special reference was made to UNCTAD & apo; sinitiatives in this area, including in Brazil and Uganda.

    The changes in the way TNCs organize their activities internationally calls for continuousmonitoring of policy options at the national as well as the international level. In thiscontext, a need for countries to keep sufficient policy space to pursue their developmentobjectives was noted.

    The debate highlighted areas in which the UNCTAD secretariat could help address thechallenge of spreading benefits from TNC activities more evenly. First, enhancedtechnical assistance in improving the investment climate in developing countries couldinvolve investment policy reviews, investment advisory councils; help with negotiationson bilateral and regional investment agreements, and dissemination of best practices.Second, continued efforts to improve the dissemination of investment opportunities couldinclude the production of investment guides, benchmarking tools (such as theInvestment Compass) and projects related to good governance in investmentpromotion. Third, more emphasis could be given to policies to enhance the benefits fromFDI. In particular, the analysis of possible policy options at national and internationallevels should be deepened.

    But the challenge cannot be addressed by UNCTAD alone. To leverage availableresources financial and intellectual there is a need for close cooperation with otherorganizations, national and international, the private sector and civil society. This impliesbuilding on existing relations. Joining forces in a common Investment for DevelopmentPartnership is required in order to improve the use of scarce resources and helpdeveloping countries, especially LDCs, reap more benefits from FDI, boost theirproductive capacities and integrate with the global economy.

    BIBLIOGRAPHY

    IMF: www.imf.org

    UNCTAD, World Investment Report 2002.(www.UNCAD.org)

    ABD: Asian Outlook

    www.google.co.in

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    http://www.google.co.in/http://www.google.co.in/
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    www.wto.org

    HTML Documents

    FAO Corporate Document Repository.

    G-20 Ministry of Declaration.

    International Trade Forum.

    The International Centre Corporate and Sustainable Development.

    Export Procedure & Documentation/IIPM/SS-2004-06/PA2 15

    http://www.wto.org/http://www.wto.org/