prospects for foreign direct investment and the strategies of ......prospects for foreign direct...

Prospects forForeign Direct Investment

and the Strategies ofTransnational Corporations


and the Strategies ofTransnational Corporations

UNCTAD's Global Investment ProspectsAssesment (GIPA)

The Global Investment Prospects Assesment (GIPA)is designed to present short-term and medium-termprospects for foreign direct investment (FDI) at theglobal, regional and industry levels. It also analysesthe evolving trends in the strategies of transnationalcorporations (TNCs) as well as national FDI policies.

GIPA is designed to equip governments andbusinesses alike with an instrument for proactivedevelopment of policies and strategies, as opposed topost facto assessment of foreign investment facts.

The GIPA 2005-2008 was based on the findings ofthree worldwide surveys (i.e. the surveys of the world'slargest TNCs, national investment promotionagencies (IPAs) and international investmentexperts). GIPA also analyses relevant leadingeconomic indicators, and policy developments thatwould shape future FDI patterns.

For more information, please visit

or contact Mr James X. Zhan (+41 22 907 5795)

http://www.unctad.org/fdiprospects; email: [email protected]

Printed at United Nations, GenevaGE.05- - December 2005 - 3,450

UNCTAD/ITE/IIT/2005/17

United Nations publicationSales No. E.05.II

ISBN 92-1-112657-6

2005-2008


and the Strategies ofTransnational Corporations,

2005-2008

UNITED NATIONSNew York and Geneva, 2005

Prospects for Foreign Direct Investment and theii Strategies of Transnational Corporations, 2005-2008

Acknowledgements

The Global Investment Prospects Assessment (GIPA) wasconducted by a team comprising: James X. Zhan (Team Leader), LudgerOdenthal (Deputy Team Leader), Persephone Economou and PadmaMallampally (Senior Advisors), Helge Mueller and Alex De Jonquieres(Experts), Karen Suyi Lee, Pia Buller and Matteo Carrozza (ResearchAssistants).

Comments on the study were received from Harnik Deol, KumiEndo, Torbjorn Fredriksson, Masataka Fujita, Mongi Hamdi, MasayoIshikawa, Kalman Kalotay, Guoyoung Liang, Ann Miroux and NicoleMoussa. Amanda Weber provided outreach support. Chris MacFarquharedited the report. Josephine Ayiku provided administrative assistance.The cover was designed by Diego Oyarzun-Reyes, the desktop publishingwas done by Teresita Sabico and Jean-Marc Humblot provided supportto the publication.

UNCTAD would like to thank all transnational corporations(TNCs) and national investment promotion agencies (IPAs) participatedin the global surveys.

We would also like to give special thanks to the group of FDIexperts including: Daniele Antonucci, Helena Arlander, Aykhan I. Asadov,Dilek Aykut, James Beatty, Hans Bethge, Soren Bjerregaard, MichaelBlank, Darien Bradshaw, Mario Carini, Massimiliano Danusso, IttiraDavis, Gino De Reuwe, Eduardo Del Puedo, Dennis J. Donovan, CarlyseEvans, Roberto A Fortunati, Michael Gestrin, John Hanna, ChristianHelmenstein, David R M Henderson, David J Stewart Howitt, MunamarIhsan, Bjorn Jakobsen, Amita Jhangiani, Thomas E Johnson, AndrewKafkaris, Marianne E Kager, Jukka Kero, Stuart King, Katharina Kohn,Steve Lanier, Alberto Lasheras Shine, Daniel Liew, Hank Lim, TomasLindholm, Andrew Lipman, Pradeep K.Mathur, Daniel R. Matthews,Rebecca McCaughrin, Mila Korugic Milosevic, Holger Moelller, GeorgeMusat, Clemens Muth, Roger M Nellist, Paul Nunn, Dan O'Brien,Dominic O'Kane, Hiromi Oki, Gbenga Oyebode, Philip Patterson, KevinPickup, Claudia Pienkny, Daniel W. Riordan, Jonathan Ross, DavidRusnok, Koji Sakuma, Gunther Schall, Rolf Schneider, Vijay Sethu,Edward M Southey, Roel Spee, Kah Poh Tay, Dirk Tevelde, AmbroseThorpe, Anne-MarieThurber, Rachid Tmar, Eduardo Vale, Nico MWVermeulen, Hans Vermij, Trevor Williams, Geoffrey Winne, and DanWolody.

UNCTAD/ITE/IIT/2005/7

UNITED NATIONS PUBLICATION

Sales No. E.05.II.D.32

ISBN 92-1-112691-6

iii

Executive summary

Prospects for global foreign direct investment (FDI) arepromising in both the short term (2005-2006) and the medium term(2007-2008). The overall positive outlook, indicated by the GlobalInvestment Prospects Assessment (GIPA) 2005 surveys and thebusiness environment depicted by various leading indicators forFDI, all point to increased investment in the future.

The stage for the expected FDI growth is set by theforeseeable macroeconomic climate, which is largely favourableto FDI, and growing corporate profits that increase the availabilityof investible funds for corporate future expansion. Furthermore,investment liberalisation continues apace at both national andinternational levels. Competition to attract FDI through variouspromotion and facilitation measures has also escalated further.All this has set the scene for increased FDI flows over the nextfew years. At the same time, there are also risk factors that canbe potentially detrimental to future FDI growth rates. The followingis a summary of the findings by UNCTAD's global surveys oftransnational corporations (TNCs), international FDI experts andinvestment promotion agencies (IPAs):

• Overall short- and medium-term FDI prospects. The mainmessage from the 2005 survey is positive. More than half ofTNCs and expert respondents, and 81% of IPAs, expectedshort-term (2005-2006) growth in FDI flows, while almost allother respondents expected flows to remain steady. Only asmall fraction of respondents thought that FDI would decreasein the immediate future. Opinions on medium-term (2007-2008) FDI prospects are equally optimistic. TNCs and IPAsare confident regarding FDI growth, with 57% of experts, 65%of TNCs, and 83% of IPAs expecting FDI to increase. Again,most other respondents expected FDI levels to remain thesame.

• Risk factors for global FDI growth. Respondents indicated anumber of reasons to be cautious about FDI growth prospectsin the short and medium term. Protectionism, lower-than-expected growth in industrialised countries, financial

Prospects for Foreign Direct Investment and theiv Strategies of Transnational Corporations, 2005-2008

instability in major source economies, global terrorism, andthe volatility of petroleum and other raw material prices wereall regarded as potential risk factors.

• Regional pattern of FDI flows. Investors' attention appears tobe shifting away from traditionally important locations indeveloped countries in favour of certain emerging markets.Asia and South-eastern Europe are the two regions with themost favourable FDI prospects. FDI in Latin America is likelyto continue its recovery. FDI flows to Africa are expected toremain stable at recent levels. Developed countries as a groupare expected to see some recovery in FDI but this will bemodest in the short run. The United States is expected toremain the most attractive destination for FDI in the developedworld, but expectations are less positive for the majorEuropean economies.

• The most attractive global locations for FDI. Half of the topten countries ranked by both experts and TNCs alike belongto the developing world. China is considered an attractivelocation by 87% of TNCs and 85% of experts - at least 30percentage points above the ranking of the next bestperformer. The other countries in the top five tier were theUnited States, India, the Russian Federation and Brazil.

• FDI prospects by industry. Prospects for FDI varysignificantly by industry. The outlook for the services sectorwill continue to be more positive than for the manufacturingor primary sectors. The industries expected to be at theforefront of FDI growth are computing and ICT, publicutilities, transportation and tourism-related services in theservices sector; electrical and electronic products, machineryand metals in the manufacturing sector; and mining andpetroleum in the primary sector.

• Expected leading sources of FDI. IPAs expect the UnitedStates to be by far the most important source of global FDIflows, followed by the United Kingdom, Germany and China.Along with China, a number of other developing countriesfeature in the top fifteen source countries, including South

v

Africa, India, Brazil, Malaysia and the Republic of Korea.Some of these countries are important sources of FDI only fortheir immediate neighbours. Overall, these findings confirmthe current trend towards developing country TNCs becomingglobal players through outward investment.

• Prospects for TNCs' mode of entry. More than half ofrespondents expected mergers and acquisitions to be theprimary vehicle for FDI in 2005-2006. In contrast, most IPAs,the majority of which are from developing countries andconcentrate on non-M&A FDI, expected greenfieldinvestment to be the most important mode of entry. Non-equity investment, such as through strategic alliances orlicensing, is also expected to remain significant.

• Prospects for the relocation of corporate functions.Production in goods and services is the corporate functionrated most likely to be relocated. Well over 80% of thosesurveyed expected to see such activity transferred overseas.Next in line, logistics and support services are the functionsmost likely to relocate offshore, followed by distribution andsales.

• Future policy developments. As competition for FDI increases,countries worldwide are becoming more proactive in theirinvestment promotion efforts. The majority of IPAs intend tocontinue increasing the number and range of FDI-attractinginitiatives over the next two years. In particular, given limitedresources, most IPAs signaled their intention to employ a moretargeted approach to investment promotion.

In summary, although there are some potential risks, which mayweaken momentum in the near future, FDI growth is likely tocontinue. The recovery is increasingly fuelled by investment into,and from, developing countries. The overall mood is one of cautiousoptimism.

Prospects for Foreign Direct Investment and thevi Strategies of Transnational Corporations, 2005-2008

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Prospects for Foreign Direct Investment and theviii Strategies of Transnational Corporations, 2005-2008

ix

Table of Contents

Executive Summary .................................................................. iii

I. Introduction .......................................................................... 1

II. Investment environment for future FDI ......................... 3A. Economic determinants for future FDI .......................... 3B. Policy determinants for future FDI ................................ 6

III. Global FDI prospects and TNC strategies ................... 11A. Global FDI prospects ..................................................... 11B. Most attractive global FDI locations ........................... 12C. FDI prospects by industry ............................................. 14D. Predicted sources of FDI ............................................... 17E. Prospects for TNC strategies: mode of entry ............. 18F. Prospects for TNC strategies: relocation

of corporate functions .................................................... 19G. Risks to global FDI flows ............................................. 20

IV. Regional prospects ............................................................. 23A. Developed countries ....................................................... 23B. Africa ............................................................................... 29C. Asia and the Pacific ....................................................... 35D. Latin America and the Caribbean ................................. 40

V. Concluding remarks .......................................................... 53

Annex : Methodology ............................................................... 55

References ................................................................................... 57

Questionnaire ............................................................................. 59

Prospects for Foreign Direct Investment and thex Strategies of Transnational Corporations, 2005-2008

Figures

I.1. Trends in global FDI flows, 1990-2004 ....................... 1II.A.1. Global GDP growth rates, 2002-2006 .......................... 3II.B.1. Policy measures to attract FDI, 2004-2006 ................. 7II.B.2. Number of BITs and DTTs concluded, 1990- 2004 .... 8III.A.1a. Global prospects for FDI, 2005-2006 ...................... 11III.A.1b. Global prospects for FDI, 2007-2008 ...................... 12III.B.1. Most attractive global business locations,

2005-2006 .................................................................... 13III.C.1. Global FDI prospects in services sector,

2005-2006 .................................................................... 15III.C.2. Global FDI prospects in manufacturing sector,

2005-2006 .................................................................... 16III.C.3. Global FDI prospects in primary sector,

2005-2006 .................................................................... 17III.D.1. Expected leading sources of FDI, 2005-2006 ........ 18III.E.1. Expected modes of global investment,

2005-2006 .................................................................... 19III.F.1. Most expected corporate functions

to be relocated, 2005-2006 ....................................... 20III.G.1. Major risks to FDI flows, 2005-2006 ...................... 21IV.A.1. Developed countries: prospects for FDI flows,

2005-2006 .................................................................... 24IV.A.2. Developed countries: most attractive business

locations, 2005-2006.................................................. 24IV.A.3. Developed countries: expected leading

sources of FDI, 2005-2006 ....................................... 25IV.A.4. Developed countries: FDI prospects by industry,

2005-2006 .................................................................... 26IV.A.5. Developed countries: expected relocation

of corporate functions, 2005-2006 ........................... 27IV.A.6. Developed countries: expected modes

of investment, 2005-2006 ......................................... 28IV.A.7. Developed countries: trends in policy

measures to attract FDI, 2004-2006 ........................ 28IV.B.1. Africa: prospects for FDI flows, 2005-2006 .......... 29IV.B.2. Africa: most attractive business locations,

2005-2006 .................................................................... 30

xi

IV.B.3. Africa: expected leading sources of FDI,2005-2006 .................................................................... 31

IV.B.4. Africa: FDI prospects by industry, 2005-2006 ...... 32IV.B.5. Africa: expected relocation of

corporate functions, 2005-2006 ............................... 33IV.B.6. Africa: expected modes of investment,

2005-2006 .................................................................... 33IV.B.7. Africa: trends in policy measures to

attract FDI, 2004-2006 .............................................. 34IV.C.1. Asia and the Pacific: prospects for FDI

flows, 2005-2006 ........................................................ 35IV.C.2. Asia and the Pacific: most attractive

business locations, 2005-2006.................................. 36IV.C.3. Asia and the Pacific: expected leading

sources of FDI, 2005-2006 ....................................... 36IV.C.4. Asia and the Pacific: FDI prospects

by industry, 2005-2006 .............................................. 37IV.C.5. Asia and the Pacific: expected relocation

of various corporate functions, 2005-2006............. 38IV.C.6. Asia and the Pacific: expected modes of

investment of FDI, 2005-2006 ................................. 39IV.C.7. Asia and the Pacific: trends in policy

measures to attract FDI, 2004-2006 ........................ 40IV.D.1. Latin America and the Caribbean: prospects

for FDI flows, 2005-2006 ......................................... 41IV.D.2. Latin America and the Caribbean: most

attractive business locations, 2005-2006 ................ 41IV.D.3. Latin America and the Caribbean: expected

leading sources of FDI, 2005-2006 ......................... 42IV.D.4. Latin America and the Caribbean: FDI

prospects by industry, 2005-2006 ............................ 43IV.D.5. Latin America and the Caribbean: expected

relocation of corporate functions, 2005-2006 ........ 44IV.D.6. Latin America and the Caribbean: expected

modes of investment, 2005-2006 ............................. 45IV.D.7. Latin America and the Caribbean: trends in

policy measures to attract FDI, 2004-2006 ............ 46IV.E.1. South-east Europe and the CIS: prospects

for FDI flows, 2005-2006 ......................................... 47

Prospects for Foreign Direct Investment and thexii Strategies of Transnational Corporations, 2005-2008

IV.E.2. South-east Europe and the CIS: most attractivebusiness locations, 2005-2006 .................................. 47

IV.E.3. South-east Europe and the CIS: expectedleading sources of FDI, 2005-2006 ......................... 48

IV.E.4. South-east Europe and the CIS: FDI prospectsby industry, 2005-2006 .............................................. 49

IV.E.5. South-east Europe and the CIS: expectedrelocation of corporate functions, 2005-2006 ........ 50

IV.E.6 South-east Europe and the CIS: expectedmodes of investment, 2005-2006 ............................. 51

IV.E.7. South-east Europe and the CIS: trends inpolicy measures to attract FDI, 2004-2006 ............ 52

I. Introduction

The Global Investment Prospects Assessment (GIPA) isdesigned to present short- and medium-term prospects for foreigndirect investment (FDI) at the global, regional and industry levels.It also analyses the evolving trends in the strategies of transnationalcorporations (TNCs), as well as national FDI policies.

GIPA is designed to equip governments and business alikewith an instrument for proactive development of policies andstrategies, as opposed to a post facto assessment of foreigninvestment facts.

This study, the third in the GIPA series, assesses the 2005-2008 prospects for FDI trends, TNC activities and policydevelopments using a methodology similar to last year’s report.GIPA is a comprehensive analysis based on the findings of threeparallel global surveys of TNCs, FDI experts and IPAs, as wellas on relevant macroeconomic and microeconomic indicators andpolicy initiatives that shape the future global FDI.

The GIPA 2005 survey was conducted against the backdropof the end of a three-year downturn in global FDI, with therecovery, which began in 2004, being led by a rise in FDI todeveloping countries as flows to developed countries remainedmodest (figure I.1).1

Figure I.1. Trends in global FDI flows, 1990-2004(US$billion per year)

Source: UNCTAD, www.unctad.org/fdistatistics.

0

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II. Investment environment for future FDI

A. Economic determinants for future FDI

Recent growth forecasts suggest that the globalmacroeconomic climate will be largely favourable to FDI in theshort and medium term (figure II.A.1). Most regions are expectedto maintain robust gross domestic product (GDP) growth, withAsia at the forefront. Important threats to growth and FDI in turnare ongoing increases in interest rates and spiralling petroleumand commodity prices.

Figure.II.A.1. Global GDP growth rates, 2002-2006

Source: World Bank, Global Economic Prospects 2005.

Note: The figures for the years 2005 and 2006 are estimates.

Global growth rates are expected to fall slightly from a peakof 4% in 2004, to an average of 3.2% in 2005 and 2006. Thefigures, at least for the world as a whole, are still higher than in2002 and 2003 (World Bank 2005a). As in previous years, growthin developing countries is expected to outstrip that of the developedworld. While the former are expected to see a growth rate of over5% in 2005 and 2006, the latter are likely to average a rate of 2.7%.There is, however, significant variability in growth among countriesin each of the groups.

1.7%

2.7%

4.0%

3.2%3.2%3.4%

5.2%

6.1%

5.4%5.1%

1.3%

2.1%

3.5%

2.7%2.7%

2002 2003 2004 2005 2006

Year

Re

al

GD

Pg

row

th

World

Developingcountries

Developedcountries

Prospects for Foreign Direct Investment and the4 Strategies of Transnational Corporations, 2005-2008

The United States economy is expected to grow by slightlymore than 3% in both 2005 and 2006, while Western Europe andJapan are expected to be less dynamic. Growth in the euro areais forecast at 2.6% per year, dragged down by the sluggishnessof its three largest economies, France, Germany and Italy. Thesethree are all expected to see annual growth of just 1-2% over thenext two years (Eurostat 2005). On the other hand, most of thesmaller European Union (EU) countries, particularly the newCentral and Eastern European members, are expected to recordhealthy growth of at least 4%. Japan’s economy is likely to growby only 1.8% in 2005 and 1.6% in 2006.

South Asia, East Asia, and Eastern Europe and Central Asiaare all expected to experience growth of over 5.5% in 2005 and2006 (World Bank 2005a). Every other developing region isexpected to expand by between 3.5% and 5% per year. Developingcountries are, therefore, becoming increasingly the primary engineof global economic growth.

Since there is generally a stable and positive relationshipbetween GDP growth and global FDI flows, this positivemacroeconomic performance bodes well for national FDI prospects.On the supply side, FDI is affected by the availability of investmentcapital, generated by corporate profits or loans, which in turn areaffected by domestic economic conditions, including growth. Onthe demand side, growing overseas markets lead TNCs to investmore, while depressed markets inhibit them.

Over the past two decades, booms in global FDI havefollowed periods of high economic growth, while declines havefollowed recessions or periods of slow growth. The decline in FDIflows in 2001 and 2002 followed rapid increases in FDI growthduring the late 1990s. There was a similar pattern during the late1980s and early 1990s, as well as in 1982-1983. The positive recenteconomic trends suggest that an FDI upturn is in the worksfollowing the recent investment recession.

While short-term growth forecasts are largely positive, themacroeconomic outlook is not entirely rosy. Firstly, gross fixedcapital formation (GFCF) figures for the period 2005-2006 pointto a slowdown in overall investment in member countries of theOrganisation for Economic Co-operation and Development

Chapter II 5

(OECD). The OECD average is expected to drop from 5.9% in2004 to 2.65% in 2005 and 0.8% in 2006. Secondly, while inflationis expected to remain under control in most regions, interest ratesare expected to increase. This is particularly true in the UnitedStates, where rates for 6-month dollar denominated loans areexpected to increase from 1.6% in 2004 to 3.5% in 2005 and 4.6%in 2006 (World Bank 2005a). Such a surge may dampen FDIexpectations over the next two years. Thirdly, there are noindications of an imminent drop in petroleum prices. Forecastsfor 2005-2006 suggest the price of crude oil will be high (UnitedStates Energy Information Administration 2005). The latter is boundto have an adverse effect on a variety of manufacturing and servicesindustries, although the higher prices are likely to generateadditional FDI in natural resources.

Another issue that has to be considered in themacroeconomic framework is the fluctuation in the value of thedollar vis-à-vis other currencies, which is likely to have an effecton cross-border investment flows between the United States andthe rest of the world, be it in the form of equity, earnings or inter-company. For foreign-based TNCs, United States assets have beencheaper in recent years. For foreign affiliates of TNCs based inthe United States, it also means that this is a good time to repatriateintra-firm dollar denominated debt or foreign earnings. The netimpact on FDI flows will depend of course on the magnitudes ofthese two effects.

Firm-level indicators suggest the microeconomicenvironment will be largely favourable to FDI expansion over thenext few years. Firstly, robust economic growth and strong demandhas raised corporate profits in a range of industries. This has helpedto increase the volume of capital available for investment. Thegrowth in profits may not remain at an exceptional level as wasthe case in 2003-2004, but the profitability of the largest TNCsremains healthy in the short term. According to UNCTAD’scalculations, profits in the world’s largest TNCs2 are likely tocontinue to increase over the next three years, but at a slower pace.

The average net profits of the top five hundred companiesin the United States continue their ascent, charting a record-breaking $8.2 trillion in revenues and $513.5 billion in profits


in 2004, according to Fortune Magazine. Of the forty-two industriesanalyzed by Fortune, thirty-eight registered profit growth in 2004(Fortune Magazine, April 2005). The average net profits of thethousand largest Asian companies (mainly TNCs from Japan, China,Hong Kong (China), Malaysia, the Republic of Korea and Taiwan,Province of China), also rose, at a high rate of 52% (Asia Week2005).

The positive profit outlook is also reflected in another setof microeconomic indicators business confidence levels. Severalsurveys of CEOs and investment experts from various regions haveportrayed cautious optimism about future investment. The McKinseyGlobal Survey of Business Executives Confidence Index (McKinsey2005), for example, revealed a positive attitude among the 9,300business executives surveyed, though their forecasts were generallyless upbeat than a year ago. The PriceWaterhouseCoopers 8th

Annual Global CEO Survey (PwC 2005) found rising confidencein future levels of revenue growth over the next twelve months.The proportion of CEOs who were “very confident” or “somewhatconfident” rose from 72% in 2002 to 84% in 2003 and 91% in2004. In response to growing competition, nearly 40% of the CEOsare engaging in offshoring or planning to do so.

B. Policy determinants for future FDI

Investment liberalisation continues apace, and has in factintensified at both national and international levels. This is likelyto contribute to increased FDI flows in years to come. Competitionto attract FDI through various promotion and facilitation measureshas also escalated further.

National level

Generally, countries are responding to increased globalcompetition for FDI by becoming more proactive in theirinvestment promotion efforts. The number of countriesimplementing investment-related policies, and the range ofmeasures they used, both grew in 2004. Measures included furtherliberalisation, additional incentives and often investor targeting(figure II.B.1). Only 16% of the IPAs surveyed indicated that their

Chapter II 7

countries did not introduce any additional investment promotionmeasures over the past year.

A total of 269 FDI-related regulatory changes wereintroduced in 102 countries in 2004. The vast majority (87%) weredesigned to make host countries more attractive to foreigncompanies (UNCTAD 2005a). A clear example of this was areduction in corporate tax rates, which fell on average in the OECDfrom 29.7% to 26.5% (UNCTAD 2005a). The largest reductionwas made by Romania, from 26% to 16%, followed by Uruguayand Bulgaria.

Figure II.B.1. Policy measures to attract FDI, 2004-2006(Per cent of response by IPAs)

Source: UNCTAD prospects assessment 2005, www.unctad.org/fdiprospects.

According to the GIPA 2005 survey, more than 50% of theresponding countries planned to intensify their investmentpromotion efforts for 2005-2006. Furthermore, given the limitedresources at their disposal, most countries intend to use moretargeted policies that are also viewed as yielding better resultsand being more cost-effective. These findings suggest that globaland regional competition for FDI is increasing, and will continueto do so in the future.

0 20 40 60 80 100

No new measures

Further liberalization

Additional incentives

Other promotion

measures

Greater targeting

2005-2006 2004


International level

International investment agreements continue to proliferateat the bilateral, regional and interregional levels. Through theirliberalisation, protection and promotion provisions, these constitutean international enabling framework for investment. On average,in 2004, more than three agreements were signed each week.

As part of this trend, the number of bilateral investmenttreaties (BITs) continued to expand. During 2004, 73 new BITswere concluded, bringing the total number in force to 2,392 (figureII.B.2). Several countries, including Germany, China, Switzerlandand the United Kingdom, have now signed over 100 suchagreements. 84 double taxation treaties (DTTs) involving 80countries were also concluded in 2004, bringing the total numberin existence to 2,559.

Figure II.B.2. Number of BITs and DTTs concluded, 1990- 2004(Cumulative and year by year)

Source: UNCTAD (www.unctad.org/iia).

Number of BITs and DTTs concluded, 1990 - end 2004

0

50

100

150

200

250

19

90

19

91

19

92

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93

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94

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99

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00

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01

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Years

An

nu

alB

ITs

&D

TT

s

0

500

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1500

2000

2500

3000

Cu

mu

lative

BIT

s&

DT

Ts

BITs/Years DTTs/Year BITs/Cumulative DTTs/Cumulative

Chapter II 9

Investment rules are also increasingly being incorporatedinto free trade agreements (FTAs), regional integration agreements(RIAs) and economic partnership agreements (EPAs). They usuallycontain commitments to liberalise, protect and/or promote cross-boarder investment flows in addition to a range of tradeliberalisation and promotion provisions.3 The number of agreementswith investment components has been growing steadily and, byJune 2005, more than 215 had been concluded.

A number of other agreements are likely to help facilitateFDI, especially to developing countries. Preferential tradearrangements, for example, can encourage trade-related, or “barrier-hopping” investment. Market access measures for African countries,such as the African Growth and Opportunity Act (AGOA), theEverything But Arms initiative (EBA) and Japan’s so-called 99%rule4 can help attract foreign investors seeking to gain access tomarkets in the United States, EU and Japan. Equally, the KyotoProtocol’s Clean Development Mechanism (CDM) could resultin increased FDI to developing countries. It creates an incentivefor firms to make environmentally friendly investments indeveloping countries. The CDM covers a wide range of industriesand the first projects have already come to fruition.

In summary, developments at both national and internationallevel point towards continued long-term growth in FDI. Theexpanding body of agreements will increasingly facilitateinternational investment and present new opportunities fordeveloping countries. At the same time, competition for FDI isgrowing as countries are introducing more policy measures to attractFDI.

III. Global FDI prospects and TNCstrategies

A. Global FDI prospects

The principal findings of the GIPA 2005 survey augur wellfor FDI prospects. After its rebound in 2004, global FDI is likelyto continue rising in the coming years. Indeed, the majority ofthe FDI experts, TNCs, and IPAs surveyed predicted that FDI wouldcontinue to grow in both the short and medium term. Whileforecasts remain positive, however, they are not as optimistic asthose in the GIPA 2004 survey.

More than half of the TNCs and expert respondents, andfour-fifths of IPAs, expected short-term (2005-2006) growth inFDI flows, while almost all remaining respondents expected levelsto remain steady (figure III.A.1a). Only a small fraction ofrespondents thought that FDI would decrease in the immediatefuture. The survey results represent a vote of confidence in theprospects for short-term FDI flows.

Figure III.A.1a. Global prospects for FDI, 2005-2006(Per cent of responses)


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

TNCs Experts IPAs

Increase Remain the same Decrease


Opinions on medium-term (2007-2008) FDI prospects areeven more optimistic (figure III.A.1b). Some 57% of experts, 65%of TNCs and 83% of IPAs expected FDI to increase through 2007-2008. Again, most of the remaining respondents expected FDI levelsto remain the same, and only a few foresaw a decline.

Figure III.A.1b. Global prospects for FDI, 2007-2008(Per cent of responses)


These results are broadly in line with those of the GIPA 2004survey, though a greater proportion, but still a minority, of thisyear’s respondents predict that FDI will remain stable rather thangrow. This caution is due in part to the slowdown in economicgrowth in some major developed economies and structuralweakness in some regions.

B. Most attractive global FDI locations

There were a number of surprises in the investment locationsthat were selected as “most attractive”. Four of the top fivecountries, as ranked by TNCs, are not from the developed world

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

TNCs Experts IPAs


Chapter III 13

(figure III.B.1). China is considered an attractive location by 87%of TNCs, by a margin of 36 from the next country in line. Thisis impressive, even for a country which has been one of the world’slargest FDI recipients for quite some time. India’s high rankingis even more remarkable, given that FDI flows to that country havebeen modest until recently. The United States is the only developedcountry in the top five locations. Germany, Canada and the UnitedKingdom made it into the top ten, but traditionally important FDIdestinations, such as France, the Netherlands and Italy, were notincluded. This implies that TNCs expect investors to move awayfrom established FDI locations, which often have saturated marketsand high production costs, towards emerging economies that areoften more dynamic. This finding is also supported by overall trendsin FDI flows in 2004, which saw developing countries taking thelead in the global FDI recovery (UNCTAD 2005a).

Figure III.B.1. Most attractive global business locations, 2005-2006(Per cent of responses)


Responses from

1. China (87%)

2. India (51%)

3. USA (51%)

4. Russia (33%)

5. Brazil (20%)

6. Mexico (16%)

7. Germany (13%)

8. UK (13%)

9. Thailand (11%)

10. Canada (7%)

Responses from TNCs

1. China (87%)

2. India (51%)

3. United States (51%)

4. Russian Federation (33%)

5. Brazil (20%)

6. Mexico (16%)

7. Germany (13%)

8. United Kingdom (13%)

9. Thailand (11%)

10. Canada (7%)


C. FDI prospects by industry

Prospects for FDI vary significantly by industry, accordingto the 2005 survey.5 The outlook for the services sector is morepositive than that for the manufacturing or primary sectors. IPAsand experts shared gross modo the views in regard to the prospectsof specific industries. IPAs were at times more optimistic thanexperts in their assessment across sectors.

FDI growth is expected to be led by services in computingand ICT, public utilities (such as the generation and distributionof electricity, water and gas), transportation, followed by tourism,hotels and restaurants, construction, banking and insurance, retailand wholesale and business services, all of which were noted bymore than 40% of both IPAs and experts (figure III.C.1).

In manufacturing, the greatest FDI growth is expected inelectrical and electronic products, machinery and equipment, andmetals and metal products (figure III.C.2). There is less optimismregarding FDI in textiles and clothing, rubber and plastic products,non-metallic minerals and media and publishing. It is interestingto note that in contrast to the 2004 survey, the optimism is quiteconcentrated in a few industries in the manufacturing sector.

In the primary sector, FDI in mining and petroleum isexpected to increase in response to higher prices and strong demandfor natural resources (figure III.C.3). Higher oil and commodityprices induce TNCs to take up new exploration projects, or to stepup production in existing ones. Downbeat predictions for theagriculture industry might be due to ongoing trade disputes andslow liberalisation in this area.

In sum, the findings of the GIPA 2005 survey are broadlyin line with those of the 2004 survey. One major difference is thatthis year’s respondents expect a greater divergence in the prospectsfor individual sectors compared with the 2004 survey. As well,the gap between the prospects for FDI in the services sector andthose for FDI in other sectors has widened, as compared with the2004 survey.

Chapter III 15

Figure III.C.1. Global FDI prospects in services sector, 2005-2006(Per cent of responses)


0% 20% 40% 60% 80% 100%

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

Ele

ctr

icity

,

ga

sa

nd

wa

ter

Co

ns

tru

ctio

n

Re

tail

&

wh

ole

sa

le

To

uri

sm

,

ho

tels

&

res

tau

ran

t sT

ran

sp

ort

Ba

nk

ing

&

ins

ura

nc

e

Co

mp

ute

r

/IC

T

Bu

sin

es

s

se

rvic

es

Ed

uc

atio

n

&h

ea

lth

Improve Remain the same Worsen


Figure III.C.2. Global FDI prospects in manufacturing sector, 2005-2006(Per cent of responses)


0% 20% 40% 60% 80% 100%

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

IPAs

Experts

b

Food

&

evera

ges

&T

extile

s

clo

thin

gP

ublis

hin

g&

media

Chem

icals

Rubber

&

pla

stic

pro

ducts

Non-

meta

llic

min

era

l

pro

ducts

Meta

lM

achin

ery

Ele

ctr

ical

&

ele

ctr

onic

pro

ducts

Moto

r

vehic

les


Chapter III 17

Figure III.C.3. Global FDI prospects in primary sector, 2005-2006(Per cent of responses)


D. Predicted sources of FDI

In the short term, the IPAs surveyed expect the United Statesto be by far the most important source of global FDI flows, followedby the United Kingdom, Germany and China. The overall rankingis interesting because along with China, several other developingcountries feature in the top 15 (figure III.D.1). These include SouthAfrica, India, Brazil, Malaysia and the Republic of Korea. It isimportant to note that this is not a ranking of the magnitude ofFDI outflows. Instead, the survey asks IPAs from which threecountries they expect to receive the largest investment in 2005-2006. This finding confirms the current trend of TNCs fromdeveloping countries increasingly becoming global players andinvesting abroad.

0% 20% 40% 60% 80% 100%

IPAs

Experts

IPAs

Experts

Agriculture

&

oth

er

Min

ing

&

petr

ole

um



Figure III.D.1. Expected leading sources of FDI, 2005-2006(Per cent of responses)


E. Prospects for TNC strategies: mode ofentry

More than 50% of the three groups of respondents combinedexpected mergers and acquisitions (M&As) to be the primaryvehicle for FDI in 2005-2006. In contrast, most IPAs expectedgreenfield investment to be the most important (figure III.E.1).This reflects the fact that most IPA respondents were fromdeveloping countries in which greenfield FDI tends to dominate.Non-equity investment, such as investment through strategicalliances or licensing, is also expected to remain important, althoughTNCs seem less convinced of this. The emphasis of TNCs on M&A

0% 10% 20% 30% 40% 50% 60%

Republic of Korea

Netherlands

Canada

Malaysia

Brazil

Australia

Spain

Italy

India

South Africa

Japan

France

China

Germany

United Kingdom

United States

Chapter III 19

activity contrasts with the GIPA 2004 findings, according to whichTNCs expected equal use of each mode of investment.

Figure III.E.1. Expected modes of global investment, 2005-2006(Per cent of responses)


F. Prospects for TNC strategies: relocation ofcorporate functions

There was a broad consensus among IPAs, TNCs and expertsthat production would be the corporate function most likely tobe relocated. Well over 80% of those surveyed expected production-related activities to be transferred overseas (figure III.F.1)

After production, logistics and support services are the nextmost frequently expected functions to be relocated abroad. Thisis followed by distribution and sales. Regional headquarters andresearch and development are the least likely corporate functionsto be relocated abroad.

TNCs expected to see less relocation of R&D activities thanIPAs and experts. Only 20% of TNC respondents expected R&Dto be relocated, in contrast with more than 40% of experts and

60%

0%

10%

20%

30%

40%

50%

70%

80%

90%

100%

Mergers and

acquisitions

Greenfield FDI Others such as

strategic alliances or

licensing

IPAs Experts TNCs


almost 60% of IPAs. This finding is particularly interesting giventhe recent trend towards the globalization of R&D, and reinforcesthe notion that since R&D involves knowledge vital to a firm’scompetitiveness, it is in need of maximum protection, and it istherefore less likely to be transferred overseas. A separate UNCTADsurvey of the world’s largest R&D spenders shows that the shareof R&D funded by foreign companies will increase by 2009, withChina, the United States and India as the top three recipients ofFDI in R&D (UNCTAD 2005a).

Figure III.F.1. Most expected corporate functions to be relocated, 2005-2006(Per cent of responses)


G. Risks to global FDI flows

Interestingly, views on what constitutes major threats toglobal FDI prospects differ among the three survey groups.Protectionism and slow growth in industrialised countries werethe issues TNCs and experts felt were the most threatening to FDIgrowth (figure III.G.1). Indeed, every TNC respondent felt thattrade wars had the potential to undermine FDI growth in 2005-2006.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Production Distribution/sales Research and

development

Regional

headquarters

Logistics/supporting

services

IPAs Experts TNCs

Chapter III 21

Figure III.G.1. Major risks to FDI flows, 2005-2006(Per cent of respones)


Note: Percentage of respondents that considered each factor as“important” or “very important.”

For IPAs the biggest concern was the financial instabilityof major economies and the volatility of raw material prices. Thisdifference in views underlines the fact that IPAs are more in tunewith host country domestic political and economic issues and lessfocused on broader global issues. This might also explain whypolitical instability and civil war is the third greatest concern ofIPAs, while the other two survey groups of respondents rankedit as the least important.

0% 20% 40% 60% 80% 100%

Protectionism

Exchange rate volatilities

Global terrorism threat

Slow growth inindustrialized countries

Political instabilities andcivil wars

Volatility of petroleum andother raw materials prices

Financial instability ofmajor economies

IPAs Experts TNCs

IV. Regional prospects

The focus of investors’ attention appears to be shifting awayfrom traditionally important investment locations in the developedworld towards a handful of emerging markets. This underlies thefact that developing countries were at the forefront of the globalFDI recovery in 2004 (UNCTAD 2005a).

Overall, developed countries are expected to see somerecovery in FDI, but this will be relatively modest in the shortrun. The United States is expected to remain the most attractivedestination for FDI in the developed world. Of the major Europeaneconomies, only the United Kingdom and Germany feature amongthe ten most attractive investment locations. Prospects for FDIin new European Union (EU) member countries are generallypositive.

Asia and Eastern Europe are the two regions with the mostpositive FDI prospects. China, India and the Russian Federationare likely to be the main beneficiaries, while Thailand, the Republicof Korea, Ukraine and Romania are also expected to perform well.FDI flows to Africa are generally expected to remain stable. SouthAfrica is considered to be by far the most attractive investmentlocation on the continent, although Egypt, Nigeria and Moroccoare also expected to see healthy FDI growth. Latin America shouldmaintain its recent FDI recovery, with Brazil at the forefront,followed by Mexico, Argentina and Chile.

A. Developed countries

Between 2003 and 2004, developed countries’ share of globalFDI inflows dropped from 70% to 59%. Looking ahead, most ofthe experts and TNCs surveyed expect FDI flows to developedcountries to remain steady in the short term (figure IV.A.1). Muchof the caution over the FDI prospects of developed countries isdue to ongoing uncertainty about the health of their economies,as well as concerns over protectionism and trade wars (see thepolicy section, chapter II, section B). IPA respondents6 are muchmore optimistic, however. This reflects the positive outlook of


IPAs from EU accession countries, which are currently enjoyinghigh growth and offer access to EU markets, low labour costs andlow corporate tax rates (UNCTAD 2005a).

Figure IV.A.1. Developed countries: prospects for FDI flows, 2005-2006(Per cent of responses)


The United States remains the most attractive destination,and largest source, for FDI among developed countries (figureIV.A.2). Other top FDI destinations include the United Kingdom,Canada, Germany and France.

Figure IV.A.2. Developed countries: most attractive business locations,2005-2006

(Per cent of responses)


0%

10%

20%

30%

40%

50%

60%

70%

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90%

100%

Experts TNCs IPAs


Responses from experts

3. Canada (44%)4. Germany (41%)5. France (31%)6. Japan (28%)7. Spain (28%)8. Belgium (13%)9. Ireland (13%)10. Italy (13%)

2. Canada (44%)

4. Germany (35%)5. France (26%)6. Spain (20%)7. Ireland (17%)8. Japan (17%)9. Australia (13%)10. Italy (11%)

1. United States (75%)2. United Kingdom (59%)3. Canada (44%)4. Germany (41%)5. France (31%)6. Japan (28%)7. Spain (28%)8. Belgium (13%)9. Ireland (13%)10. Italy (13%)

1. United States (74%)2. Canada (44%)3. United Kingdom (37%)4. Germany (35%)5. France (26%)6. Spain (20%)7. Ireland (17%)8. Japan (17%)9. Australia (13%)10. Italy (11%)

Responses from TNCs

Chapter IV 25

Most FDI flows are likely to take place between developedcountries. The expected leading sources of FDI to the group ofdeveloped countries are the United States, followed by Germanyand the United Kingdom (figure IV.A.3). Indeed, significantvariation in FDI flows between developed countries was recordedin 2004 (UNCTAD 2005a), due to, among other things, varyinglevels of economic growth, business confidence, and cross-borderM&As. On the other hand, EU-15 countries, Norway andSwitzerland generally performed worse owing to lower economicgrowth rates and corporate restructuring. Meanwhile, FDI flowsto those new EU accession countries are expected to continuegrowing.

Figure IV.A.3. Developed countries: expected leading sources of FDI, 2005-2006(Per cent of responses from IPAs)


Overall, IPAs from developed countries were generally mostoptimistic about the prospects for attracting FDI in services (figureIV.A.4). The sectors expected to attract most investment arecomputing and ICT, hotels and restaurants, transport and businessservices industries. FDI in tourism, and in the retail and wholesalesector, is also expected to grow, though more modestly.

0% 20% 40% 60% 80%

Switzerland

Sweden

France

The Netherlands

United Kingdom

Germany

United States


Figure IV.A.4. Developed countries: FDI prospects by industry, 2005-2006(Per cent of responses from IPAs)


0% 20% 40% 60% 80% 100%

Agriculture & other

Mining & petroleum

Food & beverages

Textiles & clothing

Publishing& media

Chemicals

Rubber & plastic products

Non-metallic mineral products

Metal

Machinery

Electrical & electronic products

Motor vehicles

Electricity, gas and water

Construction

Retail & wholesale

Tourism

Hotels & restaurants

Transport

Banking & insurance

Computer/ICT

Business services

Education & health

Pri

ma

ry

Se

cto

rM

anufa

ctu

ring

Se

rvic

es


Chapter IV 27

The largest growth areas for foreign investment in themanufacturing sector are likely to be electrical and electronicequipment, motor vehicles and other transport equipment,machinery and chemicals. Investment in textiles and clothing isexpected to fall because of competition from developing countries,particularly those from Asia.

The corporate functions that IPAs from developed countriesmost expect to see relocated include R&D, logistics and supportingservices, and production (figure IV.A.5). Most of the FDI in R&Dby firms from developed countries continues to be directed at otherdeveloped countries.

Figure IV.A.5. Developed countries: expected relocationof corporate functions, 2005-2006

(Per cent of responses from IPAs)


TNCs believe that M&As will remain the most frequentmeans of investment in developed countries. On the other hand,IPAs believe that the majority of the FDI they will receive in 2005-2006 will take the form of greenfield investment (figure. IV.A.6).This is largely a reflection of the shift taking place within the EU,with firms looking to move their operations to new accessioncountries to take advantage of the lower cost structures available.This could also reflect the fact that IPAs are geared more towardsnew, greenfield investors.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Production Distribution/Sales

Research anddevelopment

Regionalheadquarters

Logistics/supportingservices


Figure IV.A.6. Developed countries: expected modesof investment, 2005-2006

(Response by TNCs and IPAs from developed countries)


In 2004, around half of developed countries boosted theirinvestment promotion efforts by introducing more sophisticatedtargeting techniques. In addition, 20% offered extra investmentincentives, and 17% further liberalised their investment regimes(figure IV.A.7).

Figure IV.A.7. Developed countries: trends in policymeasures to attract FDI, 2004-2006



0% 20% 40% 60% 80% 100%

No new measures



Greater targeting

Other promotion measures

2004 2005-2006

0%

20%

40%

60%

80%

100%

Mergers andacquisitions

Greenfield FDI Others such asstrategic alliances

or licensing

IPAs TNCs

Chapter IV 29

In 2005-2006, developed countries will continue to intensifytheir investment promotion efforts, particularly through greatertargeting and additional incentives. However, they plan to introducefewer new liberalization measures than countries from otherregions. This is not surprising given that most developed countriesalready have highly liberalised markets and relatively hospitableinvestment environments.

B. Africa

After a downturn in 2002, FDI flows to Africa recoveredin 2003 and remained relatively stable in 2004. In the short run,FDI expectations for the continent remain fairly positive, thoughthe three survey groups gave widely differing assessments (figureIV.B.1). The consensus among TNCs is that FDI flows to Africawill remain stable, with the same proportion of respondentspredicting an increase in FDI as predicting a fall. In contrast,experts and, especially, IPAs7 are more optimistic: a third of theformer and 90% of the latter believe that FDI inflows will continueto increase. Both experts and TNCs believe that North Africancountries have greater FDI potential than those from sub-Saharan

Figure IV.B.1. Africa: prospects for FDI flows, 2005-2006(Per cent of responses)


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Africa. The overall mood of optimism is due in large part to highpetroleum and commodity prices. In the case of the IPAs and theirhigh level of confidence, it should be noted that their optimismis partly rooted in their professional role.

In the short term, South Africa appears to be by far the mostattractive business location in Africa (figure IV.B.2). Nine outof ten experts and TNCs believed it will be among the continent’stop five business locations in 2005-2006. Around half of each groupalso placed Egypt in their top five most attractive businesslocations, while North African countries in general featuredprominently in the top ten.

Figure IV.B.2. Africa: most attractive business locations, 2005-2006(Per cent of responses)


South Africa and China were the most frequently cited aspotential sources of FDI for Africa (figure IV.B.3). 40% of AfricanIPAs believe that corporations from these countries will be amongtheir three largest investors. Europe is also seen as a major sourceof investment, with the four largest EU economies all in the topten. Many IPAs also expect significant investment from Asia. Inrecent years, Chinese TNCs have expanded their resource-seekingand manufacturing activities on the continent, and Indian firmshave begun to invest in IT-related services. Both China and Indiafeatured in the top five expected leading sources of FDI in the2004 edition of the GIPA survey.

1. South Africa (92%)2. Egypt (44%)3. Nigeria (33%)4. Morocco (28%)5. Libya (23%)6. Algeria (21%)7. Botswana (21%)8. Tunisia (18%)9. Ghana (15%)10. Kenya (15%)

1. South Africa (87%)2. Egypt (53%)3. Morocco (40%)4. Nigeria (38%)5. Tunisia (35%)6. Algeria (29%)7. Libya (16%)8. Botswana (11%)9. Ghana (7%)10. Angola (7%)


1. South Africa (92%)2. Egypt (44%)3. Nigeria (33%)4. Morocco (28%)5. Libya (23%)6. Algeria (21%)7. Botswana (21%)8. Tunisia (18%)9. Ghana (15%)10. Kenya (15%)

1. South Africa (87%)2. Egypt (53%)3. Morocco (40%)4. Nigeria (38%)5. Tunisia (35%)6. Algeria (29%)7. Libya (16%)8. Botswana (11%)9. Ghana (7%)10. Angola (7%)

Responses from TNCs

Chapter IV 31

Figure IV.B.3. Africa: expected leading sources of FDI, 2005-2006(Per cent of responses from IPAs)


The majority of African IPAs continue to expect FDI growthin the services sector to remain strong (figure IV.B.4). They areparticularly positive about prospects for computing and ICTservices, the hotel and restaurant sector and construction and realestate. This is in line with most other developing countries. Thereis less optimism about FDI in the manufacturing sector, althoughsome exceptions, such as electrical and electronic products, food,beverages and tobacco, are expected to perform relatively well.In the primary sector, predictions for FDI in agriculture, forestryand fishing are less upbeat than last year. In contrast, 85% of IPAsbelieve that mining, quarrying and petroleum will see substantialinvestment growth, largely as a result of rising commodity prices.

Most African IPAs believe that production and distributionare the corporate functions that are the most likely to be relocatedto their countries (figure IV.B.5), with 80% expecting to benefitfrom investment in these areas. Around half are also optimisticabout the prospect of attracting FDI in logistics and supporting

0% 10% 20% 30% 40% 50% 60%

Germany

Italy

Malaysia

United States

France

India

United Kingdom

China

South Africa


Figure IV.B.4. Africa: FDI prospects by industry, 2005-2006(Per cent of responses from IPAs)


services. Few believe that they will attract FDI for R&D or regionalheadquarters.

Both TNCs and IPAs believe that greenfield investment willdominate FDI to Africa in the short term (figure. IV.B.6). 80%of IPAs expect to see new greenfield investment in their country

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Agriculture & other

Mining & petroleum

Food & beverages

Textiles & clothing

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Chemicals



Metal

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Motor vehicles


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Transport

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Chapter IV 33

by the end of 2006. The low expectation for other modes ofinvestment is largely a result of the under-developed nature ofAfrican economies and companies, which makes it difficult forTNCs to find appropriate targets for M&As.

Figure IV.B.5. Africa: expected relocation ofcorporate functions, 2005-2006



Figure IV.B.6. Africa: expected modes of investment, 2005-2006(Per cent of responses)


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Over two thirds of IPAs indicated that their countries willintensify investment promotion efforts through greater targeting,additional incentives and further liberalisation (figure IV.B.7).Investor targeting, which was employed by more than half ofAfrican IPAs in 2004, is expected to become even more importantas promotion efforts become more focused. Investment promotionis still at its infancy for most countries, since many IPAs in theregion are still young. It is not surprising, therefore, that IPAsare experimenting with different investment promotion techniques.Only one out of five African IPAs did not introduce new investmentpromotion methods in 2004, and just one in ten have no plans forapplying new methods in 2005-2006.

Figure IV.B.7. Africa: trends in policy measures toattract FDI, 2004-2006



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No new measures

Other promotion measures



Greater targeting

2004 2005-2006

Chapter IV 35

C. Asia and the Pacific

FDI prospects for Asia and the Pacific are resoundinglypositive, with over 85% of each survey group expecting increasedFDI flows to the region (figure IV.C.1). This is significantly moreoptimistic than in previous years. FDI inflows surged in 2004,reaching $148 billion, an increase of $46 billion on 2003 levels.Rapid economic growth, an improving policy environment andTNCs’ increasing strategic commitment to the region should ensuresustained FDI growth in the years to come.

Figure IV.C.1. Asia and the Pacific: prospects for FDI flows, 2005-2006(Per cent of responses)


China and India are expected to be the top FDI destinationsin the region. Thailand’s prospects are also encouraging, whilethe Republic of Korea, Malaysia, Indonesia, Viet Nam andSingapore are all expected to perform well (figure IV.C.2). It shouldbe noted that experts and TNCs came up with an identical rankingof the countries. This suggests that there is a general consensuson the region’s and individual countries’ prospects.

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Figure IV.C.2. Asia and the Pacific: most attractivebusiness locations, 2005-2006



The United States is expected to be the most important sourceof FDI for more than half of Asia’s economies in 2005-2006,according to IPAs in the region.8 Other major source countriesinclude China, Japan, Australia and India, as well as the UnitedKingdom (figure IV.C.3).

Figure IV.C.3. Asia and the Pacific: expected leadingsources of FDI, 2005-2006

(Response rate of IPAs)


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India

Australia

Japan

China

United States

1. China (92%)

2. India (66%)

3. Thailand (50%)

4. Rep. of Korea (34%)

5. Malaysia (32%)

6. Indonesia (28%)

7. Viet Nam (22%)

8. Singapore (16%)

1. China (94%)

2. India (71%)

3. Thailand (38%)


5. Malaysia (32%)

6. Indonesia (29%)

8. Singapore (16%)


1. China (92%)

2. India (66%)

3. Thailand (50%)


5. Malaysia (32%)

6. Indonesia (28%)

8. Singapore (16%)

Responses from TNCs

1. China (94%)

2. India (71%)

3. Thailand (38%)


5. Malaysia (32%)

6. Indonesia (29%)

7. Viet Nam (23%)

8. Singapore (16%)

Chapter IV 37

In the short term, FDI to Asia is expected to be concentratedin the services and manufacturing sectors as companies takeadvantage of low production costs and the availability of skilledlabour (figure IV.C.4).

Figure IV.C.4. Asia and the Pacific: FDI prospectsby industry, 2005-2006



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Asian IPAs expect FDI growth in the services sector to beconcentrated in construction, tourism, computing and ICT, businessservices, and education and health. In the manufacturing sector,metal and metal products, electronics, motor vehicles and chemicalsare expected to attract the most investment. The food and beveragesand machinery and equipment industries are also expected toperform relatively well.

One striking aspect of these forecasts is that most of theindustries predicted to attract substantial investment are humancapital-intensive. This reflects an increasing effort by firms totake advantage of the abundance of skilled labour in Asia.Investment in construction, meanwhile, is driven by rapid economicgrowth in the region as well as post-tsunami reconstruction.Business services and computing and ICT-related activities arelikely to continue to benefit from the current wave of outsourcing.In contrast, prospects for agriculture are gloomy, but this isunsurprising given that FDI in that industry is traditionally low.

Asian IPAs believed they would benefit from the relocationof numerous corporate activities in 2004-2005. 90% expect toreceive investment in production, while 87% anticipated FDI inlogistics and supporting services. The figures for R&D, anddistribution and sales are 78% and 70% respectively (figure IV.C.5).

Figure IV.C.5. Asia and the Pacific: expected relocation of variouscorporate functions, 2005-2006



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Chapter IV 39

The largest change from last year’s results is in R&D, with positiveresponses more than doubling since 2004, reflecting a broadertrend towards growing FDI in research (UNCTAD 2005a).

In the short term, greenfield investment is expected to bethe most important form of FDI in Asia. It is interesting to notethat 67% of Asian IPAs also expect to benefit from other formsof investment, up from 23% in 2004 (figure IV.C.6). This mayreflect the efforts of countries in the region to upgrade the capacitiesof local firms, thus facilitating greater cooperation with foreigncorporations through strategic alliances and contractualarrangements. TNCs continue to regard greenfield investment andM&As as equally important modes of FDI.

Figure IV.C.6. Asia and the Pacific: expected modes of investmentof FDI, 2005-2006(Per cent of responses)


Asian countries introduced a range of new investmentpromotion measures in 2004, and this is expected to continue in2005-2006 (figure IV.C.7).

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Figure IV.C.7. Asia and the Pacific: trends in policy measuresto attract FDI, 2004-2006(Per cent of responses from IPAs)


D. Latin America and the Caribbean

After four consecutive years of FDI decline, Latin Americaand the Caribbean registered a significant upsurge in inflows in2004, albeit to a level still significantly below that recorded in1997. The consensus among TNCs, experts and IPAs from theregion9 is that this recovery will continue, though Latin Americais not expected to perform as well as other developing regions(figure IV.D.1). The majority of Latin American and CaribbeanIPAs, a third of TNCs, and two out of five FDI experts expecta short-term increase in FDI to the region. The regional economicrecovery, improved macroeconomic environment, high demandfor commodities and increased policy support for manufacturingindustries in some countries is opening up new businessopportunities for foreign investors. Nonetheless, FDI experts andTNCs generally expect FDI inflows to the region to remain fairlyconstant.

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No new measures



Greater targeting

Other promotion

measures

2004 2005-2006

Chapter IV 41

Figure IV.D.1. Latin America and the Caribbean: prospectsfor FDI flows, 2005-2006



Brazil is expected to be the most attractive location in LatinAmerica for FDI in 2005-2006 (figure IV.D.2). More than 80%of TNCs and 90% of FDI experts believe that the country willbe one of the region’s five most attractive investment locationsin the short term. This may be due to a recent upturn in the

Figure IV.D.2. Latin America and the Caribbean: most attractivebusiness locations, 2005-2006



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1. Brazil (91%)2. Mexico (71%)3. Chile (59%)4. Argentina (32%)5. Peru (21%)

1. Brazil (82%)2. Mexico (67%)3. Argentina (57%)4. Chile (51%)5. Venezuela (31%)

1. Brazil (91%)2. Mexico (71%)3. Chile (59%)4. Argentina (32%)5. Peru (21%)

1. Brazil (82%)2. Mexico (67%)3. Argentina (57%)4. Chile (51%)5. Venezuela (31%)

Responses from TNCs


economy, led by the dynamically expanding export sector. Mexico’shigh ranking is unsurprising given that it has been the majorrecipient of investment over the last four years. Argentina andChile are also considered to have positive prospects for 2005-2006.

The United States is expected to remain the leading sourceof FDI in Latin America and the Caribbean. Spain, Brazil, Chinaand Canada are also expected to provide investment, though ona significantly smaller scale (figure IV.D.3). Latin American andCaribbean IPAs expect growth in investment from Asian sources,such as China, the Republic of Korea and Japan.

Figure IV.D.3. Latin America and the Caribbean: expected leadingsources of FDI, 2005-2006



In line with global trends, FDI growth in Latin America andthe Caribbean is expected to be the highest in service industries(figure IV.D.4). This is also consistent with the results of the 2004survey. The industries with the most positive prospects are hotelsand restaurants, construction/infrastructure related and real estate,tourism and computing and ICT services.

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Canada

China

Brazil

Spain

United States

Chapter IV 43

In the manufacturing sector, the majority of Latin AmericanIPAs expect no significant change in FDI flows. The only exceptionto this is the food and beverage sector, for which the outlook ismore promising. This suggests that the region’s manufacturingindustries are still in the process of restructuring.

Figure IV.D.4. Latin America and the Caribbean: FDI prospectsby industry, 2005-2006



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Agriculture & other

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Tourism


T

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