UNCTAD VIRTUAL INSTITUTETRAINING PACKAGE ON ECONOMIC AND LEGAL ASPECTS

OF INTERNATIONAL INVESTMENT AGREEMENTS (IIAs)

Module 1Concepts, trends and economic aspects of foreign direct

investment Theme 4

Foreign Direct Investment in the World and in Africa: Long-term Trends and Current Patterns

Kampala, 10-14 November 2008

Zbigniew ZimnyUNCTAD consultant

1. International production (and TNCs activities including FDI) has grown very fast since

the mid-1980s and its importance in the world

economy has significantly increased

How it was three decades ago, according to Dunning?

“[Production] undertaken by enterprises which deliberately coordinate their operations (purchasing, production, finance, R&D, marketing) on a global basis to make the most efficient use of their resources (material, technical, financial and managerial) is still more the exception than the rule.

Even on the eve of the Second World War, the value of such production was only one third that of international trade. In the mid-1950s and 1960s the growth of such production outpaced that of trade, and in spite of trade liberalization and rising oil prices, by the 1976 it had exceeded that of trade”.

Source: J. H. Dunning, International Production and the Multinational Enterprise, 1981, London, G. Allen and Unwin.

Since the mid-1980s world FDI has grown faster than world GDP and

exports… Index of world FDI outflows, GDP and exports (in current prices). 1980-2007,

per cent, 1980=100

0

500

1000

1500

2000

2500

3000

3500

4000

FDI outflows GDP Exports

…and its relative importance in the world economy has significantly increased

(FDI/GDP, FDI/GFCF and sales of FA/exports)

The ratio of FDI stock to GDP, 1985-2006 (per cent)

0

5

10

15

20

25

1985 1990 1995 2000 2006

The ratio of FDI inflows to GFCF, 1985-2006 (per cent)

0

5

10

15

20

25

1985 1990 1995 2000 2006

The ratio of sales of foreign affiliates to world exports, 1985-2006 (per cent)

0

50

100

150

200

1985 1990 1995 2000 2006

FDI has become by far the largest source of external financial resources flows to developing

countries(types of flows, 1990-2003, $ billions)

Total resource flows

Priva

te fl

ow

s

Commercial banks loans

350

300

250

200

150

100

50

0

-50

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

Portfolio flows

FDI inflows

Summary of the increasing role of TNCs in the world economy

• FDI stock/GDP: from 6% to 25%• FDI flows/GFCF: from 2% to 15-20%• Sales of foreign affiliates (FA) in host countries/exports:

from parity to 2 times higher• TNCs account for some 2/3 of world exports: 1/3 parents’

exports from home countries and 1/3 foreign affiliates’ exports from host countries

• 1/3 of world trade is intra-firm trade of TNCs• FDI is the largest source of external finance for

developing countries• TNCs dominate world industrial R&D and are important in

international technology transfer (4/5th internal to TNCs)• Value added of foreign affiliates accounts for 11% of

global GDP (compared to 5% in the early 1980s). The share of foreign affiliates in global employment is estimated at 3%

Individual host countries rely to varying degrees on FDI and TNCs

HIGH RELIANCE LOW RELIANCE

Host countries with high reliance on FDI, UNCTAD Transnationality Index, 2005, %

0 20 40 60 80 100

PanamaSweden

New ZealandHonduras

Bosnia and HerzegovinaIreland

JamaicaNetherlands

ChileCzech Republic

HungarySlovakia

Macedonia, TFYRBulgaria

Trinidad and TobagoEstonia

LuxembourgSingapore

BelgiumHong Kong, China

Host countries with low reliance on FDI, UNCTAD Transnationality Index, 2005, %

0 2 4 6 8 10 12 14

PeruTurkey

SloveniaBrazilChina

Russian FederationGermany

AlbaniaGreece

ItalyIndonesia

PhilippinesTaiwan Province of China

United StatesBarbados

Saudi ArabiaKorea, Republic of

IndiaBelarus

Japan

2. World FDI flows fluctuate with economic cycles but as long as they are positive they increase FDI stock and international production (that is, production under the governance of TNCs), which grows continuously

World FDI flows grow in the long term but fluctuate with economic cycles

World FDI inflows, 1998-2007, ($ mln)

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

1998 2000 2002 2004 2006

World FDI inflows, 1988-1995, ($ mln)

0

50000

100000

150000

200000

250000

300000

350000

400000

1988 1990 1992 1994

World FDI inflows, 1979-1987, ($ mln)

0

20000

40000

60000

80000

100000

120000

140000

160000

1979 1981 1983 1985 1987

World FDI stock grows continuously

World inward FDI stock, 1980-2007, billions of dollars

0

2000

4000

6000

8000

10000

12000

14000

16000

Years 1980-2007

3. Cross-border M&As determine the global rhythm and pattern of FDI flows and

non-equity forms of investment increasingly complement FDI in TNCs activities and strategies

Cross-border acquisitions (M&As) drive global FDI,

determining its rhythm and fluctuations Global FDI inflows and cross-border M&As, 1987-2006, billions of dollars

0

200

400

600

800

1000

1200

1400

1600

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Cross-border M&As FDI inflows

M&As are particularly important for FDI of developed countries …

Developed countries: FDI inflows and cross-border M&As, 1987-2006, billions of dollars

0

200

400

600

800

1000

1200

1400

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Cross-border M&As FDI Inflows

… and less so for inward FDI of developing countries, where greenfield

FDI is largerDeveloping countries: FDI inflows and cross-border M&As, 1987-2006, billions of dollars

0

50

100

150

200

250

300

350

400

Cross-border M&As FDI Inflows

Notes on cross-border M&As• The values of M&As and FDI flows are not comparable: the

figures show only the broad correlation• The bulk of cross-border M&As takes place among developed

countries• In the past M&As were dominated by the US TNCs. Nowadays

they are widely used by TNCs from other countries• M&As are less popular form of FDI entry into developing

countries, especially into Asia where most FDI is greenfield investment

• They were quite popular in Latin America during the 1990s, when LA countries (notably Brazil and Argentina) implemented large-scale privatization programmes

• M&As boom in the second half of the 1990s, which peaked in 2000, lifted world FDI flows to unprecedented levels

• When the boom ended, FDI flows fell drastically and have recovered only in 2007 due to the recovery of cross-border M&As

TRADITIONAL FORMS EXAMPLES OF NEW FORMS

Non-equity forms (NEFs) of FDI: a neglected dimension of international

production

- Franchising (fast food, hotels, car rentals)

- Licensing

- Management contracts (hotels)

- Partnerships in business consultancy or legal services

- Original equipment

manufacturing

- Functional partnerships: technology or marketing

- Strategic alliances

- Cross-licensing

- Close customer-supplier relationships

- Contract manufacturing

- Outsourcing/off-shoring of

corporate services

New NEFs: explosive growth1985 1995 1999

1000 9000 7000

• ALL:

• Cross-border forms dominate, although their share decreased from 86% to 63%

End of 1970s End of 1980s 1995 End of 1990s

150 500 700 500

• TECHNOLOGY

• Cross-border forms account for half of technology NEFs

4. The rapid growth of FDI in the recent past has been driven largely by FDI in

services and the sectoral pattern of FDI has shifted

towards services

Shift towards services was gradual, but steady

• During the 1950s, FDI was concentrated in the primary sector and manufacturing

• FDI in manufacturing was of a market-seeking import-substitution type, motivated by access to large national markets (e.g. FDI in Brazil) or large regional markets (American FDI in Europe)

• Services represented less than a quarter of FDI of major home and host countries at the beginning of the 1970s, 40 % in 1985 and less than a half in 1990

During the 1990s and into the 21st century the shift towards services accelerated in

the world …

World: sectoral composition of FDI inward stock, %, 1990

Primary9%

Services50%

Manufact.41%

World: sectoral composition of inward FDI stock, %, 2006

Manufact.29%

Primary8%

Services63%

… and in both developed and developing countries

Developed countries: sectoral composition of inward FDI stock, %, 2006

Primary8%

Services63%

Manufact.29%

Developed countries: sectoral composition of inward FDI stock, %, 1990

Primary10%

Services49% Manufact.

41%

Developing countries: sectoral composition of inward FDI stock, %, 1990

Primary8%

Services48%

Manufact.44%

Developing countries: sectoral compostion of inward FDI stock, %, 2006

Primary8%

Services66%

Manufact.26%

…owing to “dynamic” services• Electricity - 24x increase in world FDI

stock from 1990 to 2006• Telecommunications - 26x• Business services (excl. finance) - 15x

THE COMBINED SHARE OF THESE SERVICES IN SERVICES FDI STOCK INCREASED FROM 19% TO 40% at the expense of financial and trading services, the share of which fell from 64% 48%

Notes on the shift towards services• In absolute terms, FDI stock has grown

in all sectors and almost all industries• Even in “agriculture, hunting, forestry

and fishing” category, traditionally not important FDI industries, world inward FDI stock increased more than 2.5 times between 1990 and 2006, while that in manufacturing increased nearly 4.5 times and in extractive industries 5.5 times

• Stock in services, however, increased 8 times

5. Changing geography of FDI

A. Home countries and TNCs: from a club of few to many sources of outward

FDI

During the two decades after World War Two…

• Four countries dominated outward FDI stock with the US accounting for a half of it

• Almost all FDI originated from developed countries

World outward stock of FDI, 1960, %

United States

50%

United Kingdom18%

Netherlands10%

France6%

Other developed16%

What’s new today?• More sources of FDI in

developed countries• US remains the largest

home country, but accounts for less than 1/5th of the stock

• EU as a group is the largest source of FDI, accounting for 45% of it

• Developed countries continue to dominate outward FDI but developing countries have emerged as a significant source of FDI

World outward stock of FDI by home countries and regions, 2007, %

France9%

Netherlands5%

United Kingdom11%

United States18%

Japan3%

Other EU19%

Other20%

DCs15%

Notes on home country changes• The rise and fall of Japan’s role. Between 1980

and 1994 Japanese outward stock increased 14 times and its share of world’s stock from 3.5% to 12%. As a result of the prolonged economic stagnation the share declined to some 3%. Japan remains large FDI home

• Emergence of TNCs from developing countries. The share of these countries increased from 3% in the 1970s and 1980s to 15% now. Almost all the increase came from Asia: the Republic of Korea, Taiwan Province of China, Singapore, Hong Kong (China) and China. The growth of FDI from developing countries is set to continue

• Growth of the EU FDI has come from both six original and new members of the EU

A snapshot of transnational corporations (TNCs) – firms that undertake FDI and international

production

The number of TNCs and their foreign affiliates has grown rapidly

The existing TNCs have expanded their foreign production

The leading TNCs are large and attract attention, but in numbers most TNCs are

SMEs

The number of TNCs and their foreign affiliates is growing rapidly

The number of parent companies of TNCs in the world from the early 1990s until now

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Early 1990s Late 1990s Now

The number of foreign affiliates of TNCs in the world, early 1990s and now

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

Early 1990s Late 1990s Now

Most of the existing TNCs expand faster abroad than at home

0 10 20 30 40 50 60 70 80 90 100

Daimler ChryslerHitachi

General MotorsToyota

MatsushitaFord

RenaultBayerBMW

VolkswagenBASF

IBMHewlett Packard

SonyFiat

SiemensExxon MobilRoyal Dutch

VolvoBP

NestlePhilips

Transnationalization index of 22 selected TNCs, 1985 and 2006, %

2006

1985

The world’s top 100 non-financial TNCs in 2006A snapshot

85 TNCs are based in the “Triad” (USA, EU and Japan) 6 firms are based in developing economies More than a half of top 100 TNCs are in traditional and new FDI industries

TRADITIONAL: motor vehicles (13); petroleum (10); chemicals and pharmaceuticals (10); electrical and electronic equipment (9)NEW: telecommunications (8); electricity (6); retail trade chains (4); water (1)

The top 100 TNCs account for some 10 per cent of the foreign assets; 16 per cent of the sales; and 12 per cent of the employment... ...of all TNCs!

MOST OF 79,000 TNCs ARE SMALL AND MEDIUM-SIZED FIRMS

Ten largest TNCs in the world, by foreign assets, USD billions, 2006

             Foreign               TNI 

  Corporation Home country Industry         assets                 %

1 General Electric United States Electrical & electronic equipment 442 53

2 British Petroleum  United Kingdom Petroleum expl./ref./distr.   170 80

3 Toyota Motor  Japan Motor vehicles   164 45

4 Royal Dutch/ShellUnited Kingdom, 

Netherlands Petroleum expl./ref./distr.   161 70

5 Exxonmobil  United States Petroleum expl./ref./distr.   155 68

6 Ford Motor  United States Motor vehicles   131 50

7 Vodafone  United Kingdom Telecommunications   126 85

8 Total France Petroleum expl./ref./distr.   121 74

9 Electricite De France France Electricity, gas and water   112 35

10 Wal-Mart Stores United States Retail trade   110 41

Ten largest TNCs from developing (mostly Asian) countries,

by foreign assets, USD billions, 2006(Billions of dollars and per cent)

        Foreign assets TNI

  Corporation Home economy Industry $ bln Per cent

1 Hutchison Whampoa Hong Kong, China Diversified   70 82

2 Petronas - Petroliam Nasional Malaysia Petroleum   31 26

3 Samsung Electronics Republic of Korea

Electrical & electronic equipment   27 48

4 Cemex  Mexico Cement   24 78

5 Hyundai Motor Republic of Korea Motor vehicles   20 27

6 Singtel SingaporeTelecommunications   19 68

7 CITIC Group China Diversified   18 19

8 Formosa Plastic Group Taiwan Province of China Chemicals   17 41

9 Jardine Matheson Holdings Hong Kong, China Diversified   17 71

10 LG Corporation Republic of Korea

Electrical & electronic equipment   15 47

Asia dominates outward FDI stock of developing countries

Outward stock of FDI by developing regions, 2007, $ bln and %

Africa, 73, 3% Latin America, 493, 22%

Asia, 1,722, 75%

5. Changing geography of FDI(continued)

B. Host countries: always more balanced distribution of the world inward FDI stock, although the majority of FDI goes to developed countries

Key changes among host countries between 1960s-1970s and now

• In the 1960s almost all FDI originated from developed countries but 70% of it went to developed countries and 30% to developing countries

• During the 1980s the share of developing countries in inward FDI stock increased to over 40% to fluctuate around 30% during the 1990s and into 21st century

• Over time the competition for FDI among countries has intensified as more and more countries opened up to FDI and actively have sought to attract it

• During the 1990s China and transition economies entered the picture, India started to seek more FDI and Brazil returned to the FDI scene, overcoming the crisis of the 1980s.

• The United States became the largest single host country (in the 1960s and 1970s it was Canada)

Global picture: changing fortunes of host regions in attracting FDI stock

The geographical composition of the world inward FDI stock, 1967, 1980, 1990, 2000 and 2007, %

0%

20%

40%

60%

80%

100%

1967 1980 1990 2000 2007

EU-15 USA Other developed Developing Transition

6. FDI in developing countries and Africa

Developing countries: until 1980 Latin America was the largest host region

among developing countries and Brazil was the largest host country. In 1970-75

Africa was close to AsiaCumulated FDI inflows by region, 1970-1975

and 1976-1980

0

5000

10000

15000

20000

25000

Africa Latin America Asia China

1970-1975 1976-1980

After 1980 FDI inflows into all DC regions and China grew, with some fluctuations…

FDI inflows into developing countries, 1980-2007, billions of dollars

0

100

200

300

400

500

600

Africa Latin America Asia net of China China

… and with LA and Africa losing ground to Asia (including to China)

FDI inflows into developing countries, 1980-2007, % share in developing countries inflows

0%

20%

40%

60%

80%

100%

Africa Latin America Asia net of China China

Relative to the size of the economy, FDI in Africa is not so small: matches that of LA and is higher

than in Asia

The ratio of inward FDI stock to GDP, developing regions, 1998-2007, %

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Africa

Latin America

Asia

The ratio of FDI inflows do domestic investment, developing regions, 1997-2007, %

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Africa

Latin America

Asia

“Relative” FDI makes small African host countries large host countries

Top 15 host countries of Africa, FDI stock, 2007, billions of dollars

0 10 20 30 40 50 60 70 80 90 100

NamibiaChad

ZambiaCôte d' Ivoire

United Republic of TanzaniaLibyan Arab Jamahiriya

Equatorial GuineaAlgeriaAngolaSudanTunisia

MoroccoEgypt

NigeriaSouth Africa

Top 15 host countries in Africa by FDI stock/GDP, 2007, %

0 20 40 60 80 100 120 140

EgyptMozambiqu

MoroccoLesothoZambiaCongo

Cape VerdeNamibiaDjibouti

MauritaniaChad

TunisiaGambia

EquatorialSeychelles

Africa in 2007: highest ever level of FDI inflows

Driven by the booming global commodities-market; rising profitability of investment; and an increasingly FDI-friendly environment.

The growth of FDI

inflows was spread across 35 countries, and included many natural resource producers. Source: UNCTAD, World Investment Report 2008, Transnational

Corporations and the Infrastructure Challenge.

FDI inflows in value and as a percentage of gross fixed capital formation, 1995–2007

Africa: top 10 recipients of FDI inflows, 2006–2007

(Billions of dollars)

Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.

Rates of return on inward FDI in developing regions: in

2006-2007 in Africa highest among developing regions

Income on inward FDI grew by 31% in 2007, and the rate of return on FDI in Africa has increased steadily since 2004.

• All sub-regions except North and West Africa experienced growth in FDI in 2007, with the highest growth rate registered in Southern Africa

• Six countries of North Africa attracted 42% of FDI to the region in 2007 compared with 51% in 2006

• While most countries of North Africa continued to do well, large inflows to Nigeria and South Africa plus Equatorial Guinea, Madagascar and Zambia, each receiving about $1 billion or more inflows in 2007, boosted FDI to sub-Saharan Africa

• Consequently, 47 countries of sub-Saharan Africa accounted for 58% of African inflows in 2007, up from 49% in 2006

• The top ten FDI-host countries in Africa accounted for over 82% of the region's FDI inflows in 2007

• But what really matters is the relative (not absolute) size of FDI (relative to the size of the host economy)

Africa: Current patterns of FDI inflows by sub-regions

Africa: patterns of FDI inflows (continued)

Key TNCs investing in Africa have been from the United States and Europe, mainly from France, Italy and the United Kingdom, expanding in particular in natural-resource exploitation

There have also been TNCs from Africa, particularly from South Africa, Morocco and Libyan Arab Jamahiriya, investing in services, medium-scale manufacturing but also in primary sectors

TNCs from Asia have invested in the oil and mining industries (diamonds, gold, copper, nickel, zinc, uranium and other gem stones)

Sources of recent FDI

Africa: some impacts of FDI on host economies

FDI in natural resource exploitation projects has contributed to accelerated export growth.

Owing to FDI, foreign-exchange reserves in

the region as a whole grew by some 36% in 2007; increases in some major oil-exporting countries such as Nigeria and the Libyan Arab Jamahiriya were particularly high.

Africa: FDI policy measures in 2007

Ten countries introduced policy measures in 2007. Most of these measures made regulatory frameworks more favourable to FDI and TNCs.

Favourable measures were aimed mainly at: Improving admission procedures of foreign investors; Strengthening investment promotion; Improving registration and fiscal procedures for

business start-ups.

In some cases, governments adopted less favorable measures, by, for example, restricting foreign ownership (Mozambique, Zimbabwe).

Prospects: “good times“ ahead for FDI in

Africa?

Concentration in the primary sector, driven by the commodity market boom

In 2008-2010, 15% of TNCs plan to increase FDIBUT THE SURVEY WAS CONDUCTED IN THE FIRST HALF OF 2008.

WILL ITS PROJECTIONS HOLD DURING THE FINANCIAL CRISIS?

FDI prospects in Africa, 2008–2010(Per cent of respondents)

Source: UNCTAD, World Investment Report 2008, Transnational Corporations and the Infrastructure Challenge.