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United Nations Conference on Trade and Development

World Investment Report

United NationsNew York and Geneva, 2005

2005Overview

Transnational Corporations and

the Internationalization of R&D

Note

As the focal point in the United Nations system for investment andtechnology, and building on 30 years of experience in these areas, UNCTAD, throughits Division on Investment, Technology and Enterprise Development (DITE),promotes the understanding, and helps build consensus, on matters related to foreigndirect investment (FDI), transfer of technology and development. DITE also assistsdeveloping countries to attract and benefit from FDI and in building their productivecapacities and international competitiveness. The emphasis is on an integrated policyapproach to investment, technological capacity building and enterprise development.

The term “country” as used in this study also refers, as appropriate, toterritories or areas; the designations employed and the presentation of the materialdo not imply the expression of any opinion whatsoever on the part of the Secretariatof the United Nations concerning the legal status of any country, territory, city orarea or of its authorities, or concerning the delimitation of its frontiers or boundaries.In addition, the designations of country groups are intended solely for statistical oranalytical convenience and do not necessarily express a judgement about the stage ofdevelopment reached by a particular country or area in the development process.The reference to a company and i ts activit ies should not be construed as anendorsement by UNCTAD of the company or its activities.

The boundaries and names shown and designations used on the maps presentedin this publication do not imply official endorsement or acceptance by the UnitedNations.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or are not separately reported.

Rows in tables have been omitted in those cases where no data are available for anyof the elements in the row;

A dash (-) indicates that the item is equal to zero or its value is negligible;

A blank in a table indicates that the item is not applicable, unless otherwiseindicated;

A slash (/) between dates representing years, e.g., 1994/95, indicates a financialyear;

Use of a hyphen (-) between dates representing years, e.g., 1994-1995, signifiesthe full period involved, including the beginning and end years;

Reference to “dollars” ($) means United States dollars, unless otherwise indicated;

Annual rates of growth or change, unless otherwise stated, refer to annual compoundrates;

Details and percentages in tables do not necessarily add to totals because of rounding.

The material contained in this study may be freely quoted with appropriateacknowledgement.

UNCTAD/WIR/2005 (Overview)

ii

Visit the website of theWorld Investment Reports at

www.unctad.org/wir

iii

Acknowledgements

The World Investment Report 2005 (WIR05) was prepared underthe overall guidance of Karl P. Sauvant by a team led by Anne Miroux andcomprising Diana Barrowclough, Harnik Deol, Persephone Economou,Torbjörn Fredriksson, Masataka Fujita, Masayo Ishikawa, Kálmán Kalotay,Dong Jae Lee, Guoyong Liang, Padma Mallampally, Nicole Moussa,Abraham Negash, Hilary Nwokeabia, Shin Ohinata, Jean-FrançoisOutreville and James Xiaoning Zhan. Specific inputs were prepared byVictoria Aranda, Americo Beviglia Zampetti, Kumi Endo, Hamed El-Kady,Anna Joubin-Bret, Victor Konde, Michael Lim, Helge Müller, Thomas Pollan,Prasada Reddy, Christoph Spennemann, Joerg Weber and Kee Hwee Wee.

Principal research assistance was provided by Mohamed ChirazBaly, Bradley Boicourt, Jovan Licina, Lizanne Martinez and Tadelle Taye.Additional research assistance was provided by Claudia Cardenas underthe supervision of Henri Laurencin, and by Amare Bekele and Karen Lee.Katrin Arnold, Arnaud Guerreiro and Fennie Lansberger assisted as internsat various stages. The production of the WIR05 was carried out byChristopher Corbet and Esther Valdivia-Fyfe. WIR05 was desktop publishedby Teresita Sabico. It was edited by Michael Gordy and Praveen Bhalla.

Sanjaya Lall was the principal consultant. John H. Dunning was thesenior economic adviser.

WIR05 benefited from inputs provided by participants in a GlobalSeminar in Geneva in May 2005, and two regional seminars on FDI inresearch and development held in April 2005, one in Monterrey incooperation with Texas A&M International University and Escuela deGraduados en Administración y Dirección de Empresas (EGADE) atTecnológico de Monterrey, and the other in Bangkok in association withthe ASEAN Secretariat. The former was organized by Tagi Sagafi-nejadand Alejandro Ibarra.

Inputs were also received from Rory Allan, Frank Barry, NazhaBenabbes-Taarji, John Daniels, Dieter Ernst, Vishwas Govitrikar, RobertGrosse, Yao-su Hu, Thomas Jost, Ruslan Lukach, Martin Molinuevo,Francisco Moris, Peter Muchlinski, Glenda Napier, Lisa Rydén and MartinSrholec.

Comments were received during various stages of preparation fromIsmael Aguilar, Haleh Daneshvar Alavi, Giovanni Balcet, RicardoBielshowsky, Peter Brimble, Mario Calderini, Cristina Casanueva-Reguart,

iv

Mario Cimoli, Csilla Endrödy, Elisa Cobas-Flores, Martha Corrales, RobertoEchandi, Fabienne Fortanier, Samuel Gayi, Andrea Goldstein, William C.Gruben, Miguel Guidicatti, Mongi Hamdi, Fabrice Hatem, Robert Hawkins,Gábor Hunya, Patarapong Intarakumnerd, Joachim Karl, Yves Kenfack,Tivadar Lippényi, Robert Lipsey, Henry Loewendahl, Jeffrey Lowe, GustavoLugones, Aimable Uwizeye Mapendano, Mina Mashayekhi, Riad Meddeb,Wolf R. Meier-Ewart, Michael Mortimore, Fiorina Mugione, RajneeshNarula, Peter Nunnenkamp, Herbert Oberhänsli, Sheila Page, Gloria O.Pasadilla, Robert Pearce, Lucia Piscitello, Bruno von Pottelsberghe de laPotterie, Aleksandra Prachowska, Sérgio Queiroz, Eric Ramstetter, RajahRasiah, Marie-Estelle Rey, Matfobhi Riba, Pedro Roffe, Martin Roy, RegRumney, Pierre Sauvé, Carlos Scheel, Jon Sigurdson, Djisman S.Simandjuntak, Maurizio Sobrero, Shigeki Tejima, Jaroslav Tláskal, DouglasThomas, Yasuyuki Todo, Mun Heng Toh, Elisabeth Tuerk, Sophia Twarog,Rob van Tulder, Christopher Wilkie, Maximilian von Zedwitz and ZbigniewZimny. Comments were also received from the United Nations EconomicCommission for Africa and the United Nations Economic and SocialCommission for Western Asia.

Numerous officials of central banks, statistical offices, investmentpromotion and other government agencies, and officials of internationalorganizations and non-governmental organizations, as well as executivesof a number of companies, also contributed to WIR05, especially throughthe provision of data and other information. The Report also benefitedfrom collaboration with Erasmus University, Rotterdam on data collectionand analysis of the largest TNCs.

The financial support of the Governments of Norway and Swedenis gratefully acknowledged.

�

ContentsPage

Overview ........................................................................................................... 1

END OF THE DOWNTURN

Led by developing countries, global FDI flowsresumed growth in 2004 … ................................................................. 1

…with the Asia and Oceania region the largest recipientas well as source of FDI among developing countries. ................. 10

FDI rebounded in Latin America followingfour years of decline ... ........................................................................ 12

... remained stable in Africa … ........................................................... 13

... and increased in South-East Europe and the CISfor the fourth consecutive year. .......................................................... 14

By contrast, FDI inflows into developed countriescontinued to decline. .......................................................................... 15

Further increases in FDI are expected. ............................................ 15

R&D INTERNATIONALIZATION AND DEVELOPMENT

TNCs are internationalizing R&D, includingin developing countries … ................................................................. 17

…with important implications for innovation and development. ... 18

TNCs are the drivers of global R&D. ................................................. 20

Their R&D is growing particularly fast, though unevenly,in developing countries … ................................................................. 22

… and the type of R&D undertaken varies by region. ..................... 24

The process is driven by new push and pull factors,and is facilitated by enabling technologies and policies ... ............ 28

… and has important implications for both hostand home countries. .......................................................................... 29

Page

Appropriate policy responses are needed at the national level … .. 31

…taking developments at the international level into account. .... 33

Annex

Table of contents of the World Investment Report 2005Transnational Corporations and theInternationalization of R&D................................................................... 35

List of the World Investment Reports .................................................... 39

Questionnaire ........................................................................................... 43

Box

1. Changes in geographical groupings used in WIR05 ........................ 10

Figures

1. Global FDI flows, top 10 economies, 2003, 2004 .................................. 32. FDI flows by region, 2003, 2004 .......................................................... 113. R&D expenditure by selected TNCs and economies, 2002 ............... 214. Share of foreign affiliates in business R&D,

selected countries, 2003 or latest year available ............................... 235. Current foreign locations of R&D in the UNCTAD survey .............. 256. Most attractive prospective R&D locations

in the UNCTAD survey ....................................................................... 26

Tables

1. FDI flows, by region and selected countries, 1993-2004 .................... 22. Selected indicators of FDI and international production,

1982-2004 ............................................................................................... 53. The world's top 25 non-financial TNCs,

ranked by foreign assets, 2003 ............................................................. 64. The top 25 non-financial TNCs from developing

economies, ranked by foreign assets, 2003 ......................................... 75. National regulatory changes, 1991-2004 .............................................. 96. Regional unweighted averages for the UNCTAD

Innovation Capability Index ............................................................... 19

vi

World Investment Report 2005

Transnational Corporations andthe Internationalization of R&D

Overview

END OF THE DOWNTURN

Led by developing countries, global FDI flows resumedgrowth in 2004 …

On account of a strong increase in foreign direct investment (FDI)flows to developing countries, 2004 saw a slight rebound in global FDI afterthree years of declining flows. At $648 billion, world FDI inflows were 2%higher in 2004 than in 2003. Inflows to developing countries surged by 40%,to $233 billion, but developed countries as a group experienced a 14% dropin their inward FDI. As a result, the share of developing countries in worldFDI inflows was 36% (table 1), the highest level since 1997. The United Statesretained its position as the number one recipient of FDI, followed by theUnited Kingdom and China (figure 1).

Many factors help to explain why the growth of FDI was particularlypronounced in developing countries in 2004. Intense competitive pressuresin many industries are leading firms to explore new ways of improving theircompetitiveness. Some of these ways are by expanding operations in thefast-growing markets of emerging economies to boost sales, and byrationalizing production activities with a view to reaping economies of scaleand lowering production costs. Higher prices for many commodities havefurther stimulated FDI to countries that are rich in natural resources suchas oil and minerals. In some developed as well as developing countries,increased inflows in 2004 were linked to an upturn in cross-border mergerand acquisition (M&A) activity. Greenfield FDI continued to rise for thethird consecutive year in 2004. Provided economic growth is maintained,the prospects for a further increase in global FDI flows in 2005 are promising.

FDI outflows increased in 2004 by 18%, to $730 billion, with firmsbased in developed countries accounting for the bulk ($637 billion). In fact,almost half of all outward FDI originated from three sources: the United

2World Investment Report 2005: Transnational Corporationsand the Internationalization of R&D

Tabl

e 1.

FD

I flo

ws,

by

regi

on a

nd s

elec

ted

coun

trie

s, 1

993-

2004

(B

illio

ns o

f dol

lars

and

per

cen

t)

FD

I inf

low

s

F

DI o

utflo

ws

Reg

ion/

coun

try

1993

-199

819

9920

0020

0120

0220

0320

0419

93-1

998

1999

2000

2001

2002

2003

2004

(Ann

ual a

vera

ge)

(Ann

ual a

vera

ge)

Dev

elop

ed e

cono

mie

s 2

56.2

849

.11

134.

3 5

96.3

547

.8 4

42.2

380

.0 3

53.3

1 01

4.1

1 09

2.7

662

.2 5

99.9

577

.3 6

37.4

Eur

ope

147

.3 5

20.4

722

.8 3

93.9

427

.6 3

59.4

223

.4 2

18.1

763

.5 8

66.1

451

.3 3

96.9

390

.0 3

09.5

Eur

opea

n U

nion

140

.3 5

01.5

696

.3 3

82.6

420

.4 3

38.7

216

.4 2

00.8

724

.6 8

13.4

433

.9 3

84.5

372

.4 2

79.8

Uni

ted

Stat

es 8

6.1

283

.4 3

14.0

159

.5 7

1.3

56.

8 9

5.9

92.

3 2

09.4

142

.6 1

24.9

134

.9 1

19.4

229

.3Ja

pan

1.3

12.

7 8

.3 6

.2 9

.2 6

.3 7

.8 2

1.4

22.

7 3

1.6

38.

3 3

2.3

28.

8 3

1.0

Oth

er d

evel

oped

cou

ntrie

s 2

1.5

32.

5 8

9.2

36.

7 3

9.6

19.

6 5

2.9

21.

5 1

8.5

52.

5 4

7.7

35.

8 3

9.1

67.

6D

evel

opin

g ec

onom

ies

138

.9 2

32.5

253

.2 2

17.8

155

.5 1

66.3

233

.2 5

6.6

88.

2 1

43.2

78.

6 4

7.8

29.

0 8

3.2

Afr

ica

7.1

11.

9 9

.6 2

0.0

13.

0 1

8.0

18.

1 2

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.5 1

.6-

2.6

0.4

1.2

2.8

Latin

Am

eric

a an

d th

e C

arib

bean

47.

9 1

08.6

97.

5 8

9.1

50.

5 4

6.9

67.

5 1

2.7

44.

7 6

0.6

29.

1 1

1.4

10.

6 1

0.9

Asi

a an

d O

cean

ia 8

3.9

112

.0 1

46.0

108

.7 9

2.0

101

.4 1

47.6

41.

6 4

1.0

81.

1 5

2.0

36.

0 1

7.2

69.

4A

sia

83.4

111

.6 1

45.7

108

.6 9

2.0

101

.3 1

47.5

41.

6 4

1.1

81.

1 5

2.0

36.

0 1

7.2

69.

4W

est A

sia

3.5

1.9

3.8

7.1

5.7

6.5

9.8

0.2

1.6

1.4

1.1

0.9

- 4.

0 0

.0Ea

st A

sia

51.

6 7

7.3

116

.2 7

8.7

67.

3 7

2.1

105

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1.7

29.

8 7

2.0

26.

1 2

7.6

14.

4 5

3.5

Chi

na 3

8.5

40.

3 4

0.7

46.

9 5

2.7

53.

5 6

0.6

2.6

1.8

0.9

6.9

2.5

- 0.

2 1

.8So

uth

Asia

2.9

3.1

3.1

4.1

4.5

5.3

7.0

0.1

0.1

0.5

1.4

1.1

1.0

2.3

Sout

h-Ea

st A

sia

25.

3 2

9.3

22.

6 1

8.8

14.

5 1

7.4

25.

7 9

.6 9

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3.3

6.4

5.8

13.

6O

cean

ia 0

.4 0

.4 0

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.1 0

.0 0

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.1 0

.0-

0.1

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Sout

h-Ea

st E

urop

e an

d th

e C

IS 6

.6 1

0.5

9.1

11.

8 1

2.8

24.

1 3

4.9

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2.6

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4.5

10.

6 9

.7S

outh

-Eas

t E

urop

e 1

.6 3

.7 3

.6 4

.5 3

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.4 1

0.8

0.1

0.1

0.0

0.2

0.6

0.1

0.2

CIS

5.0

6.8

5.5

7.3

9.0

15.

7 2

4.1

1.3

2.5

3.2

2.5

3.9

10.

4 9

.5W

orld

401

.71

092.

11

396.

5 8

25.9

716

.1 6

32.6

648

.1 4

11.2

1 10

4.9

1 23

9.1

743

.5 6

52.2

616

.9 7

30.3

Mem

oran

dum

: s

hare

in w

orld

FD

I flo

ws

Dev

elop

ed e

cono

mie

s63

.877

.781

.272

.276

.569

.958

.685

.991

.888

.289

.192

.093

.687

.3D

evel

opin

g ec

onom

ies

34.6

21.3

18.1

26.4

21.7

26.3

36.0

13.8

8.0

11.6

10.6

7.3

4.7

11.4

Sout

h-Ea

st E

urop

e an

d th

e C

IS1.

61.

00.

61.

41.

83.

85.

40.

30.

20.

30.

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71.

71.

3

Sou

rce:

UN

CTA

D,

Wor

ld I

nves

tmen

t R

epor

t 20

05:

Tran

snat

iona

l C

orpo

rati

ons

and

the

Inte

rnat

iona

lizat

ion

of R

&D

, an

nex

tabl

e B

.1.

3OverviewF

igu

re 1

. G

lob

al F

DI

flow

s, t

op 2

0 ec

onom

ies,

a 20

03,

2004

(Bil

lion

s of

dol

lars

)

Sou

rce:

U

NC

TAD

, W

orld

Inv

estm

ent

Rep

ort

2005

: T

rans

natio

nal

Cor

pora

tions

and

the

Int

erna

tiona

lizat

ion

of R

&D

, an

nex

tabl

e B

.1.

aR

anke

d on

the

bas

is o

f th

e m

agni

tude

of

2004

FD

I flo

ws.

030

60

90

Pola

nd

Canada

Chile

Kore

a,R

epublic

of

Japan

Irela

nd

Russia

nF

edera

tion

Sin

gapore

Mexic

o

Italy

Bra

zil

Spain

Fra

nce

Hong

Kong,C

hin

a

Belg

ium

Austr

alia

Luxem

bourg

Chin

a

United

Kin

gdom

United

Sta

tes

2004

2003

030

60

90

Kore

a,R

epublic

of

Port

ugal

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an

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vin

ce

ofC

hin

a

Austr

ia

Bra

zil

Russia

nF

edera

tion

Sin

gapore

Sw

eden

Austr

alia

Italy

Sw

itzerland

Belg

ium

Japan

Hong

Kong,C

hin

a

Canada

Fra

nce

Spain

Luxem

bourg

United

Kin

gdom

United

Sta

tes

2004

2003

96 91

229

119

101

FD

Iin

flo

ws

FD

Io

utflo

ws


States, the United Kingdom and Luxembourg in that order (figure 1).Developed countries as a group remained significant net capital exportersthrough FDI; net outflows exceeded net inflows by $260 billion. While FDIoutflows from the European Union (EU) declined by 25%, to $280 billion(a seven-year low), most other developed countries increased their investmentabroad. In the case of the United States, outflows increased by over 90%,to $229 billion, a record high.

The stock of FDI in 2004 is estimated at $9 trillion. It is attributedto some 70,000 transnational corporations (TNCs) and their 690,000 affiliatesabroad, with total sales by foreign affiliates amounting to almost $19 trillion(table 2). Ranked by foreign assets, General Electric (United States) remainedthe largest non-financial TNC worldwide, followed by Vodafone (UnitedKingdom) and Ford Motor (United States) (table 3). Among the top 100 TNCsworldwide, four companies, led by Hutchison Whampoa (Hong Kong, China),are based in developing economies (table 4).

The pace at which the top 100 TNCs are expanding internationallyappears to have slowed down. Although their sales, employment and assetsabroad all rose in absolute terms in 2003, their relative importance declinedsomewhat as activities in the home countries expanded faster. Japanese andUnited States TNCs are generally less transnationalized than their Europeancounterparts. The top 50 TNCs based in developing economies (table 4),with a shorter history of outward expansion, are even less transnationalized,but the gap between TNCs from developed and developing countries isshrinking in this respect.

International investment in services, particularly financial services,continued to grow steadily, accounting for the bulk of the world FDI stock.The services sector accounted for 63% of the total value of cross-borderM&As in 2004, with financial services responsible for one-third of the valueof cross-border M&As in this sector. For the first time, this year’s WIR ranksthe top 50 financial TNCs. Large TNCs dominate world financial services,not only in terms of total assets but also in terms of the number of countriesin which they operate. Citigroup (United States) tops the list, followed byUBS (Switzerland) and Allianz (Germany). Financial TNCs from France,Germany, Japan, the United Kingdom and the United States accounted for74% of the total assets of the top 50 financial TNCs in 2003.

Low interest rates, higher profits and the recovery of asset prices,principally in developed countries, contributed to an upturn in M&As,including cross-border M&As; their value shot up by 28% to $381 billion.These transactions played an important part in the continued restructuringand consolidation process of many industries, especially in the developed

5Overview

Tabl

e 2.

S

elec

ted

indi

cato

rs o

f FD

I an

d in

tern

atio

nal

prod

ucti

on,

1982

-200

4(B

illio

ns o

f do

llars

and

per

cen

t)

Valu

e at

cur

rent

pri

ces

A

nnua

l gr

owth

rat

e

(B

illio

ns o

f do

llars

) (

Per

cen

t)

1986

-19

91-

1996

-It

em19

8219

9020

0320

04 1

990

1995

200

020

0120

0220

0320

04

FD

I in

flow

s 5

9 2

08 6

33 6

4822

.821

.239

.7-4

0.9

-13.

3-1

1.7

2.5

FD

I ou

tflo

ws

27

239

617

730

25.4

16.4

36.3

-40.

0-1

2.3

-5.4

18.4

FD

I in

war

d st

ock

628

1 76

97

987

8 90

216

.99

.517

.37

.18

.219

.111

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DI

outw

ard

stoc

k 6

011

785

8 73

19

732

18.0

9.1

17.4

6.8

11.0

19.8

11.5

Cro

ss-b

orde

r M

&A

s a

.. 1

51 2

97 3

8125

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24.0

51.5

-48.

1-3

7.8

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628

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ales

of

fore

ign

affil

iate

s2

765

5 72

716

963

c18

677

c15

.910

.68

.7-3

.014

.618

.8c

10.1

c

Gro

ss p

rodu

ct o

f fo

reig

n af

filia

tes

647

1 47

63

573

d3

911

d17

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.37

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.15

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28.4

d9

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tal

asse

ts o

f fo

reig

n af

filia

tes

2 11

35

937

32 1

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36 0

08e

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19.4

-5.7

41.1

e3

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11.9

e

Exp

orts

of

fore

ign

affil

iate

s 7

301

498

3 07

3f

3 69

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22.1

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f4

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16.1

f20

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Em

ploy

men

t of

for

eign

affi

liate

s (t

hous

ands

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24 4

7153

196

g57

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GD

P (

in c

urre

nt p

rice

s) h

11 7

5822

610

36 3

2740

671

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12.1

12.0

Gro

ss f

ixed

cap

ital

for

mat

ion

2 39

84

905

7 85

38

869

12.6

5.6

1.6

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12.9

Roy

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icen

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ee r

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3 9

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4 26

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11 0

6912

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rce:

UN

CTA

D,

Wor

ld I

nves

tmen

t R

epor

t 20

05:

Tra

nsna

tion

al C

orpo

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ons

and

the

Inte

rnat

iona

lizat

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of R

&D

, ta

ble

I.3.

aD

ata

are

only

ava

ilabl

e fr

om 1

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ard.

b19

87-1

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only

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Bas

ed o

n th

e fo

llow

ing

regr

essi

on r

esul

t of

sal

es a

gain

st F

DI

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ard

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k (i

n m

illio

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f do

llars

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r th

e pe

riod

198

0-20

02:

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es=2

003

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+1.8

7288

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I in

war

d st

ock.

dB

ased

on

the

follo

win

g re

gres

sion

res

ult

of g

ross

pro

duct

aga

inst

FD

I in

war

d st

ock

(in

mill

ions

of

dolla

rs)

for

the

peri

od 1

982-

2002

:G

ross

pro

duct

=622

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7+0.

3694

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DI

inw

ard

stoc

k.e

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ed o

n th

e fo

llow

ing

regr

essi

on r

esul

t of

ass

ets

agai

nst

FDI

inw

ard

stoc

k (i

n m

illio

ns o

f do

llars

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r th

e pe

riod

198

0-20

02:

Ass

ets=

-1

179.

838+

4.17

7434

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I in

war

d st

ock.

fFo

r 19

95-1

998,

bas

ed o

n th

e re

gres

sion

res

ult

of e

xpor

ts o

f fo

reig

n af

filia

tes

agai

nst

FDI

inw

ard

stoc

k (i

n m

illio

ns d

olla

rs)

for

the

peri

od 1

982-

1994

: E

xpor

ts=3

57.6

124+

0.55

8331

*FD

I in

war

d st

ock.

Fo

r 19

99-2

004,

the

sha

re o

f ex

port

s of

for

eign

aff

iliat

es in

wor

ld e

xpor

ts in

199

8 (3

3.3

per

cent

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as a

pplie

d to

obt

ain

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es.

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ased

on

the

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g re

gres

sion

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ult

of e

mpl

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ent

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thou

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s) a

gain

st F

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ard

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k (i

n m

illio

ns o

f do

llars

) fo

r th

e pe

riod

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ploy

men

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war

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ock.

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ased

on

data

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m t

he I

nter

natio

nal

Mon

etar

y Fu

nd,

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ld E

cono

mic

Out

look

, A

pril

2005

.


Tabl

e 3.

The

wor

ld’s

top

25

non-

fina

ncia

l TN

Cs,

ran

ked

by f

orei

gn a

sset

s, 2

003

a

(Mill

ions

of d

olla

rs a

nd n

umbe

r of

em

ploy

ees)

R

anki

ng b

y:

Ass

ets

S

ales

Em

ploy

men

t

T

NI

b N

o. o

f af

filia

tes

Fore

ign

(Per

asse

tsTN

IbIIc

Cor

pora

tion

Hom

e ec

onom

yIn

dust

ryF

orei

gnTo

tal

For

eign

Tota

lF

orei

gnTo

tal

cent

)

Fore

ign

To

tal

I

Ic

177

37G

ener

al E

lect

ricU

nite

d S

tate

sE

lect

rical

& e

lect

roni

c eq

uip.

258

900

647

483

54 0

8613

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715

0 00

030

5 00

043

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6813

9876

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27

95V

odaf

one

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up P

lcU

nite

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omTe

leco

mm

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atio

ns24

3 83

926

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150

070

59 8

9347

473

60 1

0985

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20

135

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372

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rd M

otor

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pany

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ted

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tes

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or v

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les

173

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304

594

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613

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332

7 53

145

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490

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nite

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otor

veh

icle

s15

446

644

8 50

751

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524

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000

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000

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17

72

97

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05

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ish

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role

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o. P

lcU

nite

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571

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5010

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751

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il C

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ted

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tes

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6 92

623

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upU

nite

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role

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dist

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716

8 09

112

9 86

420

1 72

810

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92

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164

189

503

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43

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37.5

89

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ance

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94 7

1011

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760

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96

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6428

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44.5

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7072

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t 20

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snat

iona

l C

orpo

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the

Inte

rnat

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of R

&D

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nex

tabl

e A

.I.9

.a

All

data

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ed o

n th

e co

mpa

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ual r

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anki

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mon

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ldw

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TN

I, th

e ab

brev

iatio

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nalit

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dex,

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alcu

late

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the

aver

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e fo

llow

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thre

e ra

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asse

ts to

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l ass

ets,

fore

ign

sale

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r In

tern

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late

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the

num

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n af

filia

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ded

by th

e nu

mbe

r of

all a

ffili

ates

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ote:

Affi

liate

s co

unte

d in

this

tabl

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fer

to o

nly

maj

ority

-ow

ned

affil

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s.

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ble

4. T

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op 2

5 no

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nanc

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NC

s fr

om d

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ked

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gn a

sset

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ions

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r of

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ploy

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anki

ng b

y:

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sset

s

Sal

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E

mpl

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ent

TN

Ib

No.

of

affil

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s

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ign

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asse

tsTN

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pora

tion

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e ec

onom

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dust

ryF

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gnTo

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eign

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cent

) F

orei

gn

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a Li

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114

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578

981

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613

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3425

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Sou

rce:

UN

CTA

D,

Wor

ld I

nves

tmen

t R

epor

t 20

05:

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nsna

tion

al C

orpo

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ons

and

the

Inte

rnat

iona

lizat

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&D

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nex

tabl

e A

.I.1

0.a

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data

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ed o

n th

e co

mpa

nies

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ual r

epor

ts u

nles

s ot

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world. The largest M&A deal in 2004 was the acquisition of Abbey National(United Kingdom) by Santander Central Hispano (Spain), valued at $16billion. In developing countries, cross-border M&As accounted for a moremodest share of overall FDI activity, although firms from these countrieswere increasingly involved in M&As, including some high-profile cases.The upswing in FDI flows to developing countries was mainly associatedwith greenfield investments notably in Asia. China and India togetheraccounted for about a half of all new registered greenfield (and expansion)projects in developing countries in 2004.

In terms of the three main forms of FDI financing, equity investmentdominates at the global level. During the past decade, it has accounted forabout two-thirds of total FDI flows. The shares of the other two forms ofFDI — intra-company loans and reinvested earnings — were on average23% and 12% respectively. These two forms fluctuate widely, reflectingyearly variations in profit and dividend repatriations or the need for loanrepayment. There are notable differences in the pattern of FDI financingbetween developed and developing countries; reinvested earnings areconsistently more important in the latter.

FDI continues to surpass other private capital flows to developingcountries as well as flows of official development assistance (ODA). In 2004,it accounted for more than half of all resource flows to developing countriesand was considerably larger than ODA. However, FDI is concentrated ina handful of developing countries, while ODA remains the most importantsource of finance in a number of other developing countries. This isparticularly the case for most least developed countries (LDCs) even thoughFDI flows have surpassed ODA for individual countries in that group.

Countries continue to adopt new laws and regulations with a viewto making their investment environments more investor friendly. Out of 271such changes pertaining to FDI introduced in 2004, 235 involved steps toopen up new areas to FDI along with new promotional measures (table 5).In addition, more than 20 countries lowered their corporate income taxesin their bid to attract more FDI. In Latin America and Africa, however, anumber of policy changes tended to make regulations less favourable toforeign investment, especially in the area of natural resources.

At the international level, the number of bilateral investment treaties(BITs) and double taxation treaties (DTTs) reached 2,392 and 2,559respectively in 2004, with developing countries concluding more suchtreaties with other developing countries. More international investmentagreements were also concluded at the regional and global level, potentiallycontributing to greater openness towards FDI. The various international

9Overview

Tabl

e 5.

Nat

iona

l reg

ulat

ory

chan

ges,

199

1-20

04

Item

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Num

ber

of c

ount

ries

tha

t in

trod

uced

cha

nges

i

n th

eir

inve

stm

ent

regi

mes

35

43

57

49

64

65

76

60

63

69

71

70

82

102

Num

ber

of r

egul

ator

y ch

ange

s8

27

910

211

011

211

415

114

514

015

020

824

824

427

1

of

whi

ch:

M

ore

favo

urab

le t

o F

DI

a8

07

910

110

810

69

813

513

613

114

719

423

622

023

5

Les

s fa

vour

able

to

FD

I b

2-

12

61

61

69

93

14

12

24

36

Sou

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NC

TAD

, W

orld

Inv

estm

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Rep

ort

2005

: T

rans

nati

onal

Cor

pora

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s an

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tern

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naliz

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n of

R&

D,

tabl

e I.

14.

a

Inc

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eral

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ange

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aim

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reng

then

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b

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s ch

ange

s ai

med

at

incr

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ng c

ontr

ol,

as w

ell

as r

educ

ing

ince

ntiv

es.


agreements are generally becoming more and more sophisticated andcomplex in content, and investment-related provisions are increasinglyintroduced into agreements encompassing a broader range of issues. Thereis also a rise in investor-State disputes, paralleling the proliferation ofinternational investment agreements.

…with the Asia and Oceania region the largest recipient aswell as source of FDI among developing countries.

The upturn in global FDI was marked by significant differencesbetween countries and regions (figure 2 and table 1). Asia and Oceania (fordefinition, see box 1) was again the top destination of FDI flows todeveloping regions. It attracted $148 billion of FDI, $46 billion more thanin 2003, marking the largest increase ever. East Asia saw a 46% increase ininflows, to reach $105 billion, driven largely by a significant increase in flowsto Hong Kong (China). In South-East Asia, FDI surged by 48% to $26 billion,while South Asia, with India at the forefront, received $7 billion,corresponding to a 30% rise. FDI inflows to West Asia grew even more,rising from $6.5 billion to $9.8 billion, of which more than half wasconcentrated in Saudi Arabia, the Syrian Arab Republic and Turkey. China

Box 1. Changes in geographical groupings used in WIR05

Major changes in the classification of groups of economies have beenintroduced by the United Nations Statistical Division. The EU now has25 members, including the 10 countries that became new members on 1 May2004. Eight countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania,Poland, Slovakia, Slovenia) have been reclassified from Central and EasternEurope (CEE) to EU, and Cyprus from West Asia to EU. Malta has now beenreclassified from “other developed countries” to EU. These ten countriesare now included among the “developed countries”. After the reclassificationof the eight EU-accession countries from CEE as developed countries, theremaining CEE countries, along with countries formerly in the group CentralAsia (under developing countries) are now classified under South-East Europein a new grouping comprising South-East Europe and the Commonwealthof Independent States (CIS). CIS includes all of the former republics thatwere part of the former USSR except the Baltic States. In addition to thereclassifications mentioned above, the nomenclature used for the developingPacific Island countries classified in previous WIRs under the Pacific subregionof the Asia-Pacific region is changed to “Oceania”.

Source : UNCTAD, World Investment Report 2005: TransnationalCorporations and the Internationalization of R&D , box I.2.

11Overview

0

100

200

300

400

500

600

700

Develo

ped

countr

ies

Afr

ica

Asia

and

Oceania

Latin

Am

erica

and

the

Caribbean

South

-East

Euro

pe

and

CIS

2003

2004

0

100

200

300

400

500

600

700

Develo

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countr

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Afr

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Asia

and

Oceania

Latin

Am

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FD

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regi

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2003

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04(B

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continued to be the largest developing-country recipient with $61 billionin FDI inflows.

The Asia and Oceania region is also emerging as an important sourceof FDI. In 2004 the region’s outward flows quadrupled to $69 billion, duemainly to dramatic growth in FDI from Hong Kong (China) but also toincreased investments by TNCs from other parts of East Asia and South-East Asia. Most of these investments are intraregional, taking place especiallyamong the economies of East and South-East Asia. However, interregionalinvestment from Asian economies also increased. For example, a key driverof Chinese outward FDI was the growing demand for natural resources. Thishas led to significant investment projects in Latin America. Indian TNCsalso invested large amounts in natural resources in other regions, primarilyin African countries and the Russian Federation. Asian investment indeveloped countries is on the rise as well: the past year in particular hasseen a few sizeable acquisitions of United States and EU firms by Chineseand Indian TNCs — such as the acquisition by Lenovo (China) of thepersonal computers division of IBM (United States).

The growth of both inward and outward FDI flows in Asia andOceania is being facilitated by various policy changes at the national andregional levels. For example, the Association of Southeast Asian Nations(ASEAN) and China signed an agreement to establish a free trade area by2010, and several Asian countries signed free trade agreements with theUnited States.

FDI rebounded in Latin America following four years ofdecline...

Following four years of continuous decline, FDI flows to LatinAmerica and the Caribbean registered a significant upsurge in 2004,reaching $68 billion — 44% above the level attained in 2003. Economicrecovery in the region, stronger growth in the world economy and highercommodity prices were contributing factors. Brazil and Mexico were thelargest recipients, with inflows of $18 billion and $17 billion respectively.Together with Chile and Argentina they accounted for two-thirds of all FDIflows into the region in 2004. However, FDI inflows did not increase in allthe countries of Latin America. There were notable declines in Bolivia andVenezuela, mainly linked to uncertainty regarding legislation related to oiland gas production. In Ecuador the completion of the crude oil pipelineconstruction explained the decrease in FDI inflows. A number of countriesmodified their legislation and tax regimes to increase the State’s share inrevenues from non-renewable natural resources. It is still too early to assess

13Overview

the impact of these changes on the volume of FDI. Significant projectsremain under development and additional ones were announced during 2004.

The sectoral composition of inward FDI to parts of Latin America andthe Caribbean appears to be changing. For several countries of the region,natural resource and manufacturing industries became more popular FDIdestinations than services in 2004. In Argentina, Brazil and Mexico,manufacturing attracted more FDI than services. FDI in Mexico’smaquiladora industry surged by 26% in response to growing demand inthe United States after three consecutive years of decline. The completionof most privatization programmes, coupled with financial difficulties facingforeign investors in the aftermath of the recent financial crisis and theensuing economic stagnation in some countries, reduced the attractivenessof the services sector for FDI in Latin America. Firms in that sector sufferedthe most from the impact of the economic crisis, facing serious problemsin reducing their large foreign-currency liabilities while at the same timebeing unable (owing to the non-tradability of their activities) to shift towardsexport-oriented production. In Central America and the Caribbean, however,renewed privatization activity made services the largest FDI recipient sector.In the Andean Community, high oil and mineral prices sustained the positionof the primary sector as the main recipient of FDI flows.

... remained stable in Africa …

FDI flows to Africa remained at almost the same level — $18 billion— as in 2003. FDI in natural resources was particularly strong, reflectingthe high prices of minerals and oil and the increased profitability ofinvestment in the primary sector. High and rising prices of petroleum, metalsand minerals induced TNCs to maintain relatively high levels of investmentin new exploration projects or to escalate existing production. Several largecross-border M&As were concluded in the mining industry last year. Despitethese developments Africa’s share in FDI flows worldwide remains low, at 3%.

Angola, Equatorial Guinea, Nigeria, Sudan (all rich in naturalresources) and Egypt were the top recipients, accounting for a little lessthan half of all inflows to Africa. While FDI inflows to the last three rose,those to South Africa, another important FDI recipient, fell. LDCs in Africareceived small amounts: around $9 billion in total in 2004. Most investmentin Africa originated from Europe, led by investors from France, theNetherlands and the United Kingdom, and from South Africa and the UnitedStates; together these countries accounted for more than half of the region’sinflows. FDI outflows from Africa more than doubled in 2004, to $2.8 billion.


A renewed wave of FDI-friendly measures and initiatives at nationaland international levels has sought to facilitate and attract more FDI to theAfrican continent. At the national level, many measures focused onliberalizing legal frameworks and improving the overall environment for FDI.However, failure to move rapidly on economic and social policies importantfor attracting and retaining FDI, and a weak emphasis on capacity building,have hampered the ability of many countries in the region to attract FDI,in particular in manufacturing. Thus far, international market-accessmeasures and initiatives targeting African countries (such as the UnitedStates’ African Growth and Opportunity Act) overall have not been verysuccessful in increasing FDI. In order to realize the potential for increasedFDI and to derive greater benefits from it, African countries generally needto develop stronger industrial and technological capabilities.

The need for international support to Africa’s development has beenstressed in several recent initiatives. For example, the Commission for Africa(established by the United Kingdom) released a report in March 2005recommending a substantial increase in aid to Africa: an additional $25 billionper year to be implemented by 2010. It also proposed several measures thatcould help the continent attract more FDI and enhance its benefits fordevelopment. Specifically the report called for donors to double theirfunding for infrastructure, adopt a 100% external debt cancellation, supportan Investment Climate Facility for Africa under the New EconomicPartnership for Africa’s Development (NEPAD) initiative, and create a fundthat would provide insurance to foreign investors in post-conflict countriesin Africa.

… and increased in South-East Europe and the CIS for thefourth consecutive year.

FDI inflows to South-East Europe and the CIS, a new group ofconomies under the United Nations reclassification (box 1), recorded a fourthyear of growth in 2004, reaching an all-time high of $35 billion. This wasthe only region to escape the three-year decline (2001-2003) in world FDIflows, and it maintained robust growth in inward FDI in 2004 (more than40%). Trends in inward FDI to the two subregions have differed somewhat,however, reflecting the influence of various factors. In South-East Europe,FDI inflows started to grow only in 2003. Led by large privatization deals,these inflows nearly tripled, to $11 billion in 2004. In the CIS, inflows grewfrom $5 billion in 2000 to $24 billion in 2004, benefiting largely from the highprices of petroleum and natural gas. The Russian Federation is the largestrecipient of FDI inflows in the region.

15Overview

By contrast, FDI inflows to developed countries continued todecline.

FDI flows into developed countries, which now include the 10 newEU members (see box 1), fell to $380 billion in 2004. The decline was lesssharp than in 2003, possibly suggesting a bottoming out of the downwardtrend that started in 2001. The decline pertained to many major hostcountries in the developed world. However, there were some significantexceptions; the United States and the United Kingdom recorded substantialincreases in inflows mainly as a result of cross-border M&As. Meanwhile,investment outflows from developed countries turned upwards again in 2004to reach $637 billion.

FDI flows into the EU as a whole fell to $216 billion — the lowest levelsince 1998. However, the performance of individual EU members varied, withDenmark, Germany, the Netherlands and Sweden registering the mostsignificant declines. To some extent the persistence of the downward FDItrend in the EU reflected large repayments of intra-company loans andrepatriation of earnings in a few members. At the same time, FDI inflowsinto all the 10 new EU countries increased, attracted by high rates ofeconomic growth, the availability of skilled human resources at competitivecosts and reduced uncertainty with regard to the regulatory framework forFDI following EU accession. Flows into Japan surged by 24% to $8 billion,while those to other developed countries (Israel, New Zealand, Norway andSwitzerland) declined.

Further increases in FDI are expected.

Prospects for FDI worldwide appear to be favourable for 2005. For2006, global FDI flows can be expected to rise further if economic growthis consolidated and becomes more widespread, corporate restructuring takeshold, profit growth persists and the pursuit of new markets continues. Thecontinued need of firms to improve their competitiveness by expanding intonew markets, reducing costs and accessing natural resources and strategicassets abroad provides strong incentives for further FDI in developingcountries in particular. Also, the improved profitability of TNCs is likelyto trigger greater M&A activity, which should also push up the levels ofFDI in developed countries.

Surveys of TNCs, experts and investment promotion agencies (IPAs)undertaken by UNCTAD corroborate this relatively optimistic picture, asdo the findings of other recent surveys. In the UNCTAD surveys, more thanhalf of the responding TNCs as well as experts and four-fifths of the IPAs


expected short-term (2005-2006) growth in FDI flows; very few predicteda decline of FDI in the near future. The competitive pressure on firms,continued offshoring of services, ongoing liberalization and the growth ofTNCs from emerging markets were identified as factors that should lead tomore FDI.

At the same time, there are grounds for caution in forecasting FDIflows. The slowdown of growth in some developed countries, along withstructural weaknesses and financial and corporate vulnerabilities in someregions, continue to hinder a strong recovery of FDI growth. Continuingexternal imbalances in many countries and sharp exchange-rate fluctuations,as well as high and volatile commodity prices, pose risks that may hinderglobal FDI flows.

There is some variation in the FDI prospects of individual regions.In view of the improved economic situation in Asia and Oceania, itsimportant role as a global production centre, its improved policyenvironment and significant regional integration efforts, the prospects forFDI flows to that region are strongly positive. According to the TNCs,experts and IPAs surveyed by UNCTAD, the region’s outlook for FDI isbright. FDI inflows to Latin America and the Caribbean are expected toincrease in 2005-2006 as most of the driving forces behind FDI growth in2004 are set to continue. Prospects are also positive for Africa, partly asa result of higher commodity prices and Africa’s natural resource potential.One out of four TNC respondents expected that inflows to Africa wouldincrease in 2005-2006, suggesting more cautious optimism vis-à-vis thisregion.

FDI inflows into South-East Europe and the CIS are expected to growfurther in the near future, based on the expectation that their competitivewages, in particular in South-East Europe, could attract an increasing numberof efficiency-seeking or export-oriented projects, while the natural-resource-rich CIS countries could benefit from continued high oil and gas prices.

Despite the decline in 2004, prospects for renewed growth in bothinward and outward FDI flows for developed countries in 2005 remainpositive, underpinned by forecasts of moderate economic growth and astrong pick-up in corporate profits. Already, during the first six monthsof 2005, cross border M&As in developed countries increased significantly.For the largest recipient country — the United States — prospects for FDIare good, although the inflows may not reach the high levels recorded in2004.

17Overview

R&D INTERNATIONALIZATION ANDDEVELOPMENT

TNCs are internationalizing R&D, including in developingcountries …

WIR05 focuses on the internationalization of research anddevelopment (R&D) by TNCs. This is not a new phenomenon. Whenexpanding internationally, firms have always needed to adapt technologieslocally to sell successfully in host countries. In many cases, someinternationalization of R&D has been necessary to accomplish this.However, it was traditionally the case that R&D was reserved for the homecountries of the TNCs. By contrast, now a number of new features areemerging in the internationalization process. In particular, for the first time,TNCs are setting up R&D facilities outside developed countries that gobeyond adaptation for local markets; increasingly, in some developing andSouth-East European and CIS countries, TNCs’ R&D is targeting globalmarkets and is integrated into the core innovation efforts of TNCs.

Consider the following illustrations. Since 1993 when Motorolaestablished the first foreign-owned R&D lab in China, the number of foreignR&D units in that country has reached some 700. The Indian R&D activitiesof General Electric — the largest TNC in the world — employ 2,400 peoplein areas as diverse as aircraft engines, consumer durables and medicalequipment. Pharmaceutical companies such as Astra-Zeneca, Eli Lilly,GlaxoSmithKline, Novartis, Pfizer and Sanofi-Aventis all run clinical researchactivities in India. From practically nothing in the mid-1990s, the contributionby South-East and East Asia to global semiconductor design reached almost30% in 2002. STMicroelectronics has some of its semiconductor design donein Rabat, Morocco. General Motors (GM) in Brazil competes with other GMaffiliates in the United States, Europe and Asia for the right to design andbuild new vehicles and carry out other core activities for the globalcompany. There are many such examples.

In theory, the internationalization of R&D into developing countriesis both expected and unexpected. It is expected for two reasons. First, asTNCs increase their production in developing countries, some R&D (of theadaptive kind) can be expected to follow. Second, R&D is a form of serviceactivity and like other services, it is “fragmenting”, with certain segmentsbeing located where they can be performed most efficiently. Indeed,according to a survey of Europe’s largest firms conducted in 2004 byUNCTAD and Roland Berger, all service functions — including R&D — are


now candidates for offshoring. It is unexpected in that R&D is a serviceactivity with very demanding skill, knowledge and support needs,traditionally met only in developed countries with strong national innovationsystems. Moreover, R&D is taken to be the least “fragmentable” ofeconomic activities because it involves knowledge that is strategic to firms,and because it often requires dense knowledge exchange (much of it tacit)between users and producers within localized clusters.

It is clear that, to date, only a small number of developing countriesand economies in transition are participating in the process of R&Dinternationalization. However, the fact that some are now perceived asattractive locations for highly complex R&D indicates that it is possiblefor countries to develop the capabilities that are needed to connect withthe global R&D systems of TNCs. From a host-country perspective, R&Dinternationalization opens the door not only for the transfer of technologycreated elsewhere, but also for the technology creation process itself. Thismay enable some host countries to strengthen their technological andinnovation capabilities. But it may also widen the gap with those that failto connect with the global innovation network.

…with important implications for innovation anddevelopment.

Innovative activity is essential for economic growth anddevelopment. Moreover, sustainable economic development requires morethan simply “opening up” and waiting for new technologies to flow in. Itdemands continuous technological effort by domestic enterprises, alongwith supportive government policies. With the increasing knowledge-intensity of production, the need to develop technological capabilities isgrowing. Greater openness to trade and capital flows does not reduce theimperative of local technological effort. On the contrary, liberalization, andthe open market environment associated with it, have made it necessaryfor firms — be they large or small, in developed or developing countries— to acquire the technological and innovative capabilities needed tobecome or stay competitive.

R&D is only one source of innovation, but it is an important one.It takes various forms: basic research, applied research and product andprocess development. While basic research is mainly undertaken by thepublic sector, the other two forms are central to the competitiveness of manyfirms. In the early stages of technological activity enterprises do not needformal R&D departments. As they mature, however, they find it increasinglyimportant to monitor, import and implement new technologies. The role of

19Overview

formal R&D grows as a firm attempts significant technological improvementsand tackles product or process innovation. For complex and fast-movingtechnologies it is an essential part of the technological learning process.

But the process of acquiring technological capabilities is slow andcostly. Technical change and advanced science-based technologies in manyindustries call for more high-level skills and intense technical effort. Theserequire better infrastructure, not least in information and communicationtechnologies (ICTs). They also require strong supporting institutions, aswell as stable and efficient legal and governance systems. Finally, theyrequire access to the international knowledge base, combined with astrategy to leverage this access for the benefit of local innovation systems.The cumulative forces that are increasing the gap between countries withrespect to innovation make the role of policy increasingly important at boththe national and international levels.

There are large differences in countries’ capabilities to innovate andbenefit from the R&D internationalization process. According to a newmeasure of national innovation capabilities — the UNCTAD InnovationCapability Index — the differences appear to be growing over time (table6). Developed countries fall into the high capability group, as do TaiwanProvince of China, the Republic of Korea and Singapore, along with someof the economies of South-East Europe and the CIS. The medium capabilitygroup comprises the remaining economies in transition, most of the resource-rich and newly industrializingeconomies and two sub-Saharan African economies(Mauritius and South Africa).The low capability groupcontains most of the sub-Saharan African countries aswell as several countries inNorth Africa, West Asia andLatin America. Amongdeveloping countries, South-East and East Asia are theleaders in innovationcapability, while the position ofLatin America and theCaribbean has deterioratedover time and has beenovertaken by North Africa andWest Asia.

Table 6. Regional unweightedaverages for the UNCTAD

Innovation Capability Index

Region 1995 2001

Developed countr ies(excl . the new EU members) 0 .876 0.869

The new EU members 0.665 0.707South-East Europe and CIS 0.602 0.584South-East and East Asia 0.492 0.518West Asia and North Afr ica 0.348 0.361Lat in America and the Car ibbean 0.375 0.360South Asia 0.223 0.215Sub-Saharan Afr ica 0.157 0.160

Source : UNCTAD, World Investment Report2005: Transnational Corporations andthe Internat ional izat ion of R&D, tableII I .6.


The innovative capabilities of a country are directly relevant to itsattractiveness as a host country for R&D by TNCs, as well as to its abilityto benefit from such R&D. The quality of R&D performed abroad dependson local capabilities of the host country. The same applies to the resultingexternalities in terms of how much local firms and institutions are able toabsorb and learn from exposure to best practice R&D techniques and skills.Whether or not R&D deepens over time, and how far it spreads overdifferent activities, are the result of an interactive process between the TNCsand local actors in the host economy, and this process is in turn affectedby the institutional framework and government policies of the host country.

TNCs are the drivers of global R&D.

Global R&D expenditure has grown rapidly over the past decade toreach some $677 billion in 2002. It is highly concentrated. The top tencountries by such expenditure, led by the United States, account for morethan four-fifths of the world total. Only two developing countries (Chinaand the Republic of Korea) feature among the top ten. However, the shareof developed countries fell from 97% in 1991 to 91% in 2002, while that ofdeveloping Asia rose from 2% to 6%. Similarly, there has been a rise ininnovation outputs (as measured by the number of patents issued). Forexample, between the two time periods of 1991-1993 and 2001-2003, the shareof foreign patent applications from developing countries, South-East Europeand the CIS to the United States Patent and Trademark Office, jumped from7% to 17%.

TNCs are key players in this process. A conservative estimate is thatthey account for close to half of global R&D expenditures, and at least two-thirds of business R&D expenditures (estimated at $450 billion). These sharesare considerably higher in a number of individual economies. In fact, theR&D spending of some large TNCs is higher than that of many countries(figure 3). Six TNCs (Ford, Pfizer, DaimlerChrysler, Siemens, Toyota andGeneral Motors) spent more than $5 billion on R&D in 2003. In comparison,among the developing economies, total R&D spending came close to, orexceeded, $5 billion only in Brazil, China, the Republic of Korea and TaiwanProvince of China. The world’s largest R&D spenders are concentrated ina few industries, notably IT hardware, the automotive industry,pharmaceuticals and biotechnology.

The R&D activities of TNCs are becoming increasinglyinternationalized. This trend is apparent for all home countries, but startsfrom different levels. In the case of United States TNCs, the share of R&Dof their majority-owned foreign affiliates in their total R&D rose from 11%in 1994 to 13% in 2002. German TNCs set up more foreign R&D units in the

21Overview

Figure 3. R&D expenditure by selected TNCs and economies, 2002(Billions of dollars)

3.5

3.7

3.7

3.8

4.0

4.3

4.3

4.3

4.3

4.4

4.4

4.5

4.5

4.6

4.6

5.4

5.4

5.5

5.7

5.9

6.3

6.5

6.8

4.8

7.2

0 1 2 3 4 5 6 7 8

Motorola (United States)

Johnson & Johnson (United States)

India (2001)

Intel (United States)

Microsoft (United States)

Volkswagen (Germany)

Russian Federation

Matsushita Electric (Japan)

Denmark

GlaxoSmithKline (United Kingdom)

IBM (United States)

Austria

Finland

Toyota Motor (Japan)

Brazil (2003)

Pfizer (United States)

Israel (2001)

General Motors (United States)

Belgium

Siemens (Germany)

DaimlerChrysler (Germany)

Switzerland (2000)

Taiwan Province of China

Spain

Ford Motor (United States)

TNCs Countries

Source : UNCTAD, World Investment Report 2005: Transnat ional Corporat ions andthe Internat ional izat ion of R&D , f igure IV.1.


1990s than they had done in the preceding 50 years. The share of foreignto total R&D in Swedish TNCs shot up from 22% to 43% between 1995 and 2003.

Reflecting the increased internationalization of R&D, foreign affiliatesare assuming more important roles in many host countries’ R&D activities.Between 1993 and 2002 the R&D expenditure of foreign affiliates worldwi

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