Download Trends - UNCTAD Virtual Institute

Economic aspects of foreign
direct investment
Virtual Institute-St. Petersburg
State University Study Tour
Geneva, 18 April 2007
Michael Lim
UNCTAD-DITE
[email protected]
1
Outline
 I. Basic concepts
 II. Determinants and Impacts of FDI
 III. Recent global and regional FDI trends
 IV. WIR 2006: FDI from developing
economies
Source: UNCTAD
2
I. Basic concepts
3
What is foreign direct investment?
 Balance-of-payments concept
 Distinguish between portfolio and direct investment
 Direct investment: investment of a resident in a foreign company
resulting in a lasting and significant management interest (more than
10 per cent of the equity or voting shares).
 Portfolio investment: investment of a resident in a foreign company
without a lasting and significant management interest (less than 10
per cent of the equity or voting shares).
 FDI flows comprise three different components:
 Equity capital
 Reinvested earnings
 Intra-company loans
Source: UNCTAD
4
What is a transnational corporation
(TNC)?
 A TNC consists of:
 A parent company (based in a ‘home country’); and
 One or more foreign affiliates (in ‘host countries’)
 Foreign affiliates may refer to:
 Subsidiaries (majority-owned)
 Associate (ownership share is>10% but <50%)
 Branch (wholly or jointly unincorporated enterprise)
Source: UNCTAD
5
Modes of FDI
 Greenfield investment
 Acquisition
 Merger
 Joint venture
 Expansion investment
Source: UNCTAD
6
Are TNCs and FDI important to the world
economy?
Yes because:
1. TNCs together account for a significant
part of international economic activity (eg
international trade, generation of technology)
2. FDI is the largest single source of private
finance for developing countries
3. Their role in the world economy is likely to
grow further.
Source: UNCTAD
7
FDI constitutes the largest component of resource flows
to developing countries
Billions of dollars
500
Total Resource flow s
450
400
350
300
250
FDI inflow s
200
150
Commercial banks loans
Portfolio flow s
100
50
0
Official flow s
-50
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: UNCTAD
8
The role of TNCs is increasing
 > 60,000 TNCs
 > 800,000 foreign affiliates
 TNCs account for some 2/3 of world exports
 1/3 of world trade is intra-firm
 TNCs dominate world industrial R&D
 FDI is the largest source of external finance
for developing countries
Source: UNCTAD
9
Some TNCs are very big
Value added or GDP, 2000, USD billions
71
Chile
ExxonM obil
63
Pakistan
62
General M otors
56
Algeria
53
Peru
53
Czech Republic
51
N ew Zealand
51
48
U nited Arab Em irates
Bangladesh
47
H ungary
46
Ford M otor
44
42
D aim lerChrysler
N igeria
Source: UNCTAD 0
41
10
20
30
40
50
60
70
80
10
II. Determinants and impacts of FDI
11
A typology of FDI is useful for analysis
 FDI is diverse, so a typology is useful to
create categories of different types of FDI
 A typology is useful (necessary in fact) as an
analytical aid
Source: UNCTAD
12
A Typology of types of FDI
 Natural resource-seeking
Oil and gas extraction, mining, forestry, fisheries
 Market-seeking (horizontal FDI)
Access a domestic or regional (e.g. EU, NAFTA, ASEAN)market
 Efficiency-seeking (vertical FDI)
Specialize and divide production in line with the comparative
advantages of different locations; export-oriented FDI
 Strategic-asset seeking (primarily through M&As)
Access specific (created) assets such as technology, brand
name, specialized skills
Source: UNCTAD
13
Economic determinants of FDI
Type of FDI
Natural resourceseeking FDI
Market-seeking FDI
(national or regional)
Efficiency-seeking,
export-oriented FDI
Strategic assetseeking FDI
Source: UNCTAD
Key determinants
Abundance of natural resources
Price movements
Market size and purchasing power
Market growth
Tradability of product/service
Need for local adaptation
Structure and openness of markets
Quality and cost of human resources
Physical infrastructure (electricity, transport, ports,
roads, telecoms, etc.)
Technical infrastructure
Trade costs
Quality of suppliers, clusters, etc.
Economic and political stability
Presence of strategic assets
14
Two analytical perspectives on FDI impact
on host country: financing versus micro
and macro (and broader) impacts
 Financing (BoP): FDI provides valuable external
financing
(Simplistic financing version: more FDI = more
financing; therefore more FDI is good)
versus
 Micro and macro impacts: FDI may have important
impacts (positive and negative) on the host economy
– at both the microeconomic and macroeconomic
level
(A broad analysis could include social, environmental,
cultural and political in addition to economic impacts)
Source: UNCTAD
15
Potential benefits from inward FDI
o Provide external financing
o Transfer of hard technology
o Transfer of “soft technology” (knowledge, management skills,
organizational methods – spillovers)
o Promote exports (efficiency-seeking, export platform FDI)
o Employment creation (M&As vs. greenfield FDI)
o Promote local skills development through training
o Improve quality of local services
o Introduce new goods and services
o Competitive spur to local economy (spillover – but may crowd out!)
o Contribute to local enterprise development (via spillovers and
directly)
o Provide access to international markets
Source: UNCTAD
16
Potential negative impacts and concerns
from inward FDI
 Balance of Payments problems (potentially large future
remittances, possibly high import content of FDI projects)
 Crowding out local enterprises (via unfair competition vs. via
higher efficiency and better performance)
 Lack of local linkages (enclave activities using few local inputs)
 Low level of local processing (and low local value added)
 Environmental degradation (from certain activities (e.g.
mining))
 Limited transfer of technology (an important aspect of
linkages)
 Employment destruction (M&As)
 Footloose operations (e.g. garments)
 Excessive use of incentives/race to the top (competition for
FDI)
 Anticompetitive practices (abuse of dominant position)
Source: UNCTAD
 Transfer pricing (low tax contribution locally)
 Socio-cultural effects
17
Some key points to remember on TNCs
and FDI
 The impact of FDI on host countries is not
homogenous, but rather depends, inter alia, upon (i)
country-specific conditions (notably the level of
income, economic development, country size,
domestic firms’ development in the industry in
question, technological development and human
capital and infrastructure development), (ii) the
specific TNC investing, their motives and the specific
industry in question and (iii) host country policies.
 Benefits from FDI are generally not automatic and
may depend upon the active use of government
policies to promote them.
Source: UNCTAD
18
Some key points to remember on TNCs
and FDI (continued)
 TNCs are a diverse group and include huge global
firms (e.g. General Motors, Citigroup, Exxon-Mobil)
as well as small firms with few foreign affiliates.
 Government’s should attempt to integrate their
policies on FDI into a broader strategy of economic
development (comprised of a set of consistent
policies) taking into account their specific conditions
(advantages and disadvantages) and priorities.
 Given the extreme diversity among countries and
TNCs, policy recommendations on FDI should in
general be country-specific. (But some observations
may hold for many countries.)
Source: UNCTAD
19
III. Recent global and regional FDI
trends
20
FDI inflows grew in 2005 for the second consecutive year
…
and it was a worldwide phenomenon
 World FDI inflows:
 Developed countries:
 Developing economies:
–
–
–
–
Africa
LAC
West Asia
South, East and SE Asia
(+ 20%)
 SE Europe and CIS
Source: UNCTAD
$916 billions
$542 billions
$334 billions
$31b
$104b
$35b
$165b
(+ 29%)
(+ 37%)
(+ 22%)
(+ 78%)
(+ 3.1%)
(+ 85%)
$40b
(+ 0.3%)
WORLD INVESTMENT REPORT
2006
21
… but remained below the 2000 peak
(Billions of dollars)
World total
1 400
1 200
Developing economies
1 000
Developed economies
800
600
South-East Europe and CIS
400
200
Source: UNCTAD
2005
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
22
FDI flows by region, 2004-2005
(Billions of dollars)
396
542
334
300
Developing countries
2004
2005
250
200
150
100
50
0
Developed
countries
Source: UNCTAD
Developing
countries
Africa
Latin America
and the
Caribbean
South, East and
South-east Asia
and Oceania
West Asia
WORLD INVESTMENT REPORT
2006
South-East
Europe and CIS
Memorandum:
LDCs
23
Top 10 recipients of FDI inflows
165
United Kingdom
United States
China
2005
2004
France
Netherlands
Hong Kong, China
Canada
Germany
Belgium
Spain
-20
Source: UNCTAD
0
20
40
60
80
WORLD INVESTMENT REPORT
2006
100
24
Largest 10 sources of FDI outflows
119
Netherlands
116
France
101
United Kingdom
2005
Japan
2004
Germany
Switzerland
Italy
Spain
Canada
Hong Kong, China
-20
0
20
40
60
80
100
… but developing economies are becoming emerging sources
… Hong Kong (China) 10th and China 17th
Source: UNCTAD
25
Sectoral analysis:
the revival of FDI in natural resources
a) Sales
2005
2004
5%
5%
16%
32%
32%
According to cross-border
56%
63%
63%
28%
M&As:
 The primary sector gained in
Primary Manufacturing Tertiary
Primary Manufacturing Services
Primary
Primary Manufacturing
Manufacturing Services
Tertiary
importance
b) Purchases
 Services still remain
2004
dominent
5%
 Main target industries are:
– Petroleum (oil and gas):
share of 14% of all industries
– Telecommunications: 14%
– Finance: 13%
Source: UNCTAD
2005
15%
28%
21%
67%
Primary
Primary
64%
Manufacturing
Manufacturing Services
Tertiary
WORLD INVESTMENT REPORT
2006
Primary
Primary Manufacturing
Manufacturing Services
Tertiary
26
A new wave of cross-border M&As:
close to the previous boom
Cross-border M&As
Value ($ billion)
Number of deals
1999-2001 average
2003
2004
2005
835
297
381
716
6 974
4 562
5 113
6 134
… and an increasing number of mega deals (75 in 2004; 141 in 2005).
Caracteristics of cross-border M&As
Previous wave
Current wave
Financial market boom
Pressures to merge
IT dotcom boom
Sector No. 1: transport
storage
communications
Source: UNCTAD
Economic growth
Strategic choices
New investors (private-equity firms)
Sector No. 1: natural resources
WORLD INVESTMENT REPORT
2006
27
Regional trends: South-East Europe
and the Commonwealth of Independent
States (CIS)
28
FDI flows to South-East Europe and CIS in 2005:
steady after the large increase in the previous year
40
21
35
18
15
25
12
20
9
15
Per cent
$ Billion
30
6
10
5
3
0
0
1995
1996
1997
South-East Europe
Source: UNCTAD
1998
CIS
1999
2000
2001
2002
2003
2004
2005
FDI inflows as a percentage of gross fixed capital formation
29
Inflows and their growth uneven by subregion and
country
 CIS: two thirds of inflows; South



East Europe: one-third.
FDI inflows, top five economies,
2004, 2005a
Three countries (Russian
(Billions of dollars)
Federation, Ukraine and Romania)
14.6
accounted for three quarters of the Russian
Federation
15.4
regional total in 2005.
7.8
In 2005, inflows rose in CIS and
Ukraine
1.7
declined in South-East Europe
6.4
Inflows rose in 8 countries
Romania
2005
6.5
2004
(most notably in Ukraine).
2.2
Bulgaria
Inflows fell in 11 countries,
3.4
including Azerbaijan, Kazakhstan
1.7
Kazakhstan
and the Russian Federation
4.1
(the latter marginally).
0
2
4
6
8
10
12
14
16
Ranked on the basis of the magnitude of 2005 FDI flows.
Source: UNCTAD
30
FDI outflows from South-East Europe and CIS in 2005:
fourth year of growth
16
10
14
9
8
7
10
6
8
5
6
4
Per cent
$ Billion
12
3
4
2
2
1
0
0
1995
1996
1997
Other CIS and South-East Europe
Source: UNCTAD
1998
1999
2000
Russian Federation
2001
2002
2003
2004
2005
FDI outflows as a percentage of gross fixed capital formation
31
IV. WIR
2006 Part II:
FDI from Developing and Transition
Economies:
Implications for Development
32
FDI from developing and transition economies has
increased significantly
 An acceleration in the 1990s
 FDI outflows: $133 billion in 2005 (17% of world total)
 Outward FDI stock: $1.4 trillion in 2005 (13% of world total)
 Their share in global cross-border M&A purchases rose
from 4% in 1987 to 13% in 2005
 South-North deals: rapid rise in past two years
Source: UNCTAD
33
FDI from developing and transition economies, 19802005
(Millions of dollars)
90 000
80 000
70 000
60 000
50 000
40 000
30 000
20 000
10 000
0
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
- 10 000
Offshore financial centres
Hong Kong (China)
Other developing and transition economies
Source: UNCTAD
34
The largest investors
Stock of OFDI from developing
and transition economies, 2005
(Billions of dollars)
Source: UNCTAD
Economy
Hong Kong (China)
British Virgin Islands
Russian Fed.
Singapore
Taiwan POC
Brazil
China
Malaysia
South Africa
Korea, Rep. of
2005
470
123
120
111
97
72
46
44
39
36
All developing and transition
economies
1 400
WORLD INVESTMENT REPORT
2006
35
Main features of FDI from Developing and Transition
Economies
 Concentrated (top 10 sources = 83% of FDI
stock) but a number of countries are joining in
 Asia has grown in importance
 Services sector dominates
 Developing countries invest primarily in other
developing countries (the bulk of their flows)
(i.e. large South-South FDI flows)
 Larger developing economies along with Russia
dominate the numbers, but some smaller, lowincome economies (including some LDCs) have
OFDI - however, on a much smaller scale
Source: UNCTAD
WORLD INVESTMENT REPORT
2006
36
Outward FDI stock, by source region, developing and
transition economies, 1980-2005
Millions of dollars
350 000
614 605
755 520
874 305
2000
2004
2005
300 000
250 000
200 000
150 000
100 000
50 000
0
1980
Source: UNCTAD
1985
1990
1995
Africa
Latin America and the Caribbean
Asia and Oceania
South-East Europe and the CIS
37
Mapping South-South FDI: the role of Asia
South-South FDI flows, excl. offshore financial centres, 20022004, millions of dollars
Source: UNCTAD
38
Main drivers and motives of developing and
transition economy TNCs
 Main driver today: Globalization process
 Major push factors (home country drivers):
– Limited size of home markets (especially for small
economies)
– Rising costs of production in the home economy (rising
wages, exchange rate changes)
– Rising competition in the home and foreign markets
(notably via globalization), which intensifies the impact
of the above two drivers.
 Main pull factors (host country drivers):
– Markets abroad, natural resources, labour
– Opportunities arising from liberalization
Source: UNCTAD
WORLD INVESTMENT REPORT
2006
39