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Amidst global FDI downturn…

17 September 2002

Belgium/Luxembourg; Hong Kong, China; and Angola are the best-performing host economies for foreign direct investment (FDI), while the US, Sweden and Singapore have the highest potential, according to the World Investment Report 2002 (1), released today by the United Nations Conference on Trade and Development (UNCTAD).

These findings come from UNCTAD’s new FDI benchmarking tools, which measure performance by standardizing a country’s inflows to the size of its economy, and measure potential by using a set of economic and policy factors of importance to foreign investors. Taken together, the two indices show how countries are performing relative to their potential. Thus, the United States ranks in the lower half of the performance index, because it receives relatively little FDI given its GDP. But as a strong economy with strong fundamentals, it heads the potential index, for the same reason.

"The decline of FDI flows by more than half in 2001 is the largest in 30 years", says Rubens Ricupero, Secretary-General of UNCTAD. “This makes it all the more important for countries to measure how they are doing today in terms of attracting FDI and what their potential is for the future”, adds Karl P. Sauvant, lead author of the World Investment Report.

World FDI inflows plunged last year by 51%, to $735 billion, marking the first decline in a decade. But the picture is mixed, with the downturn concentrated mainly in developed countries (down 59%), as opposed to a 14% drop in developing countries. At the same time, developing countries and Central and Eastern Europe (CEE) economies are garnering a rising share of FDI overall.

Against the background of these strong regional and national differences, this year’s World Investment Report introduces two new indices -- the Inward FDI Performance Index and the Inward FDI Potential Index. They have been calculated for two periods spanning the past decade: 1988-1990, and 1998-2000 (see table 1 and sidebar on methodology).

The more straightforward of the two is the Inward FDI Performance Index, which is the ratio of a country’s share in global FDI flows to its share in global GDP. Here, a value of one means that the shares of global FDI flows and global GDP are equal. Countries with a value higher than one attract more FDI than could be expected on the basis of their relative GDP size; this category includes several advanced industrial economies whose FDI performance reflects high incomes and technological strengths (e.g. the United Kingdom) or a location (combined with other favourable factors) within large regional markets like the EU (Ireland). In other countries, high scores reflect the end of political or economic crises, transition to a market economy or massive privatizations. Countries with low values that receive less FDI than would be expected from their size also vary greatly, due to a range of factors including instability, poor policy design and implementation or competitive weaknesses. Some are very large economies that attract large amounts of FDI, albeit low in relation to GDP (the United States), while others – like Japan – have traditionally been closed to FDI. Many are simply poor or unable to compete effectively.

Thus, according to this measure, during 1998-2000 the developed world as a whole was more or less balanced in terms of the FDI it received, although the EU reported the highest score (1.7) and Japan the lowest (0.1). The CEE countries as a group ranked at almost the same level throughout the decade, with a score close to one. The developing world has also generally maintained its score over time, but its FDI inflows reflect its relative size. Africa’s score fell (from 0.8 during 1988-1990 to 0.5 during 1998-2000), suggesting a loss in its relative attractiveness even given its low share of global GDP. Latin America and the Caribbean, by contrast, improved its ranking significantly (from 0.9 to 1.4), reflecting the strong performance of countries in South America. Asia as a whole slid from 1.1 to 0.9, based largely on the weakened performance in West Asia and East and South-East Asia, although there is a marked difference between the two subregions: West Asia had a very low score in both periods, while East and South-East Asia retained values well above one. South Asia increased its score, but from a very low base (0.1-0.2).

By country rankings, the greatest gains in FDI performance over the past decade were those by Angola, Panama, Nicaragua and Armenia, with Oman, Greece, Botswana and Sierra Leone registering the largest declines.

The Inward FDI Potential Index is more complex. Based on slow-changing structural factors, including social, political, institutional and economic variables, its values are fairly stable over time and correspond by and large to levels of economic development. The top 20 economies in 1998-2000 by this measure were developed countries or high-income developing countries, while the bottom 20 ranks were all held by developing countries. Most developed countries tend to sustain similar ranks over time, while some developing countries and economies in transition make large upward or downward leaps. The largest jumps in this index were by Guyana, El Salvador and Lebanon, and the largest falls by Georgia, Tajikistan and Moldova.

Inward FDI performance and potential indices: the methodology

UNCTAD has long compared the absolute values of inflows into host countries. But this comparison does not take into account the size of the host economy. As it could reasonably be assumed that the larger the economy – as measured by GDP – the more FDI it will receive, a more relevant yardstick of success in attracting FDI needs to take size into account. This can implicitly capture the effect of other factors to which foreign investors are sensitive, such as the quality of infrastructure and skills, technological capacity and political and macroeconomic stability.

This is the rationale behind UNCTAD’s two new indices for benchmarking inward FDI performance and potential. They must be treated with care, however. The performance index reflects problems in compiling and comparing FDI inflow data, particularly for tax havens and the massive inflows they may show in relation to their size; they are thus excluded from the index. Similarly, the potential index cannot reflect the host of nearly unquantifiable social, political and institutional factors that can affect FDI, or such economic and competitiveness factors as market access, the strength of local suppliers and the perceptions of individual transnational corporations (TNCs). This index is thus constructed as the unweighted average of the normalized values of eight variables: rate of GDP growth, per capita GDP, share of exports in GDP, telephone lines per 1,000 inhabitants, commercial energy use per capita, share of R&D expenditures in gross national income, share of tertiary students in the population, and political and commercial country risk. Neither of the two indices is intended to provide a comprehensive model explaining the locational decisions of TNCs or to measure the impact of FDI on host economies.

Global trends last year: a return to normalcy?

Last year’s striking descent in FDI flows largely reflects a fall in cross-border mergers and acquisitions (M&As), which were the driving force. M&As are expected to remain low this year as well – between January and July, with a value of only $222 billion, they dipped 40% over the same period in 2001 – which would contribute to a further decline overall.

The downturn was strongly influenced by the worldwide recession, especially in the world’s three largest economies (the United States, European Union and Japan) and a sharp slide in the stock market activities of industrial countries. For this reason it was felt primarily in the developed world, where both inflows and outflows are likely to maintain their present low levels. The US held onto its position as the largest FDI recipient, but inflows were halved, to $124 billion. And although it has again become the world’s #1 investor, outflows were also down – by 30%, to $114 billion. Canada and Mexico, the country’s two NAFTA partners, are seeing an increasing share of those dollars.

Inflows and outflows to the European Union have skidded as well, by about 60%, again primarily because of the drop in M&As. The United Kingdom and Germany registered the greatest declines in inflows, while France became the region’s largest outward investor.

In the developing world, too, inflows slumped last year, by 14%, from $238 billion to $205 billion, largely because of developments in Argentina, Brazil and Hong Kong, China. China was one of several developing countries to boast an increase – primarily due to heightened investor interest following the country’s accession to the WTO. In relative terms, however, developing countries and CEE should benefit from other post-recession fall-out – namely, the likelihood that the recession may, as the World Investment Report suggests, lead investors increasingly to relocate to, or expand in, lower-cost locations. In fact, the number of developing and CEE countries registering increased inflows (77 and 13, respectively) is larger than those experiencing decreases (69 and six, respectively), while in developed countries inflows fell in 22 out of 25 countries.

Long-term prospects promising

Underlying economic factors suggest that the outlook for FDI over the longer term is “promising”, says the Report. A number of surveys of TNCs confirm this, despite the events of 11 September. In fact, despite the decline, TNCs are expanding their role in the global economy (table 2). Last year, the estimated 850,000 foreign affiliates of the world’s 65,000 TNCs accounted for about 54 million employees, compared to 24 million in 1990; their sales of almost $19 trillion were more than twice as high as world exports in 2001, compared to 1990 when both were roughly equal; and the stock of outward FDI skyrocketed from $1.7 trillion to $6.6 trillion over the same period. Foreign affiliates now account for 11% of world GDP – as opposed to 7% in 1990 – and one third of world exports.

The picture is dominated by the world’s largest TNCs, where the rapid ascendancy in 2000 of three firms – Vodafone (UK) to #1, Vivendi (France) to #4 and Telefónica (Spain) to #9 – reflected the unprecedented wave of cross-border M&As and the peak of a decade-long stock market rally (see table 3 for the top 25 of those firms). Despite these developments, the composition of the 10 largest TNCs remained fairly stable. The top-100 list reflects the continuing expansion of TNCs from developing countries, which now account for five of the 100, although their percentage of total outflows has slumped over the past decade.

Firms from the European Union garnered more than half of all foreign assets of the top 100, which were up more than 20% from 1999, to $2.5 trillion; US and Japanese companies put in a declining performance. And while 45 of the 100 registered double-digit rises in their foreign assets as a result of M&As, an “unprecedented” number of them – 20 in all – suffered declines, says the World Investment Report 2002. These companies were in a wide range of industries, with the exception of “new economy” sectors, such as telecommunications. Electrical and electronic equipment, motor vehicles and pharmaceutical firms represented more than half of all those with reduced foreign assets and operations, usually a result of spin-offs, the sale of manufacturing operations abroad to contract manufacturers or in response to dimmer economic prospects.

Total foreign sales of the top 100 firms climbed 14% in 2000, thus boosting their importance relative to total sales. Foreign employment also did an about-face, up 17% over 1999 to an unprecedented 7 million of 14 million total employees. And while the same industries dominated the list as in previous years – electronics and electrical equipment, motor vehicles and parts, petroleum exploration and distribution, and food and beverages – the transnationality of the top 100 rose. This UNCTAD index captures the foreign dimension of TNC activities by averaging three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. Between 1991 and 2000, the average transnationality index value of the top 100 grew from 51% in 1991 to almost 56% in 2000, with some interruptions.


1. The World Investment Report 2002: Transnational Corporations and Export Competitiveness (Sales No. E.02.II.D.4, ISBN 92-1-112551-0) is available for US$ 49, and at a special price of US$ 19 in developing countries and economies in transition, from United Nations Publications, Two UN Plaza, Room DC2-853, Dept. PRES, New York, NY 10017, USA, tel: +1 800 253 9646 or +1 212 963 8302, fax: +1 212 963 3489, e-mail: publications@un.org, or Section des Ventes et Commercialisation, Bureau E-4, Palais des Nations, CH-1211 Geneva 10, Switzerland, tel: +41 22 917 2614, fax: +41 22 917 0027, e-mail: unpubli@unog.ch; Internet: www.un.org.

For more information, please contact:
Director, Karl P. Sauvant
Division on Investment, Technology and Enterprise Development
Tel: +41 22 907 5797
E-mail: karl.sauvant@unctad.org
Press Officer, Erica Meltzer
Tel: +41 22 907 5365/5828
Information Officer, Alessandra Vellucci
Tel: +41 22 907 4641/5828
Fax: +41 22 907 0043
E-mail: press@unctad.org


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