unctad.org | HIGH EXPORT GROWTH IN DEVELOPING COUNTRIES LINKED TO TNCs, SAYS NEW UNCTAD REPORT
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HIGH EXPORT GROWTH IN DEVELOPING COUNTRIES LINKED TO TNCs, SAYS NEW UNCTAD REPORT

TAD/INF/PR/54
16 September 2002

Transnational corporations (TNCs) are playing a pervasive role in the exports of developing countries, UNCTAD finds in the World Investment Report 2002 (1), released today. In a number of countries they account for a substantial share of all exports, and this is especially true of “winner countries” – those boasting the largest gains in market share over the past decades. Their export growth is directly or indirectly linked to the expansion of TNCs’ international production systems. But although more and more countries are targeting export-oriented FDI, high shares in exports are not enough, as the Report points out: exports must also be upgraded and involve local value added if this investment is to yield longer-term development gains.

While the list of the world´s top exporting countries is dominated by developed countries, developing countries and economies in transition accounted for the principal gains in world export market shares between 1985 and 2000 (figure). Moreover, in countries that have boasted substantial increases in exports of non-resource-based manufactures, TNCs have played a major role, primarily through their foreign affiliates but also by way of non-equity links. The UNCTAD report includes six case studies – China, Costa Rica, Hungary, Ireland, Mexico and the Republic of Korea – for which it examines this phenomenon down to the firm level (table 1). In Costa Rica, Hungary and Mexico, for example, the top three TNC exporters account for 29%, 26% and 13%, respectively, of total exports. In Mexico´s case, the affiliates of the five transnational auto manufacturers brought in $27 billion of the country´s exports in 2000.

In most of the countries with the largest gains in export market shares, the role of TNCs in those exports has increased over time. In China, the share of foreign affiliates in exports rose from 17% in 1991 to 50% in 2001. In the Republic of Korea, strong export growth was achieved without a strong presence of foreign affiliates, although non-equity relationships with foreign TNCs played a key role. At the same time, the export repertoire of the winner countries has generally shifted, from primary to manufacturing products and from low- to medium- and high-technology manufactures. The role of TNCs is particularly important for those products that have seen the fastest growth in world trade between 1985 and 2000. They are mostly to be found in non-resource-based manufactures, particularly in the electronics, automotive and apparel industries.

TNCs´ role in exports varies greatly between countries, however, from 4% in Japan to 80% in Hungary (table 2). That role also goes beyond the most dynamic manufacturing products to encompass increasingly internationally traded services as well as natural resources and agriculture. In Kenya, for example, rapid growth in the exports of flowers has made the country the leading flower supplier of the European Union, with foreign affiliates producing most of these exports.

A key factor behind the shifts in export competitiveness is changing corporate strategies. These are leading to a specialization within the international production systems of TNCs, with different activities being performed in locations that offer the best conditions in terms of costs, resources, logistics and market access. As a result, trade in parts and components is assuming greater significance. In response to a search for more cost-efficient production systems, these changes are also generating new exports from developing countries and economies in transition.

Several concurrent trends are responsible for the transformation of international production systems, the Report finds. On the one hand, barriers to international transactions are falling, spurred by globalization, liberalization and technological innovation, including speedier transportation (see e-brief of 20 August). This intensifies competitive pressures, forcing corporations to become more efficient and to internationalize their operations. In the process, many TNCs are focusing more on their core activities and contracting out other functions to independent firms, if not opting out of production altogether. These changes are resulting in new forms of international production systems and networks, ranging from linkages through FDI to non-equity linkages, posing both opportunities and challenges for developing countries.

Targeting export-oriented FDI

Countries are scaling up their efforts to attract and benefit from export-oriented FDI. The intense competition for such investment is leading countries to adopt a more targeted approach to FDI promotion, particularly in the framework of their own development objectives. The basis for successful targeting is a good understanding of a location’s relative strengths and weaknesses and of the corporate strategies driving location decisions. As a rule-of-thumb, the Report suggests that countries wishing to target export-oriented FDI should consider an approach involving an analysis of existing trade and industry patterns; consultations with existing investors; an analysis of what competing locations are exporting and what they have attracted in terms of export-oriented FDI; and an identification of other factors that may attract export-oriented FDI (such as membership in free trade areas, preferential trade schemes, clusters of economic activity and industrial parks). UNCTAD emphasizes that any effort to promote export-oriented FDI needs to be well integrated into a country’s overall development strategy.

The Report addresses a number of policies that can be considered by governments to facilitate export-oriented FDI in developing countries. One key issue is to secure better access to developed country markets for goods and services produced in the developing world. A rise in protectionism could effectively jeopardize the prospects for poor countries to exploit their comparative advantages fully. The growing use of anti-dumping, increased tariffs on certain products, tariff peaks and targeted subsidies in developed countries is of concern in this context. Beyond promotional activities, key instruments for host country policies include the provision of improved infrastructure and trade and investment facilitation. Most of the winner countries identified in the World Investment Report also used export processing zones (EPZs) in their efforts to attract export-oriented FDI. The Report notes that, in order to comply with WTO rules, many developing countries will have to eliminate the use of export subsidies as of 1 January 2003, with implications for many EPZs. Although these zones are likely to continue to play an important role in the overall strategy for promoting export-oriented FDI, countries using them need to prepare for these WTO restrictions.

But as the Report stresses, enhanced export competitiveness should be seen as a means to an end: development. Longer-term development gains from export-oriented FDI cannot be taken for granted. The costs and benefits of various approaches must be carefully considered at all policy levels. UNCTAD warns, for example, that if too many countries seek to corner the same product market, a supply glut may result and prices collapse. Similarly, intense competition for export-oriented FDI may translate into a race to the bottom in social and environmental standards and a race to the top in incentives – not least in the context of EPZs.

Sustained competitiveness requires continuous upgrading towards higher value-added activities. On their own, and in the absence of an adequate policy environment, TNCs may not undertake such upgrading. Specific promotional measures therefore need to be complemented by broader efforts to strengthen a location’s endowments of skills and technological capabilities and to promote linkages between exporting foreign affiliates and domestic suppliers. Keeping these broader issues in mind is important to ensure that export-oriented FDI results in development benefits for the host country. “At the top of the agenda should be the development of domestic capabilities, as this helps not only to attract quality FDI but also to upgrade existing activities”, says Rubens Ricupero, Secretary-General of UNCTAD.




Endnotes

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.





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