unctad.org | FDI GEOGRAPHY AND THE NEW GENERATION OF FDI PROMOTION POLICIES
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FDI GEOGRAPHY AND THE NEW GENERATION OF FDI PROMOTION POLICIES

TAD/INF/PR/23
17 September 2001

Mapping inward and outward foreign direct investment (FDI(1)) reveals that FDI is reaching many more countries than in the past, according to the World Investment Report 2001(2), published today by the United Nations Conference on Trade and Development (UNCTAD). The number of countries receiving an annual average of more than $1 billion rose from 17 (six of which were developing countries) in the mid-1980s to 51 (23 of them developing countries) at the end of the 1990s. In the case of outflows, 33 countries (11 of them developing countries) invested more than $1 billion at the end of the 1990s, compared to 13 countries (only one of them a developing country) in the mid-1980s.

Despite its reach, however, FDI is unevenly distributed. The world´s top 30 host countries account for 95% of total world FDI inflows and 90% of stocks. The top 30 home countries -- mainly industrialized economies -- generate around 99% of outward FDI flows and stocks.

The locational patterns of international production differ by country and industry and change over time, partly in response to the changing industrial composition of FDI. During the past 10 years, services have become more important in international production. In many service industries and some manufacturing industries, where proximity to customers is important, FDI tends to be spread relatively widely. The more advanced the level of technology in an industry, the higher the level of concentration tends to be. Thus, mapping shows that FDI in biotechnology (see map 1) is highly concentrated, followed by semiconductors, television and radio receivers, and automobiles (see map 2). In comparison, the food and beverages industry is more evenly spread (see map 3).

At the functional level, even such critical corporate functions as design, R&D and financial management are today becoming increasingly internationalized in order to optimize cost, efficiency and flexibility. Less industrialized locations are assigned simpler tasks like assembly and packaging, while more skill- and technology-intensive functions are allocated to industrially more advanced locations.

The growing spread and mobility of transnational corporations (TNCs(3)) are making local conditions more, not less, important, the Report says. Mobile FDI "sticks" only in places where efficient complementary factors exist. Location decisions have to be based on the ability of host countries to provide the complementary skills, infrastructure, suppliers and institutions to operate technologies efficiently and flexibly. Industrial clusters are playing an increasing role in economic activity, particularly in technology-intensive activity. In their inexorable search for new competitive advantages, TNCs seek "created assets", such as technology and skilled labour, across the globe. Clusters of innovative activity - for example, those in Silicon Valley, California; Silicon Fen, Cambridge; Wireless Valley, Stockholm; or Thong Guancum, a suburb of Beijing - have a distinct advantage in attracting such (high-value) FDI.

Using and strengthening clusters to attract FDI calls for new approaches, going beyond the first and second generations of investment promotion policies. In the first policy generation, countries liberalize their FDI regimes and adopt market-friendly policies. In the second, governments go a step further and actively seek to attract FDI by "marketing" their countries. This approach leads to the setting up of national investment promotion agencies.

The third generation of investment promotion policies proceeds to target foreign investors at the level of industries and firms to meet their specific locational needs at the activity and cluster level, in light of a country´s development priorities. A critical element of such investment promotion is to improve - and market - particular locations to potential investors in specific activities. However, such a targeted approach, especially the development of locational "brand names", is difficult and takes time. It requires fairly sophisticated institutional capacities. Third generation promotion is nevertheless growing in practice, as witnessed by the proliferation of subnational agencies (of which there are currently at least 240) and even municipal investment promotion agencies.




Endnotes

1. "Foreign direct investment" is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor´s lasting interest in a foreign entity.

2. The World Investment Report 2001: Promoting Linkages (Sales No. E.01.II.D.12, ISBN 92-1-112523-5) may be obtained at the price of US$ 49, and at a special price of US$ 19 in developing countries and economies in transition, from United Nations Publications, Sales Section, Palais des Nations, CH-1211 Geneva 10, Switzerland, F: +41 22 917 0027, E: unpubli@un.org, Internet: www.un.org; or from United Nations Publications, Two UN Plaza, Room DC2-853, Dept. PRES, New York, N.Y. 10017, USA; T: +1 212 963 83 02 or +1 800 253 96 46, F: +1 212 963 34 89, E: publications@un.org.

3. "Transnational corporations" comprise parent enterprises and their foreign affiliates: a parent enterprise is defined as one that controls assets of another entity or entities in a country or countries other than its home country, usually by owning a capital stake. An equity capital stake of at least 10% is normally considered as a threshold for the control of assets in this context.





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