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M&A boom to flatten out

17 September 2001

Global flows of foreign direct investment (FDI(1)) soared by 18% in 2000 to a record $1.3 trillion, but are expected to decline this year, according to the World Investment Report 2001 (2), published today by the United Nations Conference on Trade and Development (UNCTAD).

The main impetus behind both last year´s growth and this year´s projected drop is cross-border mergers and acquisitions (M&As), which constitute a substantial share of FDI worldwide. But after last year´s peak -- cross-border M&As reached $1.1 trillion in 2000, up nearly 50% from the previous year (see table 2) - they are now on a downward trend. This, in turn, is related to the overall slowdown in economic growth.

The rapid expansion of FDI is enlarging the role of international production in the world economy, making it "the main force in international economic integration", WIR2001 says. The world´s 63,000 transnational corporations (TNCs(3)), which drive FDI, with their 800,000 foreign affiliates, also increasingly shape trade patterns, accounting for about two-thirds of all world trade. But both FDI and trade are concentrated within regions and neighbouring regions, and within each region, trade links are somewhat stronger than FDI links.

As in previous years, in 2000 the 10 largest FDI recipients, as well as the 10 largest sources of FDI, were developed countries, with one or two exceptions from the developing world (China and Hong Kong, China) (see figures 1 and 2).

With just over $1 trillion in inflows and a 21% increase last year, developed countries remain the prime destination of FDI, accounting for more than three- fourths of global totals. And although flows to developing countries were also up last year, to $240 billion, these countries´ share of global inflows has fallen over three consecutive years to 19%, the lowest since 1991. Developing countries, however, increased their share of outward flows, from 3% in the early 1980s to 9% last year. Flows to the world´s 49 least developed countries (LDCs) are also on the rise but, with only 0.3% of world inflows, are marginal.

Among other regional developments last year:

  • In both the developed world and globally, the Triad (European Union, United States and Japan) continues to dominate inward (71%) and outward (82%) FDI flows, again principally because of cross-border M&As. The US role as #1 outward investor has been taken over by the UK and France; and although the US is still the world´s leading recipient country, both its inflows and outflows dropped last year, by 5% and 2%, respectively. Germany outpaced the UK to become the top host country in Europe and has also moved to second place in global inflows. The UK is now in its second year as the top source country in the world.
  • FDI to Central and Eastern Europe(4) was up 7%, to $27 billion, concentrated in the Russian Federation, Poland and the Czech Republic, with the region as a whole maintaining its 2% share in global inflows. Overall, FDI was dominated largely by privatization-related transactions, which will lead regional inflows at least through 2002. After that, although the pattern varies considerably from country to country, inflows may be increasingly driven by greenfield investments and private cross-border M&As. The bulk of investments continue to come from Western Europe, particularly the members of the EU. As to outward FDI, it grew even faster than inward FDI last year, reaching $4 billion. Transportation, petroleum and natural gas, and pharmaceuticals are the leading sectors for outward flows.
  • FDI to and from developing Asia(5) hit record levels last year, primarily concentrated in Hong Kong, China, which overtook mainland China as the single largest home and host economy in Asia. The $143 billion in inflows to Asia overall marked a 44% increase over 1999; outflows totalled $85 billion, up 140%. But flows into South-East Asia (ASEAN-10) and South Asia dropped. Inflows to the three economies of North-East Asia (Hong Kong, Republic of Korea, and Taiwan Province of China) reached $80 billion; to China, $41 billion; and to the region´s nine LDCs, $461 million. Much of the activity into and out of Hong Kong is accounted for by TNCs "parking" funds in Hong Kong in anticipation of China´s expected entry into the WTO and by increased "transit FDI" through Hong Kong.
  • Latin America and the Caribbean registered a 22% slump in inflows last year, to $86 billion, after tripling during the second half of the 1990s. This decline reflects a correction from 1999, when inflows were affected by some major cross-border acquisitions. Top recipients were Brazil ($34 billion) and Mexico ($13 billion), while Chile was the region´s largest outward investor. Services and natural resources predominated in South America; manufacturing and financial services led the way in Mexico. M&As continued to be important in 2000, mainly directed at the services sector. FDI inflows to Argentina and Chile were down, partly because three major M&As had generated an increase the previous year. Political and economic instability caused declines in such Andean countries as Colombia and Peru; inflows to Venezuela, by contrast, rose.
  • A 13% decline in inflows to Africa, to $9.1 billion, brought the continent´s share in global flows down to less than 1% last year, largely the result of slowdowns in South Africa, Angola and Morocco. Within groups of countries, sub-Saharan Africa, including the 14 Southern African Development Community (SADC) members, and Africa´s 34 LDCs also saw declines; only North Africa remained unchanged. South Africa is the continent´s #1 source country for FDI, representing 40% of last year´s $1.3 billion outflows. The top host countries were Angola, Egypt, Nigeria, South Africa and Tunisia, in that order.

Top TNCs

The Triad, where 91 of the world´s top 100 non-financial TNCs are headquartered, continued its dominance of the list, as ranked by 1999 foreign assets, but three developing country corporations are on the list for the first time (see TAD/INF/PR29). The list is topped by General Electric (US) for the fourth year running, with ExxonMobil Corporation (US) leaping from fifth to second place. Royal Dutch/Shell Group (Netherlands/UK) remains in third place, while General Motors (US) has moved from the #2 slot to #4. TotalFina SA (France) has joined the top 10, jumping from #32 in 1998 to #8 in 1999. Ford Motor Company (US), Toyota Motor Corporation (Japan), DaimlerChrysler AG (Germany), IBM (US) and BP (UK) remain among the top 10, although their ranking has shifted.

Foreign assets of the top 100 were up 10%, to $2.1 trillion; the three largest increases in foreign assets were all reported for petroleum companies. TNCs from the United States raised their share of the overall total of foreign assets among the top 100 by 6%. The EU TNCs´ share has remained fairly steady since 1990, but the EU´s larger countries - Germany, France and Spain - considerably increased their relative share within this regional group. Japan´s share in top 100 foreign assets has risen 28% over the past decade, testifying to the sustained outward orientation of Japanese firms.

Total foreign sales were up 3%, to $2.1 trillion, with United States TNCs´ share among the top 100 sliding and the EU´s share rising, especially because of activity by German firms.

For the first time, total foreign employment fell, by about 8%, whereas total employment rose by 4%, marking a reversal in the previous trend of declining overall employment and rising foreign employment. However, a number of TNCs, led by McDonalds, General Motors and Siemens, added considerably to their foreign employment.

The top 100 list was dominated by the same four industries as in previous years: electronics and electrical equipment, motor vehicles, petroleum exploration and distribution, and food and beverages (with the first three accounting for more than 50 of the 100).

The list of the 50 largest TNCs from developing economies in 1999 (see TAD/INF/PR29) underlines the growing cross-border activities of these companies, as reflected in the impressive increase in their foreign assets and sales after a setback in 1998, respectively by 18% and 12%. Total employment, however, declined further by 27%, while foreign employment decreased only by 4%. As in the previous year, the top companies come from Asia. The industry composition of the top 50 list has remained unchanged, with conglomerates with diversified activities in a wide range of industries accounting for the lion´s share in the combined foreign assets as well as foreign employment. However, in terms of transnationalization of activities, food and beverages ranks highest, followed by diversified companies, electronics and electrical equipment and construction.

Internationalization efforts of the top 25 TNCs from Central and Eastern Europe (see TAD/INF/PR29) are fairly recent, but steadily increasing. A number of them are about to establish themselves as prominent players of their own with international production networks. The top 25 originate from nine of the region´s 19 countries. Transport, mining, petroleum and gas, and chemicals and pharmaceuticals are the industries most frequently represented among these TNCs.

Transnationality Index of TNCs, host countries

WIR2001 tracks the "Transnationality Index" (TNI) of TNCs. This Index, the average of the ratios of foreign to total assets, sales and employment, captures the foreign dimension of a firm´s overall activities. The Index declined in 1999, but is expected to rise again. It suggests a number of trends:

  • Transnationality by industry varies greatly, with media at the top and trading at the bottom of the Index. Food and beverages had the most gains; chemicals, the least. All industries except motor vehicles saw their industry-specific transnationality indices increase more than 50%, but the global consolidation trend evident in motor vehicles makes it a likely candidate for greater transnationality. The rise in the developing country index reflects these countries´ pursuit of the transnationalization process, even in crisis years.
  • There has also been a gradual emergence of large transnational utility, retailing and telecommunications companies. These companies, with their traditionally large portfolio of domestic assets, contributed to a decline in the average TNI of the top 100. Given the increasingly liberal policy environment in which such companies operate, their transnationality can be expected to increase over the next decade.

The Report also discusses the TNI of host countries, which measures the relative significance of FDI in an economy and has been estimated for 23 developed countries and 19 Central and Eastern European countries. It is calculated as the average of four shares: FDI inflows as a percentage of gross fixed capital formation; FDI inward stock as a percentage of GDP; value added of foreign affiliates as a percentage of GDP; and employment of foreign affiliates as a percentage of total employment. Among host economies, Hong Kong, China, is the most transnationalized, while New Zealand ranks highest among developed countries. The Index is generally higher in developing than developed countries, perhaps suggesting differences in the strength of local enterprises in the latter. Hungary is the most transnationalized country in Central and Eastern Europe.

The Index´s findings suggest possible policy directions for countries to follow in pursuing foreign investment. Innovation-intensive industries, such as information and communications technologies (ICT), tend to be increasingly transnational. ICT enables developing countries to host high-tech activities. The more technologically advanced an industry is, the more its firms differentiate between the "haves" and "have-nots" in choosing locations, resulting in a high level of concentration of FDI.

Inward FDI Index: new this year

As presented for the first time in WIR2001, the Inward FDI Index captures the ability of countries to attract FDI after taking into account their economic size and competitiveness. More specifically, the Index is the average of three ratios, showing each country´s share in world FDI relative to its shares in GDP, employment and exports. An index value of "one" would therefore mean that a country´s share in world FDI matches its economic position in terms of these three indicators.

The Index shows great variance among countries´ attractiveness to TNCs. Five countries are "balanced" (meaning an index of one), with their shares of FDI inflows exactly matching their average shares of world GDP, employment and exports: Costa Rica, El Salvador, Hungary, Malaysia and Slovakia. In general, countries with strong and open economies are at the top of the index ranking; however, some countries with weak economies but strong natural resources endowments are also at the top, such as Angola and Mozambique. In some cases, economic factors and policies pull a country´s ranking below what could be expected based on the elements of economic strength embodied in the Index. Others, ranked at the bottom (such as Japan and the Republic of Korea), have strong economic positions overall but, in the past, had chosen to restrict inward FDI.

Changes in the Index between 1988-1990 and 1998-2000 are in line with changes in economic performance and policy factors affecting FDI. Ireland has surged from #46 to #3 because it has targeted and attracted FDI to upgrade its technological and export structure, in combination with enhancing its human resources. In the process it has successfully transformed a "backward, low-productivity economy into a centre of technology-intensive manufacturing and software activity", says WIR2001. Sweden´s position has risen, primarily due to policy changes, from #29 to #4, over the same period.

The increase in the number of EU member countries in the top 20 over the past decade reflects in part the large and growing influence of regional integration on FDI flows. Also at the regional level, the index value for developed countries is about twice the world average, while developing countries and Central and Eastern Europe fall below that average. Both developed and developing countries attract FDI roughly in proportion to their shares in world GDP, but the former receive far larger shares of FDI than their shares of employment, while the latter, and economies in transition, receive less.


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: http://www.un.org/publications; 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.

4. Including countries of the former Yugoslavia.

5. Including West and Central Asia.

For more information, please contact:
Director, Karl P. Sauvant
Division on Investment, Technology and Enterprise Development
T: +41 22 907 5707
F: +41 22 907 0498
E: karl.sauvant@unctad.org
Press Officer, Erica Meltzer
T: +41 22 907 5365/5828
Information Officer, Alessandra Vellucci
T: +41 22 907 4641/5828
F: +41 22 907 00 43
E: press@unctad.org.


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