Foreign direct investment (FDI)(1) inflows by transnational corporations (TNCs)(2) may well surpass the one-trillion-dollar level this year, following last year´s already impressive $865 billion, according to the World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (3), published today by the United Nations Conference on Trade and Development (UNCTAD).
"Cross-border mergers and acquisitions, including the purchase by foreign investors of privatized state-owned enterprises, are driving the foreign investment volumes to new records", says UNCTAD Secretary-General Rubens Ricupero. Adds Karl P. Sauvant, chief author of the report: "A global marketplace for firms is emerging. Companies are being bought and sold across borders on an unprecedented scale".
FDI flows into developed countries last year rose to $636 billion (from $481 billion in 1998), while FDI to developing countries climbed to $208 billion ($179 billion in 1998). Worldwide annual sales of the foreign affiliates of TNCs in 1999 reached $14 trillion (from $3 trillion in 1980), almost double the volume of global exports (table 1).
Mr. Ricupero stresses: "International production by transnational corporations - numbering some 63,000 today, with approximately 700,000 foreign affiliates - now spans virtually all countries and economic activities, rendering it a formidable force in today´s world economy".
The world´s top 100 non-financial TNCs in terms of foreign assets, controlling over $2 trillion worth of such assets and employing more than 6 million people in their foreign affiliates, are the principal drivers of international production, states WIR2000. And they are increasingly using mergers and acquisitions (M&As) to boost their overall level of FDI.
FDI is the largest source of external finance for many developing countries, which in recent years, especially during financial crises, have found it to be more stable than portfolio investment and bank lending. Governments recognize the importance of attracting FDI. Across the globe they are opening their economies to encourage the flow of trade, technology, information, investment and financial flows, states the new report.
Global FDI outflows(4) rose 16% to $800 billion last year. With $199 billion, the United Kingdom became the largest outward investor in 1999, forging ahead of the United States. Large M&As in the United States and the continuing strength of its economy made it the largest recipient of FDI ($276 billion, nearly one third of the world total). TNCs based in the European Union (EU) invested $510 billion abroad in 1999, or nearly two thirds of global outflows.
WIR2000 notes that the EU´s single currency, the Euro, has increased competition, by exerting more pressure on firms to restructure and consolidate their operations. FDI flows to Japan quadrupled last year, reaching a record $13 billion, the largest inflow to date. The country´s outflows, however, fell 6%, to $23 billion.
FDI into Latin America and the Caribbean climbed steeply last year to exceed $90billion, while inflows to all of the developing countries in Asia grew to $106 billion. Flows to Central and Eastern Europe and to Africa, however, remained quite modest, at $21 billion and $9 billion, respectively. Meanwhile, FDI outflows from developing countries last year almost doubled, to $66 billion, with half of the increase attributable to TNCs registered in Bermuda and almost $20 billion accounted for by companies headquartered in Hong Kong, China. (For more details on FDI flows into these regions, see press releases TAD/INF/057, TAD/INF/058, TAD/INF/059 and TAD/INF/060).
FDI growth breaks records, led by M&As
The dramatic feature of recent trends in FDI is the continuing high levels of growth in M&As. These have risen at an annual rate of 42% over the past 20 years, and their completed value in 1999 was about $2.3 trillion, representing 24,000 deals. The value of completed cross-border M&As (defined as the acquisition of more than 10% equity share) rose from $100 billion in 1987 to $720 billion in 1999 and involved about 6,000 transactions(5) (table 2). However, 109 mega-deals (i.e. deals of more than $1 billion) accounted for more than 60% of the total value of cross-border M&As. Most of the mega-deals involve companies listed in UNCTAD´s list of the world´s 100 largest transnational corporations (table 3).
European Union firms, followed by United States firms, were the largest acquirers of assets through M&A activity in developing countries last year, with the largest amount of sales in Latin America. The biggest volume of foreign M&As into an Asian developing country involved the Republic of Korea, where the 1999 total was $9 billion.
Cross-border M&As into Central and Eastern Europe doubled to $10 billion last year, with Poland and the Czech Republic being the major target countries and Western European firms the prime acquirers. As for Africa, the overall level of FDI in the form of cross-border M&As was modest and mostly concentrated in Egypt, Morocco and South Africa.
Privatization has been the most important means in recent years of attracting FDI in Latin America and in Central and Eastern Europe and it is growing in developing Asia. In general, foreign participation in privatizations is higher than domestic participation in the countries of these regions. A majority of the 50 largest privatizations in the world during the 1987-1999 period were in developing countries. Last year Argentina was at the top, with a volume of $16 billion; Brazil had headed the list the previous year, with $20billion.
For an analysis of the performance of M&As, their driving forces and, in particular, their impact on development, see press release TAD/INF/055.
GE leads Top 100
In 1998, General Electric again held the top position among the world´s 100 largest non-financial TNCs ranked by foreign assets. General Motors moved from fourth to second place, with Royal Dutch Shell remaining in third. Only a few changes have occurred among the top 10 TNCs: BP Amoco (#8) has replaced Volkswagen Group (now # 11) and Nestlé (#10) changed places with DaimlerChrysler (#9) (table 3).
The most striking feature of the top 100 list is how little it appears to change from one year to the next. The dominance of the world´s biggest firms is underlined by this level of stability. Almost 90 of the top 100 are headquartered in the Triad of the European Union, Japan and the United States. During the past nine years, 57 of the top 100 TNCs have continued to appear on the list.
The list was dominated in 1998 by the same three industries as in previous years: motor vehicles; petroleum exploration and distribution; and electronics and electrical equipment. However, utility and telecommunication companies are catching up. They are increasingly transnationalizing as a result of market liberalization. Pharmaceutical and chemical firms reduced their entries in the 1998 list from 13 to 8 due to global consolidation in these industries, largely engineered through reiterative M&As.
M&A activity in manufacturing
The highest levels of cross-border M&A activity in manufacturing last year involved companies in the chemicals, electric and electronic equipment and petroleum products industries, while on the services side the leaders were in telecommunications, finance and business services.
UNCTAD notes that the growing importance of cross-border M&A transactions in banking reflects deregulation and liberalization, as well as competitive pressure to cope with rising information technology costs. The result of recent trends is increasing concentration among the top banks. As acquirers, financial firms were the most aggressive in both the European Union and the United States, accounting for a quarter of all 1999 cross-border M&As.
With regard to automobiles, today´s UNCTAD report states that sweeping consolidation has led to a restructuring of the whole industry as a number of automobile makers are either merged or strategically allied. Consolidation is seen to be necessary in an industry characterized by weak demand, overcapacity and environmental pressures. And as consolidation moves ahead among the major manufacturers, so it has also triggered restructuring in its supplier industries through M&As.
WIR2000 reports that it is the need to conduct expensive research and development that is promoting synergies in the pharmaceuticals sector, where all of the largest companies have grown through M&As, rather than through "organic" means. By the end of last year the top five and 10 largest TNCs accounted respectively for 28% and 46% of world pharmaceutical sales.
While cross-border M&As have seen mega-deals in telecommunications in developed countries, they have also been central in FDI related to large privatizations in developing countries. Major investment was reported recently from foreign firms in the form of privatizations in telecommunications in such countries as Brazil, Peru, Venezuela, Mexico, the Czech Republic, Kazakhstan and South Africa.
M&As dominate FDI between developed countries
FDI inflows to the United States surged by $90 billion to an astounding $276 billion last year as foreign-based TNCs continue to strive to access the country´s rapidly growing market and take advantage of cost-productivity considerations (table 4). The overwhelming majority of the inflows were in the form of M&As. United Kingdom firms were the largest investors in the United States, with the European Union as a whole accounting for over 80% of all cross-border M&As in the United States in 1999. After a decline in 1997 and 1998, Japanese FDI flows into the United States rose to $13 billion last year, a level comparable to that of 1996.
Total 1999 FDI inflows to developed countries reached $636 billion (up from $481billion in 1998), while outflows increased to $732 billion (from $652 billion; table 5). The lion´s share of all FDI in developed countries was in the form of cross-border M&As; Western European firms were especially active, with a total of $354 billion in sales and $519 billion in purchases. The significant imbalance between sales and purchases is largely explained by the cross-border M&A activity by United Kingdom firms targeting United States firms.
Key European Union trends
United Kingdom firms were the largest single foreign investors in 1999, with an FDI volume of $199 billion, trailed by the United States, with $151 billion. The EU´s position as the world´s most important source of FDI was reconfirmed in 1999 as outflows of FDI rose for the sixth consecutive year. The United Kingdom, which alone accounted for 39% of total EU outflows, was followed by two other large economies, France and Germany, and by the Netherlands. In terms of growth, Denmark, France and Spain reported the largest gains, while FDI from Finland, Italy and Germany fell significantly.
European FDI developments in 1999 were more than ever driven by M&As. The value of cross-border M&A-related sales and purchases increased by 83% and 75%, reaching $345 and $498 billion, respectively. The EU accounted for almost half of all global cross-border M&A-related sales and 70% of purchases, and EU companies were involved in all but one of the 10 largest cross-border M&As last year.
These cross-border FDI flows in Europe are partly a response to the ongoing integration and liberalization affecting much of European industry. WIR2000 states that, although it is difficult to assess the full impact of the Euro on FDI, the current reshaping of European industry is likely to be affected by the single currency. The single currency will also contribute to greater price transparency and increased competition in Europe, putting more pressure on firms to restructure and consolidate their operations.
More inward FDI for Japan
Both the number and the value of inward FDI projects in Japan increased significantly last year. Outflows of FDI from Japan declined by 6% to $23 billion, while inflows quadrupled, to $13 billion. This mirrors strategic changes in Japanese companies, which are increasingly viewing M&As as a means to revitalize and restructure. Recent government actions have encouraged this trend. "This is a remarkable and sudden shift: only a few years ago, foreign investors regarded Japan as extremely difficult to enter", the report comments.