unctad.org | IMPORTANT SHIFTS ARE EMERGING IN THE KEY FACTORS INFLUENCING FOREIGN BUSINESS INVESTMENTS
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IMPORTANT SHIFTS ARE EMERGING IN THE KEY FACTORS INFLUENCING FOREIGN BUSINESS INVESTMENTS
Governments face new challenges in attracting foreign investment, says UNCTAD Secretary-General Ricupero

TAD/INF/PR/9839
01 November 1998

The factors determining where the world´s largest transnational corporations (TNCs) invest are becoming increasingly complex, reflecting especially the rising importance of intangible assets. Access to technology and innovative capacity in foreign countries is emerging as a crucial factor, states Rubens Ricupero, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD).

In the World Investment Report 1998: Trends and Determinants (WIR98), released today by UNCTAD, the Secretary-General writes that, in contrast to natural resources, technology and innovative capacities are people-made, they are "created assets" and possessing such assets is critical for firms´ competitiveness in a globalizing economy. Indeed, he writes in the Overview, "it is precisely the rise in the importance of created assets that is the single most important shift among the economic determinants of FDI location in a liberalizing and globalizing world economy."

Key determinants of FDI: old and new

At issue is an annual volume of FDI that is now approaching US$450 billion. Traditional determinants of FDI, driven by the need to access markets, as well as natural and other resources such as low-cost labour, are still key to attracting FDI, especially from new TNCs and from many that have yet to develop large-scale international operations.

Thus, countries can be attractive to potential investors on account of the size and growth of their domestic markets, their geographic proximity and access to key potential markets, including large regional markets and the natural and other resources they host, and of course he extent to which they effectively strive to attract foreign investors. All the same, the existence of created assets is of mounting significance as a magnet for FDI inflows, especially from major TNCs.

Created assets

Created assets can be tangible like the stock of financial and physical assets such as communication infrastructure or marketing networks, or intangible.

The common denominator of intangibles in this context is knowledge. The assets sought by TNCs in this context relate to skills, attitudes to wealth creation and business culture, capabilities (technological, innovatory, managerial), competencies (to organize income-generating assets productively) and relationships (such as those between firms and contacts with government), as well as the stock of information trade marks or goodwill.

UNCTAD´s Secretary-General states: "The challenge [for governments] is precisely to develop a well-calibrated and preferably unique combination of determinants of FDI location, and to seek to match those determinants with the strategies pursued by competitiveness-enhancing TNCs."

As the search in foreign countries for created assets becomes more central to a firm´s competitiveness, so countries without traditional advantages, such as natural resources or large domestic markets, can be more competitive in attracting FDI. Today´s report shows, for example, that Costa Rica created the conditions and people-made assets, including skilled labour, needed to attract a US $500 million investment project from Intel Corporation in 1997.

Inner and outer rings of policies

The report points out that, although there must be a basic regime in place in countries that welcomes FDI, the existence of a pro-investment regime is now a given. Over the past 15 years, the overwhelming majority of countries have introduced measures to liberalize their FDI frameworks and have in this way opened the door for TNCs to an increasing degree. The choice of countries for the investor is now greater than ever. Thus, factors beyond the existence of a pro-FDI regime, especially those economic factors such as the existence of created assets, have become more significant.

In addition, policies used internationally to influence FDI and its location, constituting the "inner ring" of the enabling FDI policy framework (traditionally, policies of investment and trade liberalization), have been expanded to embrace new policies, that have not specifically been considered in the FDI context in the past. These are what are termed the "outer ring" of policies. As increasing numbers of countries have put similarly liberal policies in place, so their existence is now becoming a minimum requirement, and no longer a significant point of differentiation.

Countries are now striving to promote themselves by highlighting "outer ring" policies. These include macro-economic policies, such as sound monetary policies that secure price stability and affect costs of capital; pro-investment fiscal policies that are attractive to executives and to firms; and exchange rate policies that impact the value of transferred profits, acquired assets and of exports. These "outer ring" policies today also include corporate organizational issues, as countries strive for advantage over other countries and more explicitly address the evolving needs of TNCs, as well as those of their own domestic firms, in an era of globalization.

Host countries are gradually being evaluated by potential foreign investors on a broader base of policy considerations than the traditional ones, notes today´s report. For example, countries are evolving technology policies that may make them attractive to TNCs that are increasingly placing value on technological advantages. The policy in this regard may relate to telecommunications privatization, or tax credits for technology research, or provision of programmes to facilitate technological partnerships between domestic and foreign firms.

Then, countries are striving to develop labour market skills that may be particularly attractive to TNCs, while also promoting infrastructure developments that may give them advantage in terms of TNC requirements.

Challenges to governments to attract FDI

WIR98 stresses that in an era of competition between countries to attract FDI, the growing focus on the outer ring of policies as determinants of FDI decisions by corporations leads to a number of striking consequences and challenges for governments of host countries. Among them are:

  • The expansion of the number of policies that investors view as constituting a good investment climate.
  • Greater demands on the effectiveness of investment policies.
  • Emergence of new policy areas that cut across traditional policies such as those affecting the production of created assets ­ from special people skills to technological innovation ­ that TNCs are increasingly seeking.
  • The mounting realization that an effective national FDI policy framework requires a thorough understanding of the determinants of TNC decisions, including the broader long-term strategies of TNCs.

Pro-active measures

As competition intensifies between countries to attract FDI, so the report notes that governments are moving ahead with increasing efforts to be pro-active as promoters of FDI into their countries. These efforts involve the promotion of FDI, curbing "nuisance costs" of doing business (such as eliminating corruption and red tape) and the provision of amenities that may contribute to the quality of life of expatriate personnel.

WIR98 states that few of these measures are entirely new, but "what is new is that, in a globalizing world economy such measures have proliferated rapidly and become increasingly routine, pervasive and sophisticated."

Natural resources still important for countries and investors

While natural resource factors have declined in relative importance as a determinant of FDI, they remain key to FDI by numerous firms and in many countries. They are a major factor, for example, in FDI flows to much of Africa, to Australia, to Azerbaijan, Kazakhstan and the Russian Federation.

The existence of the resources themselves is, however, only one aspect of the FDI attracting picture. Corporations will invest in countries where natural resources exist, for example, if they can obtain the key permits, remit profits and if, in general, there is welcoming FDI environment.




For more information, please contact:
Chief, Karl P. Sauvant
International Investment, Transnationals and Technology Flows Branch
Division on Investment, Technology and Enterprise Development
UNCTAD
T: +41 22 907 57 07
F: +41 22 907 01 94
E: karl.sauvant@unctad.org
or
Chief, Carine Richard-Van Maele
UNCTAD Press Unit
T: +41 22 917 5816/28
F: +41 22 907 0043
E: press@unctad.org.



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