Foreign direct investment (FDI)(1) by transnational corporations (TNCs)(2) may reach a record of between US$430-440 billion in 1998, after rising considerably in 1997: 19 per cent in terms of world inflows (US$400 billion) and 27 per cent in terms of outflows (US$424 billion). The 1998 increase is projected despite slower world economic growth and the crises in financial markets, states the United Nations Conference on Trade and Development (UNCTAD).
Data released today show that the foreign assets held by TNCs, their foreign sales and their foreign value added, all rose to new records in 1997. FDI is becoming both a major stimulus to globalization and, at the same time, its growth is a direct result of globalization and economic liberalization, according to the new World Investment Report 1998: Trends and Determinants (WIR98)(3), released by UNCTAD.
In a comprehensive analysis of investment trends, WIR98 shows how the landscape of global business is changing rapidly. Major factors behind the accelerating tempo of FDI are soaring levels of cross-border mergers and acquisitions (M&As), increasing numbers of privatizations and strong efforts by countries to attract FDI. The world´s 100 largest TNCs alone now account for over US$2 trillion in foreign sales and 6 million foreign employees.
Increases in FDI in 1998 will probably be concentrated in developed countries, as well as Latin America and the Caribbean, states WIR98.
FDI and portfolio flows:
As WIR98 points out, direct investment abroad is a complex venture. It involves a long-term commitment to a business endeavour and substantial deployment of human and financial resources. This helps to explain why FDI flows tend to be less volatile than short-term portfolio flows. Today’s report underscores this by noting the following factors that account for the greater overall stability in FDI flows:
- TNCs look to FDI to yield long-term profits from the production of goods and services, while portfolio foreign investors are more interested in shorter-term financial returns;
- Longer-term market, structural and growth potential factors tend to motivate FDI, making FDI strategies less prone to short-term volatility in financial markets;
- Specific interests of TNCs, such as the acquisition of natural resources, or specific production plants, reduce "herd" investing behaviour in the FDI arena;
- Divestment of assets is more complicated and takes much longer in FDI than is the case for portfolio investment.
Largely due to the Asian financial crisis, however, FDI flows into Asia and the Pacific may at best remain the same as in 1997. This would be the first time since 1985 that FDI flows into this region did not rise. Within this region it is probable that there will also be some moderation in FDI into China, after six years of rapid gains that saw total FDI inflows in 1997 reach US$45 billion representing almost one-third of total FDI flows to all developing countries.
Predicting FDI flows to the countries in East and South-East Asia that have faced the greatest financial difficulties over the last year is particularly difficult. While there are numerous negative factors, there are also some distinct positive considerations. WIR98 points out, for example, that calculated in US dollar terms costs, for all firms, of establishing and expanding production facilities in these countries have declined.
Key new trends in approaches by TNCs
The forces driving globalization are changing the ways in which TNCs pursue their objectives for investing abroad. Technology and innovation have become critical to competitiveness (for example, receipts and payments of royalties and license fees related to technology by TNCs have been rising at double-digit rates).
WIR98 notes that trade and investment liberalization and privatization have been driving forces. But, at the same time, technological advances have strengthened the ability of firms to coordinate their expanded international production networks in their quest for competitiveness.
UNCTAD Secretary-General Rubens Ricupero points out in the ´Overview´ to the report that shifts are taking place in the considerations by TNCs of where to locate new foreign investments. Traditional factors, such as the existence of a pro-FDI regime, natural resources, market growth prospects and market size, as well as labour market conditions, continue to remain important. But increasingly firms are also seeking investment locations that offer people-made advantages, so-called "created assets", from technological advantages to particular labour skills.
WIR98 declares that possessing such assets is critical for firms´ competitiveness in a globalizing economy. Countries that develop such assets become more attractive to TNCs: "It is 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," says the Report.
How vital it is for countries seeking FDI to be sensitive to these basic shifts is underscored by the new data in the report. In 1997, FDI grew in all regions of the world, i.e. developed, developing and in Central and Eastern Europe. The overall annual world inflows of US$400 billion is almost double the total seen in 1990 and some seven times the amount recorded in 1980. Flows to developing countries amounted to US$149 billion in 1997, representing 37 per cent of all global FDI, compared to just US$34 billion, representing only 17 per cent of all FDI, at the start of this decade.
The biggest TNCs & key data
Today´s report ranks the world´s 100 largest TNCs in terms of their foreign assets, with General Electric of the United States just edging out Royal Dutch Shell of the United Kingdom and The Netherlands for first place. It also ranks the 50 largest TNCs in developing countries, with Daewoo Corporation of the Republic of Korea clearly the largest by a considerable margin. The lists show that the world´s largest TNCs are becoming increasingly transnational, thus less dependent on their home country in terms of assets, sales and the location of their employees.
The significance of TNCs in globalization is reflected in the fact that the world stock of FDI, constituting the capital base of operations of TNCs rose by over 10 per cent in 1997 to reach an estimated US$3.5 trillion. This stock is owned by at least 53,000 TNCs, large and small, which in turn control at least 450,000 foreign affiliates. The value of assets of these affiliates in 1997 was at least treble the volume of the FDI stock, with many of the operations locally financed.
The value of global sales by foreign affiliates of TNCs rose from $8.9 trillion in 1996 to $9.5 trillion in 1997. Their value added production amounted to close to 7 per cent of global gross domestic product (GDP) in 1997, compared to 5 per cent in the mid-1980s. Sales of the foreign affiliates are growing faster than world trade. And, as the overall FDI volume expands, so international production is contributing on a rising scale to the interdependence of the world economy.
International mergers & acquisitions soar
One of the most striking trends in globalization is the growing importance of cross-border M&As. These are now a major driver of FDI and this activity reflects the prevailing strategies of most TNCs: divesting non-core activities and strengthening competitive advantages through acquisitions in core activities, states WIR98. One consequence is greater industrial concentration in the hands of a few firms in each business sector.
Trade liberalization (including the financial services agreement reached last year in the World Trade Organization) and deregulation and privatization in some key areas (for example, telecommunications) have stimulated the M&A activity. Majority-owned M&As accounted for US$236 billion of 1997 FDI, rising to 58 per cent of all FDI from a level of just below 50 per cent in 1996. There were 58 transactions individually valued at over US$1 billion each. TNCs from developed countries accounted for 90 per cent of these M&As.
TNCs are achieving their goals of strategic positioning and restructuring not only through M&As, but through a rising volume of cross-border inter-firm agreements. Many of these agreements focus on technology. WIR98 stresses that such agreements are particularly important for enhancing the technological competitiveness of firms. Their number has increased from an annual average of less than 300 in the early 1980s to over 600 in the mid-1990s (more than 8,000 inter-firm agreements in technology-intensive activities have been concluded since 1980).
New agreements shape globalization
Globalization is being shaped, among others, by a growing array of bilateral, regional and multilateral economic agreements. Secretary-General Ricupero states that UNCTAD is seeking to help developing countries participate effectively in international investment discussions and negotiations: "UNCTAD is paying special attention to identifying the interests of developing countries and ensuring that the development dimension is understood and adequately addressed in international investment agreements."
WIR98 notes that rarely before has there been so much activity undertaken by national governments and international organizations in the realm of investment negotiations. The number of bilateral framework agreements is expanding. The number of bilateral investment agreements stood at over 1,500 by the end of 1997. And there were 1,794 double taxation agreements in effect covering 178 countries at the end of the same year.
At the same time, the report notes that the recent negotiation of new international investment agreements has brought to the fore a number of basic considerations, including:
- Whatever the fate of various initiatives, many countries see that it is necessary for them to examine the implications and appropriateness of international investment agreements.
- It is increasingly evident that these agreements are difficult to negotiate as they touch, at least in principle, on the entire range of issues related to production and the production process as well as social and cultural factors. Complex issues of national policy are therefore raised, in both developed and developing countries.
- Effective agreements have to be balanced. This raises the need to take into account the diverse circumstances of countries at different stages of development: one of the main challenges for the international community, and especially UNCTAD, is how to ensure that the development objective is given effect and translated into the structure, content, and implementation of international investment agreements.
- If broad consensus is to be forged in international agreements on investment, it is becoming clear that the concerns of all peoples likely to be affected need to be taken into account in negotiations; thus representatives of civil society need to be included in the process.