The boom in global foreign direct investment (FDI) (1) continues. Records are being shattered again -- in terms of the absolute levels of FDI flows and stocks, the numbers of cross-border mergers, acquisitions and cross-border, inter-firm agreements, as well as total sales by transnational corporations (TNCs) and their foreign affiliates. Developing countries are now not only receiving record levels of FDI, but they are an expanding source of outflows as well, as leading TNCs headquartered in these countries boost their investments elsewhere at a dynamic pace.
According to World Investment Report 1997: Transnational Corporations, Market Structure and Competition Policy(2) published today by the United Nations Conference on Trade and Development (UNCTAD), governments are increasing their efforts to encourage inward direct investments. This has contributed to mounting expectations that the FDI boom will continue its momentum into the next century.
But the scale and frequency of international mergers and acquisitions (M&As), as well as the very size and key roles being played by the world´s largest TNCs are some of the factors stimulating questions about the structures of increasingly global markets and competition policies. WIR97 stresses that policies to liberalize international investment need to be complemented by approaches that strengthen competition in national and international markets and secure market efficiency.
UNCTAD´s Secretary-General Rubens Ricupero states: "The globalization of production is yielding benefits for many countries. But building and sustaining a true competition culture is imperative for economic growth and development. This is essential for developing and industrial countries alike."
WIR97 reports that a dramatic factor boosting FDI has been the acceleration of M&As, especially in the United States and Western Europe. Considering only majority-held transactions, the overall value of cross-border M&As in 1996 was approximately $163 billion (cf. $141 billion in 1995) - just under one-half of total FDI.
The key FDI results
Total FDI(3) rose 10 per cent to $349 billion last year. However, it is important to note that FDI only captures a part - perhaps just one quarter - of the total volume of financial resources going into international production. Over and above FDI, a substantial amount of the financial capital invested, in production by foreign affiliates of TNCs is raised by them on their own account, either in the countries in which they are based or else from other countries. When these amounts are taken fully into account, in 1996 the actual value of investments made by TNCs abroad -- the capital component of international production -- can be estimated to be in the neighbourhood of $1.4 trillion (a trillion equals one million million).
Although flows of FDI into developed countries continue to far exceed those into developing countries, the gap has been narrowing. Inflows into developing countries in 1996 rose by 34 per cent, to a record of $129 billion. At the same time, inflows into developed countries gained only slightly to $208 billion. Outflows from developed countries were fractionally up, at $295 billion last year, while outflows from developing countries, at $51 billion, rose to 15 per cent of the 1996 FDI total.
Policy developments -- a race to liberalize
Between 1991 and 1996, governments made 599 changes in regulatory regimes relating to FDI. Of these, 95 per cent were in the direction of liberalization. "The expansion of international production would not have been possible if it were not for the ongoing liberalization of FDI regimes," says Secretary-General Ricupero. But, he goes on to caution that, "the reduction of barriers to FDI and the establishment of positive standards of treatment for TNCs need to go hand-in-hand with the adoption of measures aimed at ensuring the proper functioning of markets including, in particular, measures to control anticompetitive practices by firms."
The rapid tempo of FDI growth has been helped by broad-based efforts by governments to conclude bilateral investment treaties for the protection of investments. WIR97 reports that, as of the start of this year, there were 1,330 such treaties in the world, involving 162 countries, a threefold increase in half a decade. In 1996, on average, one such treaty was concluded every other day. Significantly, many of these treaties are increasingly being concluded between developing countries, often in the same region.
Today´s report underlines that the ultimate objective of FDI liberalization is to enhance economic growth and well-being in countries. This requires increasing FDI inflows, along with the capital, technology, managerial know-how and market access associated with them. It also demands that the industries and markets in which TNCs participate operate efficiently.
WIR97 cautions that, if FDI inflows lead to, or are associated with, market concentration - allowing restrictive or anticompetitive practices to appear - the positive benefits of FDI may not necessarily follow. Competition policy is thus a critical accompaniment to liberalization in terms of the removal of restrictions and establishment of standards of treatment for foreign firms.
WIR97 notes that the mounting volume of FDI and the rapidly developing regional and global strategies of TNCs make it all the harder to formulate policies with regard to competition for individual national markets. The efficiency gains associated with corporations´ integrated international production systems must be balanced against possible anticompetitive effects of particular transactions for the markets supplied by these systems.
Mr. Ricupero thus suggests that, beyond the increasing levels of bilateral and regional cooperation, consideration needs to be given to strengthening the focus of discussions at the multilateral level around the linkages between policies on FDI, trade and competition. At the multilateral level, the UNCTAD Set of Principles and Rules for the Control of Restrictive Business Practices is at present the only multilateral instrument covering all aspects of the control of restrictive business practices.
The world´s largest TNCs
The number of TNCs world-wide is expanding; yet the largest 100, ranked on the basis of their foreign assets, today control one-fifth of the total global foreign assets of TNCs, according to WIR 97. However, for the first time, in 1995, two corporations from developing countries entered the ranks of the world´s 100 largest TNCs - Daewoo Corporation of the Republic of Korea and Petroleos de Venezuela S.A.. Royal Dutch Shell (United Kingdom/Netherlands) tops the UNCTAD one hundred list for the fifth consecutive year. The top 100, in 1995, had foreign sales in excess of $2 trillion, foreign employment of close to 6 million people and foreign assets of around $1.7 trillion.
The top 50 TNCs headquartered in developing countries had total foreign assets in 1995 of $79 billion. The foreign assets of these leading corporations from developing countries grew by 280 per cent between 1993 and 1995. A very considerable amount of FDI outflows from developing countries is taking place within Asia, and indeed inter-regional investment remains the principal FDI source for the region. Thus, the FDI stock in Asia attributed to Asian TNCs, at nearly 40 per cent, is larger than that from either Europe, Japan, or the United States.
Major regional FDI trends
Most of the FDI inflows into the United States are now coming through M&As; while nearly a half of those into the European Union are in this form, with United States TNCs accounting for most of such transactions. WIR97 reports that regulatory and other barriers to M&As in some European Union countries, such as Italy and Germany, have constrained the total volume. Meanwhile, Japanese investment in the European Union fell to just $2 billion in 1994, down from its peak of $7 billion in 1990 reflecting the adjustment of Japanese TNCs to the completion of the single European market as well as the slow economic growth in Japan after the bursting of its "bubble economy".
Investment flows into Latin America and the Caribbean rose by 52 per cent in 1996 - the highest increase of any developing region - to a record of almost $39 billion. This region, which has seen major liberalization in investment regimes, now accounts for 30 per cent of all FDI to developing countries. Brazil´s performance was especially noteworthy. In 1996, total FDI into Brazil rose to $10 billion, exceeding Mexico´s $8 billion and Argentina´s $4.3 billion volume. In the first four months of 1997, FDI flows to Brazil were $4 billion - two and one half times greater than in the same 1996 period. WIR97 reports that foreign investor confidence in the region´s prospects is high, with Mexico, Brazil and Chile in top positions, in that order.
China, once again the second largest FDI recipient in the world, continues to absorb a very significant share of total FDI inflows to developing countries, accounting for $42 billion of the overall 1996 volume of $129 billion. Its large and growing market, macroeconomic reforms, successful "soft landing", and measures to promote inward investment combined to yield this result. The rush by foreign investors to establish and implement FDI projects before the country´s new policies (which abolish some preferential treatment) came into effect also contributed to the 1996 record. China accounted last year for over 50 per cent of total FDI into Asia and over two fifths of the $16 billion increase in FDI to this region. Singapore was Asia´s second largest FDI recipient, with a volume of $9 billion. Inflows of FDI into India rose by 34 per cent last year, but still only totalled $2.6 billion - just over a quarter of Singapore´s, even though its economy is almost four times as large.
Asia is rapidly emerging as an important source of FDI outflows. These rose by 10 per cent last year, to $47 billion. Hong Kong Special Administrative Region of China alone accounted for $27 billion of this. Some of the least developed Asian countries such as Cambodia and Myanmar are directly benefiting now from the rising level of outward FDI by Asian TNCs. And, as WIR97 highlights, the flows are reaching beyond the confines of the region, with a rising volume of FDI into the European Union.
After large disinvestment in West Asia in 1995, which resulted in negative regional inflows (especially in Saudi Arabia and Yemen), inward flows to this region as a whole reached $2 billion last year. FDI into oil producing countries has been declining, while flows to most of the non-oil producers in the region have tended to be modest. Overall, FDI is shifting away from oil and towards services and manufacturing.
WIR 97 reports that once again the 48 least developed countries captured very little of the increase in FDI during last year. Their share of total inflows into developing countries was less than 2 per cent. Notwithstanding their relatively weak performance, in absolute terms, flows to these countries rose by 56 per cent. Cambodia, Angola and the United Republic of Tanzania topped the league in terms of volume.
FDI flows to Africa remain small (32 of the least developed countries are in sub-Saharan Africa), at just $5 billion last year. But were still considerable relative to the size of the region´s markets. WIR97 states that prospects for increased flows to some parts of Africa are encouraging and that South Africa could begin to play a significant role as a "growth pole", contributing to the continent´s economic development through FDI and trade.
FDI flows to Central and Eastern Europe fell to $12 billion in 1996 from $14 billion in 1995. One factor in the fall was that the volume of privatizations in some countries slowed. The Czech Republic, Hungary and Poland accounted for two-thirds of the region´s total inflows.
Accompanying the FDI boom, foreign portfolio equity investment in developing countries has accelerated since the start of this decade, WIR97 reports. [WIR97 concentrates mainly on FDI, rather than on foreign portfolio equity investment. By definition the two kinds of flows are distinguished by the degree to which foreign investors exercise management control in a company. Portfolio investors tend to limit their involvements to financial engagements, while direct investors have a significant and long-lasting management interest in the company in which an investment is made] These flows have been largely concentrated in the more mature emerging markets and the origin of these flows has also been largely concentrated. Asia alone accounted for 53 per cent of net foreign portfolio equity investment flows to emerging markets in 1995. As far as source countries are concerned, the United States alone accounted for more than 35 per cent of the volume in the 1992-1994 period, with Japan accounting for 15 per cent and the United Kingdom, 11 per cent. The impact of these flows on host-country economies is likely to be significant. Although such investments can make an important contribution to the financing of equity capital of local companies, concerns have been expressed by host countries particularly as regards the volatility of these flows and their effect on exchange rates, WIR97 states.