unctad.org | Multi-Year Expert Meeting on Investment for Development — Foreign direct investment and domestic investment and development: enhancing productive capacities
Statement by Mr. Supachai Panitchpakdi, Secretary-General of UNCTAD
Multi-Year Expert Meeting on Investment for Development — Foreign direct investment and domestic investment and development: enhancing productive capacities
Geneva
03 Feb 2010

[AS PREPARED FOR DELIVERY]

Excellencies,
Distinguished delegates,
Ladies and Gentlemen,

It is a great pleasure to welcome you all to the second session of the Multi-year Expert Meeting on Investment for Development. Following last year´s meeting on the opportunities and challenges of International Investment Agreements for developing countries, this year´s session will discuss the interrelationship between foreign direct investment (FDI) and domestic investment, both private and public.

UNCTAD has always stressed that the positive impacts of FDI are contingent on a number of conditions, including transparency and regulation, and that inflows of foreign capital may not always bring positive development outcomes. FDI accounts for a limited proportion of gross capital formation in most developing countries, and, as a share of total investment, domestic investment is, and will remain, the main contributing factor to economic growth. However, since domestic investment levels are low, particularly in least developed countries (LDCs), FDI can still contribute to the capital stock, as well as introduce new technology and management know-how, which benefit countries´ long-term and strategic development objectives.

As well as these direct impacts, FDI can also indirectly affect investment by domestic firms, both positively and negatively. Depending on host country conditions, FDI may promote, complement - but also substitute for - the formation of capital by domestically-owned firms. Policymakers therefore have to ensure that foreign-owned capital does not, for example, lead to the "crowding-out" of domestic investment, but rather promotes it through linkages with suppliers and other services.

Interaction between domestic and foreign investment can be observed and enhanced in many industries and areas. We have chosen agriculture and climate change as two pertinent examples for our discussions at this expert meeting.

I would like to say a few words about the first of these examples, agriculture. The expansion and revitalization of agricultural production is one of the most critical issues facing many developing countries, both to meet the rising food needs of their burgeoning populations, and as a basis for economic diversification and development. In this regard, there are several issues of relevance to the interaction between domestic and foreign investment in agriculture:

  • The domestic private sector will remain the principle source of investment in agriculture in developing countries. Although foreign investment can make a strong contribution to the development of the agricultural sector, it is local farmers who continue to be the backbone of many societies in developing countries. The policy goal is to strengthen and support this backbone.

  • However, neither local farmers nor agricultural companies alone can make the required investments in agriculture. The United Nations High-Level Task Force on the Global Food Crisis estimates that the global financial requirements for investment in agricultural development range from $25 billion to $40 billion per annum, which is simply too big for most developing countries. Thus, it is essential that local investment be supplemented by foreign capital, although as our recent Expert Meeting on South-South Cooperation in December last year concluded, FDI is only likely to fill a small part of the investment gap; its potential for technology transfer, marketing opportunities and links to global value chains can be significant in terms of their development impact.

  • One should not expect miracles from FDI in agricultural production. Despite world FDI inflows in agriculture exceeding $3 billion per annum, from 2005-2007, the current share of FDI in the agriculture industry is currently very low. However, the sector has considerable growth potential, and rising food prices have become a significant home country driver of more FDI in agriculture.

  • Several risks associated with FDI in agriculture - such as "land grab", environmental degradation and the dislocation of local communities - can be avoided or substantially reduced if the interaction between domestic and foreign investment is mutually beneficial. FDI should not crowd out domestic farming, but rather reinforce domestic agents - including the public sector. There is ample room for such interaction, including interaction at the production level, cooperation between local farmers and foreign food processors or retailers, joint infrastructure projects such as in irrigation systems, or partnerships with regard to agriculture-related R&D. One such prospect in this regard, could be the establishment of seed and technology centres, based on public-private partnerships.

  • Each country needs to consider the balance between cash crops and staple food. Historically TNCs have been more active in the production of cash crops but could also provide capital and technology to the production of staple crops. One area of cooperation that seems particularly promising is contract farming.

At the multilateral level, countries´ attempts to achieve a positive interaction between domestic and foreign investment could be undermined by discriminatory trade policies. Continuing high subsidies in agricultural industries create a disincentive for both domestic and foreign investors, and undermine the competiveness of agricultural products. It should therefore remain a priority to remedy this situation through a successful conclusion of the WTO Doha Round.

As I mentioned earlier, the other example which this meeting will address is the interaction between domestic and foreign investment to tackle climate change. It has become clear that over the course of the next few decades investment needs for climate change mitigation and adaptation will be colossal. To give an example, the United Nations has estimated that the shift to renewable energy alone would require new global investment (and the accompanying technology) of up to $600 billion annually for a decade.

The crucial question is how to incentivize domestic and foreign private investors to develop or diffuse the necessary technologies or expertise; for this to work, a close interaction between foreign and domestic investors is crucial. Our discussions on Thursday and Friday will examine how to attract relevant investment and to create the requisite linkages with local investors to meet the challenges and opportunities created by climate change for developing countries.

Lastly, I would like to reiterate that UNCTAD´s main role in addressing the climate change challenge is to support developing countries take advantage of emerging investment and trade opportunities, whilst becoming aware of their development implications. For your information, later this year, the 2010 World Investment Report will focus specifically on investment and climate change, which will make an important contribution to meeting the challenge to development posed by climate change.

With these introductory remarks I wish you very fruitful discussions and look forward to seeing your conclusions.



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