Keynote speech: Global Value Chains and Development
[AS PREPARED FOR DELIVERY]
Ladies and Gentlemen,
I am honoured to have been invited to deliver the keynote address for the International Investment Forum 2013 at the 17th China International Fair for Investment and Trade (CIFIT).
This is my first week in the position of Secretary-General of the United Nations Conference on Trade and Development (UNCTAD). I wanted to attend this event in person and deliver my first speech in my new capacity here, as an acknowledgement of the importance that UNCTAD places on this Forum and its core theme. I would like to express my heartfelt appreciation to the Government of China for launching this initiative.
CIFIT has become an iconic event on the global trade and investment calendar. Since its inception nearly two decades ago, CIFIT has yielded a rich harvest, attracting the participation of ever-increasing numbers of business executives around the world to address the most prominent issues in international investment and to share business opportunities. The impact of CIFIT is indeed embodied in its "golden key" logo, which aims to unlock sustainable prosperity through investment, for present and future generations.
CIFIT is also highly relevant for today's policymakers. In its own words, the event strives to be a platform for shaping global investment policies, as well as a stage where policymakers, company leaders and investors can interact. In short, it is intended to strengthen international cooperation in the investment sector, and thereby help boost investment and ultimately growth in the world economy. As a co-sponsor of this Forum, UNCTAD emphatically endorses these aims. It is in large measure through investment for sustainable development that we will improve the livelihoods of people, and will create solutions that allow us to do this in a way that also safeguards the welfare of future generations. For this, we will need to be innovative. New developments in the trade and investment sphere, when well understood and strategically tapped, can act as excellent springboards for our aim of promoting sustainable development through investment.
This brings me to the theme of the International Investment Forum 2013, which is centred on the topic of global value chains. GVCs are one of these unfolding trends that are being monitored because we want to understand how these chains can be strategically harnessed for sustainable development.
As you may be aware, UNCTAD's emphasis has always been, and remains, on the developmental aspect of global economic activity in the areas of investment and trade. With this emphasis, we hope to mainstream the sustainable development and inclusive growth imperatives in these areas. And indeed, UNCTAD's flagship publication, the World Investment Report, focuses this year on global value chains, with this purpose in mind.
As we hold this 17th CIFIT, we find ourselves still embroiled in one of the most pressing, persistent and widespread financial and economic crises of our times. The economic woes we are facing are also reflected in investment flows, and to provide an appropriate backdrop for the rest of our discussions here, I would like to share with you the latest investment trends, as collated in UNCTAD's World Investment Report 2013, before turning to the topic of global value chains.
The overall news is not good. Global foreign direct investment (FDI) in 2012 contracted by 18 per cent, to $1.35 trillion. This was despite hopes that a recovery was on track. Skittishness about the fragile economic environment globally as well as policy uncertainty in the face of this fragility led investors to stash their cash, rather than investing it. Major investors globally have about six trillion dollars worth of cash on their balance sheets. This is capital, I am sure you will agree with me, that we would rather see invested in productive capacity to help spur more economic activity, to help propel us out of economic sluggishness and thereby get more people back into jobs.
Our projections for investment flows remain sober for 2013. Levels may start to pick up speed again from 2014, but we also still have to face up to some significant risks. Structural weaknesses in the global financial system, the possible deterioration of the macroeconomic environment, and continued policy uncertainty in areas crucial to investor confidence might even lead to a further delay in FDI recovery.
There is another new development on the FDI front this year that is a positive trend. Developing countries in 2012 - for the first time ever - absorbed more FDI than developed countries. 52 per cent of total FDI inflows went to developing countries, outstripping the value of FDI to developed countries by $142 billion. Developed countries received 42 per cent of total flows, with transition economies in Central and Eastern Europe receiving the balance of 6%. In terms of outbound FDI, developing countries' outflows increased to $426 billion, or a record 31 per cent, of all outflows. Asian countries remained the largest source of FDI, accounting for 75 per cent of developing-country flows. Another positive development was the trebling of outflows from Africa during last year. In the global South, the BRICS countries continued to be the leading source of FDI. Flows from the five economies of Brazil, China, India, the Russian Federation and South Africa rose to $145 billion, or 10 per cent of world total outflows.
Ladies and Gentlemen,
Let me now turn to global value chains. As we explore trade and investment and ways to harness these economic activities to benefit more people, it is very useful to also understand the underlying dynamics of these activities and what drives them. The phenomenon of global value chains is one of the truly significant developments in global production in recent times.
To offer you a tangible example, let's imagine for a moment a much-desired gadget, the iPhone 5. This electronic device will have made more cross-border trips than most people make in a year before it is sold at the retail level. Its design will be committed to paper by Apple in the United States, but most of its actual physical inputs will be sourced from elsewhere: semiconductors may come from Germany, memory from Japan, the display panels and circuit boards from the Republic of Korea and Taiwan Province of China, and rare metals from countries in Africa and Asia. These sets are eventually assembled in China before Apple again takes control of distribution and sales. Where is the iPhone made? We can only reasonably attach a "Made in the World" label to this device. This is the phenomenon of global value chains in practice. It is, in essence, a seamless and truly borderless global production system, where enterprises in several countries join forces to deliver goods and services to customers in the most efficient way. The multiple origins of these products and services are one of the most striking manifestations of modern-day globalization.
Global trade and FDI have grown exponentially over the last decade. Total FDI flows have more than doubled in the ten years since 2002, while trade over the same period has expanded by more than 60 per cent. Many factors have contributed to this robust growth, but one of the predominant drivers has undoubtedly been the phenomenon of internationalized production networks. The actors in these value chains are typically transnational corporations (TNCs) that have cross-border trade of production inputs and outputs taking place within their networks of affiliates, contractual partners and arm's-length suppliers. And these firms command a great deal of power, as they apportion activities according to their ability to maximize profits.
The phenomenon of international production systems driven by TNCs engaging in efficiency-seeking FDI is not a new one. However since the year 2000, global trade and FDI - which are the two vehicles that enable GVCs to operate - have simply exploded, significantly outpacing global GDP growth. It is now calculated that some 60 per cent of the $20 trillion dollars worth of global trade consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption.
We are also witnessing an increase in the participation of developing countries in GVCs. The developing-country share of GVC trade has increased from a mere 20 per cent in 1990 to an impressive 40 per cent today. In many developing regions the phenomenon of the regional value chain, and indeed the strategic positioning of countries in terms of value chain participation, has developed robustly. By implication, this manifestation of an increasing interconnected world shows that the costs of trade and investment protectionism and the benefits of multilateral market opening could have wider and more complex consequences than they had in the past.
This brings me to the possible nexus between GVCs and development, and how global production networks can be tapped to advance developmental goals. One of the most compelling effects of GVCs is that they are "decentralizers" of value-added and employment. This means that jobs and secondary- and tertiary-sector activities are no longer concentrated in areas that are capable of carrying out the most complex tasks - notably in developed countries - but are spread around the world. And this, in turn, means GVCs can contribute to the "catch-up" of developing countries' GDP and income levels. In addition, foreign firms have a high inclination to reinvest earnings, which may lead to increased productive capacity and additional job creation. These are the essential contributions of GVCs to development at the global level.
Despite these evident upsides, the benefits from GVC participation are not always automatic. Nor is the integration into a GVC necessarily risk-free. The experiences of individual economies show heterogeneous results. In some instances the value-added contribution of GVCs can be relatively small, where the imported content of exports is high and where GVC participation is limited to lower-value parts of the chain.
With regard to employment gains, the prognosis is not always rosy either, as global buyers, driven by cost pressures, can shift between suppliers. This is sometimes called the "footlooseness" of TNCs. It means that GVC-dependent jobs can be insecure, and the place of work may compromise on decent working conditions and occupational health and safety standards in order to maximize competitiveness. But on the other hand, GVCs can also be conduits for international best practice in social and environmental standards, and drivers of strong governance systems. They are potentially also vehicles for transferring technology and skills, which can lead to a deepening of the participating country's productive base.
It is up to each and every country to decide whether to harness GVC participation for economic development. Whatever the case may be, countries need to weigh very carefully the pros and cons from GVC integration, and to calculate the costs and benefits of proactive strategies to link development policy with GVC participation, before making a decision.
It is important to take a holistic perspective and to treat GVC participation not as a phenomenon solely related to a single policy area, such as trade policy, or industrial or investment policy. Rather, GVC participation is one aspect of a country's overall development strategy. Such development strategies should take into consideration the entire spectrum of policy areas that may have a bearing on how GVCs impact on development.
Once a country opts to take the GVC integration path, policies will matter a great deal in order to steer developmental outcomes from this participation. Gaining access to GVCs, benefiting from such participation and reaping upgrading opportunities from GVCs will require a structured approach that includes:
- Embedding GVCs in development and industrial development strategies;
- Enabling GVC growth by creating and maintaining a conducive investment and trade environment, and also by providing infrastructure;
- Building productive capacities in local firms; and
- Actively seeking out and strengthening the synergies between GVC-related policy areas, such as - for instance - trade and investment policies.
Countries will also need bolstering strategies. Mitigating the risks that are involved in GVC participation, for instance, will require the establishment of strong environmental, social and governance frameworks.
Ladies and Gentlemen,
As I mentioned earlier, a profound change in the current international investment landscape is the rise of emerging economies as both recipients and sources of FDI, and the rise of China is particularly notable. Indeed, as one of the most important FDI destination and source countries, China is in a better position than ever before to benefit from and contribute to world development through investment.
In 2012, despite a moderate drop of 2%, FDI flows to China remained at a record level, reaching $121 billion, second only to the United States. And indeed, this year inflows have picked up speed again, rising by just under 5 per cent in the first half of the year. The growth of China's outward investment is even more impressive. In 2012, China's outbound FDI hit a record of $84 billion, and it has continued that momentum into 2013, reflecting growth of 29 per cent in the first half of the year, according to UNCTAD's latest rankings. China is now the third-largest FDI source country in the world, after the United States and Japan. And according to a recent UNCTAD survey on international companies, China is still the most attractive investment destination in the medium term, followed by the United States.
In the three decades since the Chinese economy was opened up to the world, China has continuously enhanced the breadth and depth of participation in GVCs through increased FDI inflows and foreign trade. Many Chinese enterprises have become important links in the GVCs of numerous industries, and China has immensely enhanced its productive capacity and established itself as the world's manufacturing hub. Meanwhile, by adopting advanced technology and skills, China has been able to gradually enter higher value-added GVC activities, and so has created viable conditions for upgrading the country's industries.
But even more can be achieved. If China's economic growth and upgrading was mainly driven by inward FDI and trade in the last three decades since opening its market, outward FDI can play a bigger role in China's further opening and development.
In order to participate more effectively in GVCs, China should, on the one hand, attract more FDI into high-end manufacturing and knowledge-based services, and on the other hand, encourage Chinese companies, particularly export-oriented manufacturing companies, to extend their manufacturing activities overseas and establish their own international production networks and value chains. This will allow Chinese companies to most effectively allocate and utilize resources globally and to improve their competitiveness in GVCs. By relocating part of their production activities closer to the origin of raw materials or to the end market, Chinese companies will also be able to create more value for local communities while at the same time reducing pressure on energy and the environment at home, thereby making these businesses more sustainable.
Ladies and Gentlemen,
With the constant fragmentation and slicing up of the value chain in different industries, developing countries, regardless of their economic size or level of development, may all find suitable industry segments and activities where they possess a comparative advantage.
However, GVCs driven by TNCs also exert competitive pressure on developing countries. This entails appropriate policies at national level and coordinated international efforts, by both host and home countries, to ensure that all participating countries see development benefits from GVCs.
As part of our efforts to meet these challenges, UNCTAD's World Investment Report 2013, which serves as a background document for the Forum, offers a rich assessment of key issues related to GVCs, as well as practical advice to policymakers working in this area. I very much hope that our discussion today will help us make GVCs work better for sustainable development.