Trade and Development Board, 60th Session - Item 9: Investment for Sustainable Development: Global Value Chains and Development
18 September 2013
Excellencies,
Distinguished delegates,
Ladies and Gentlemen,
It is a privilege for me to welcome you to this session of the Trade and Development Board, which is devoted to the topic of investment for sustainable development, one of UNCTAD's core areas of expertise and an increasingly important topic on the global development agenda. Specifically, this session will examine the role of global value chains - GVCs - for sustainable development, taking the World Investment Report 2013 (WIR) as its substantive reference.
Distinguished delegates,
The importance of investment policy, at both the national international levels, will be borne out by our discussions today on GVCs. The production and export decisions of TNCs, including through global value chains, represent the interface between global trade and international investment. As such, policies in one area can have significant economic impacts in the other area, either promoting trade and investment or restricting it. This is why it is so critical to monitor and analyze not only trade policies, but investment policies and accompanying government and firm actions too. With this information we are better able to see what the prevailing trajectory of global policy is and what remedies and responses are needed.
The WIR is the global reference point for investment trends and investment policy issues, and as such provides the kind of essential monitoring and analysis of data and policy that I have just referred to. Before beginning our discussions on GVCs, allow me, by way of an introduction to this morning's session, to set global investment and the analysis of GVCs into some kind of context. My remarks this morning are based on this year's WIR, which described a global investment landscape balanced between caution and optimism. I would like to present to you some of this analysis in relation to international investment trends and policies. Let me begin, therefore, by highlighting why we feel cautious about the recovery in international investment, looking specifically at foreign direct investment (FDI) trends.
The report's headline in June was that global FDI had fallen by 18 per cent to $1.35 trillion in 2012. This sharp decline was in stark contrast to other key economic indicators such as GDP, international trade and employment, which all registered positive growth at the global level. Economic fragility and policy uncertainty in a number of major economies gave rise to caution among investors. Furthermore, many transnational corporations (TNCs) reorganised their investments overseas, including through restructuring of assets, divestment and relocation. The road to FDI recovery is thus proving bumpy and may take longer than expected.
We forecast that FDI flows in 2013 are expected to remain close to the 2012 level, with an upper range of $1.45 trillion - a level comparable to the pre-crisis average of 2005-2007. However, as macroeconomic conditions improve and investors regain confidence in the medium term, TNCs may convert their record levels of cash holdings into new investments. FDI flows may then reach the level of $1.6 trillion in 2014 and $1.8 trillion in 2015.
Nevertheless, I stress that we still need to be cautious about prematurely trumpeting a full recovery in global FDI, as significant risks to this growth scenario remain. Factors such as structural weaknesses in the global financial system, the possible deterioration of the macroeconomic environment, and significant policy uncertainty in areas crucial for investor confidence might lead to a further decline in FDI flows.
I now turn to look at some reasons for optimism in current FDI trends. A notable headline in this year's WIR was the record share of FDI flows to developing countries, which proved to be much more resilient than flows to developed countries. They recorded their second highest level - even though they declined slightly (by 4 per cent) to $703 billion in 2012 - but accounted for a record 52 per cent of global FDI inflows, exceeding flows to developed economies for the first time ever, by $142 billion. The global rankings of the largest recipients of FDI also reflect changing patterns of investment flows: 9 of the 20 largest recipients were developing countries, including 4 of the top 5. Together with 3 transition economies, developing and transition countries now account for the majority of the largest recipients of FDI.
A similar story of changing investment patterns can also be seen with global FDI outflows. Developing economies' outflows reached $426 billion, a record 31 per cent of the world total. Moreover, two developing countries now rank among the five largest foreign investors in the world, and for the first time ever, China was the world's third largest investor, after the United States and Japan. Conversely, FDI outflows from developed countries dropped to a level close to the trough of 2009, reflecting the large falls this group of countries experienced in inward FDI last year. The uncertain economic outlook led TNCs in developed countries to maintain their wait-and-see approach towards new investments or to divest foreign assets, rather than undertake major international expansion.
Distinguished delegates,
Having described the main trends in FDI flows, I now turn to recent policy developments related to FDI. I will first present the developments in national investment policy making and then move to international investment policies.
Looking at national investment policymaking, we see that most governments remain keen to attract and facilitate foreign investment and specifically target those investments that generate jobs, deliver concrete contributions to alleviate poverty, or help tackle environmental challenges. At the same time, we see that numerous countries reinforce their regulatory environment for foreign investment, make more use of industrial policies in strategic sectors, tighten screening and monitoring procedures, and closely scrutinize cross-border Mergers and Acquisitions.
In 2012, 75 per cent of policy measures relating to foreign investment referred to investment liberalization, facilitation and promotion. At the same time, the share of FDI-related regulations and restrictions rose to 25 percent, confirming a long-term trend after a temporary reverse in 2011.
As countries make more use of investment regulations and restrictions, the risk grows that some of these measures could be taken for protectionist purposes. UNCTAD suggests that efforts should be undertaken at the international level to establish criteria for identifying protectionist measures against foreign investment.
Looking at international investment agreements (IIAs,) we can see that the number of newly signed agreements continues to decline, including bilateral investment treaties (BITs) and "other IIAs", such as integration or cooperation agreements with an investment dimension. As a result, by the end of 2012, the IIA regime consisted of almost 3,200 agreements, which included more than 2,800 BITs and approximately 340 "other IIAs".
By the end of 2013, almost half of all BITs will be at the stage where - according to the terms of the treaties themselves - they can be terminated or renegotiated at any time. This creates a window of opportunity to address inconsistencies and overlaps in the multi-faceted and multi-layered IIA regime, and to strengthen its development dimension. In taking such actions, countries need to weigh the pros and cons in the context of their investment climate and their overall development strategies.
Turning to international investment arbitration, a rise in the number of cases in 2012 continued the increasing trend. In 2012, 58 new known investor-State dispute settlement (ISDS) cases were initiated. This constitutes the highest number of known ISDS claims ever filed in one year and confirms foreign investors' increased inclination to resort to investor-State arbitration. These 58 new cases bring the total number of known cases to 514 and the total number of countries that have responded to one or more ISDS cases to 95.
In light of the increasing number of ISDS cases and persistent concerns about the system's deficiencies, the debate about the pros and cons of the ISDS mechanism has gained momentum. This is especially the case in those countries and regions where ISDS is on the agenda of IIA negotiations.
Distinguished delegates,
Against a background of falling global FDI flows and a rising number of investment policy hurdles, it is therefore timely that we should focus our attention on how countries can increase their participation in global value chains and benefit from patterns of international production. Let me end my remarks here and hand over to my colleague, James Zhan, Director of the Investment and Enterprise Division, who will elaborate more on GVCs and policy options available to countries, and provide some further questions for the panel and the room to consider.
Thank you.
