World Investment Report 2014
24 June 2014
Ladies and Gentlemen,
Welcome to the launch of the 2014 edition of the World Investment Report. The Report, as always, examines recent trends in foreign direct investment and investment policies. This year's special topic focuses on Investment in the Sustainable Development Goals, or SDGs, which are currently being formulated by United Nations Member States in consultation with a wide range of stakeholders.
Let me start with the trends in FDI.
Global FDI returned to growth in 2013, with inflows rising 9 per cent, to $1.45 trillion. UNCTAD projects that FDI flows could rise to $1.6 trillion in 2014, and gradually to $1.8 trillion in 2016, with relatively larger increases in developed countries. Fragility in some emerging markets and risks related to policy uncertainty and regional instability may negatively affect the expected upturn.
Developing economies maintain their lead in 2013. FDI flows to developing economies reached a new high of $778 billion, or 54 per cent of the total, while those to developed countries increased by 9 per cent to $566 billion, leaving them at 39 per cent of global flows. The balance of $108 billion went to transition economies. Developing and transition economies now constitute half of the top 20 investment destinations ranked by FDI inflows.
FDI outflows from developing countries also reached a record level. Transnational corporations (TNCs) from developing economies are increasingly acquiring foreign affiliates from developed countries located in their regions. Developing and transition economies together invested $553 billion, or 39 per cent of global FDI outflows, compared with only 12 per cent at the beginning of the 2000s.
This year's Report puts the spotlight on mega-regional groupings, which have the potential to shape global FDI. The three groups of countries negotiating these mega-regionals -- the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP), and the Regional Comprehensive Economic Partnership (RCEP) -- each account for a quarter or more of global FDI flows.
A positive development noted in the Report is that the poorest countries are less and less dependent on extractive industry investment. Manufacturing and services now make up about 90 per cent of the value of announced greenfield investment projects both in Africa and in the least developed countries (LDCs).
Now let us look at FDI trends in Africa.
FDI inflows to Africa rose by 4 per cent to $57 billion, driven by international and regional market-seeking and infrastructure investments. Expectations for sustained growth of an emerging middle class attracted FDI in consumer-oriented industries, including food, IT, tourism, finance and retail.
The overall increase was driven by the Eastern and Southern African subregions. In East Africa, FDI increased by 15 per cent to $6.2 billion as a result of rising flows to Ethiopia and Kenya. Kenya is becoming a favoured business hub, not only for oil and gas exploration but also for manufacturing and transport.
Intra-African investments are increasing, led by South African, Kenyan, and Nigerian TNCs. Between 2009 and 2013, the share of announced cross-border greenfield investment projects originating from within Africa increased to 18 per cent, from less than 10 per cent in the preceding period. For many smaller, often landlocked or non-oil-exporting countries in Africa, intraregional FDI is a significant source of foreign capital.
Increasing intra-African FDI is in line with the drive for deeper regional integration. However, for most subregional groupings, FDI from within the grouping represents only a small share of intra-African flows. Only in two regional economic cooperation initiatives does intra-group FDI make up a significant part of intra-African investments. These are the East African Community, where it accounts for about half, and the Southern African Development Community, where it is more than 90 per cent. This is largely due to investments in neighbouring countries from the dominant outward investing economies in these regional groupings - South Africa and Kenya. Therefore, regional economic cooperation initiatives have so far been less effective for the promotion of intraregional investment than a wider African economic cooperation initiative could be.
Intra-African projects are concentrated in manufacturing and services. Intraregional investment could contribute to the build-up of regional value chains. However, so far, African global value chain participation is still mostly limited to downstream incorporation of raw materials in the exports of developed countries.
Moving on to investment policy trends, the Report notes that most national investment policy measures remain geared towards investment promotion and liberalization. At the same time, the share of regulatory or restrictive investment policies increased, reaching 27 per cent in 2013.
In a special analysis, the Report finds that investment incentive measures mostly focus on economic performance objectives, and less on sustainable development. Investment incentives schemes could be more closely aligned with the objectives that we foresee will become the Sustainable Development Goals.
In Africa in recent years, countries have increased their efforts to enhance the climate for investment in their respective economies. For instance, out of the 18 investment policy measures introduced between January 2012 and May 2014 that were reported in UNCTAD's database, only 4 were restrictive in nature. Out of the 13 measures introduced in 2013, 6 aimed at liberalizing entry on investment while 5 focused on promoting it.
Looking at international investment rule making, the Report describes diverging trends: on the one hand, disengagement from the system; on the other, intensifying and up-scaling of negotiations. Negotiations of "mega-regional agreements" are a case in point. Once concluded, these may have systemic implications for existing regime of international investment agreements. The Report also notes the continuing use of investment arbitration: with 56 new cases, 2013 saw the second largest number of known investor-State dispute settlement cases filed in a single year, bringing the total number of known cases to 568.
Widespread concerns about the functioning and the impact of the international investment agreement regime are resulting in calls for reform. Four options are becoming apparent: first, maintaining the status quo, secondly, disengaging from the system, thirdly, introducing selective adjustments, and finally, undertaking systematic reform. UNCTAD believes that a multilateral approach could effectively contribute to a holistic, coordinated and sustainability-oriented reform of the existing regime of international investment agreements.
The absence of a legally binding multilateral investment agreement has led African countries to engage actively in the conclusion of international investment agreements. As of end 2013, 793 bilateral investment treaties had been concluded by African countries, representing 27 per cent of the total number of such treaties worldwide. This is in addition to over 50 other economic agreements with investment provisions and various regional agreements with investment components.
As a result, a highly complex system of bilateral investment treaties and regional agreements with investment provisions in Africa has emerged. As new treaties are concluded and "old" agreements renegotiated, this network continues to grow in complexity, both with regard to its scope and content.
African countries often lack the necessary technical capacity to negotiate agreements that appropriately reflect their interests and needs. There is also the risk that protecting investment comes at the expense of other legitimate public interests. There is a need for African countries to ensure policy coherence between their various international investment commitments, including those at the national level.
The rise of regionalism in international investment relations may create a new momentum for African countries to engage in regional dialogue on investment policies for development, with the aim of finding consensus on how to best ensure coherence between regional and bilateral investment agreements.
Regional agreements also provide an opportunity to phase out older bilateral investment treaties that no longer reflect the sustainable development priorities of African countries. In these processes, African countries could consider various policy options provided in UNCTAD's Investment Policy Framework for Sustainable Development. This could assist countries in ensuring coherence between international commitments and the national legal frameworks.
Now to the special topic of this year's WIR: Investing in the SDGs.
The Sustainable Development Goals are intended to galvanize action worldwide through time bound and measurable targets for the 2015 to 2030 period. These targets are expected to encompass a broad set of challenges for poverty reduction, food security, human health and education, climate change mitigation, and a range of other objectives across the economic, social and environmental dimensions.
The SDGs will have very significant resource implications across the developed and developing world. Estimates for investment needs in developing countries alone range from $3.3 trillion to $4.5 trillion per year.
At current levels of investment in "sustainable development"-related sectors, developing countries face an annual gap of $2.5 trillion. In developing countries, especially in the least developing countries and other vulnerable economies, public finances are central to investment in sustainability. However, they cannot meet all resource demands, which the Sustainable Development Goals will imply. The role of private sector investment therefore will be indispensable.
Today, private sector investment in sustainability is relatively low. Only a fraction of the worldwide invested assets of banks, pension funds, insurers, foundations and endowments, as well as transnational corporations, is in sectors relevant to the SDGs. Private participation is even lower in developing countries, particularly the poorest ones, such as the least developed countries.
UNCTAD believes that, in the least developed countries, a doubling of the growth rate of private investment from 8 per cent per annum to 15 per cent would be a desirable target. About twice the current growth rate of private investment is needed to provide a meaningful complementary financing role in support of public investment and official development assistance.
Increasing involvement of private investors in sustainability-related sectors will pose inevitable policy dilemmas, since many of these sectors are sensitive or of a public service nature. To overcome this UNCTAD proposes a set of principles to help governments manage the trade-offs they may face in attracting private investment in these sectors. These principles include:
Balancing a business-friendly investment climate with protecting the public interest through regulation;
Balancing sufficiently attractive returns to private investors with accessibility and affordability of services for all; and
Balancing the push for more private investment with the parallel push for more public investment to ensure complementarity.
The Report also develops a concrete Action Plan for Private Investment in the SDGs, presenting a range of policy options that respond to challenges in mobilizing funds for investment in sustainbility, channeling such funds to the relevant sectors, and maximizing positive impacts while managing risks.
UNCTAD specifically suggests that a focused set of actions can help shape a Big Push for private investment in sustainable development.
We advocate setting-up SDG-related investment development agencies in order to develop, market, and facilitate pipelines of bankable projects in SDG sectors.
We also need to restructure investment incentive schemes to facilitate sustainable development projects. This means moving from "location-based" incentives towards one are more "SDG-based" focused.
Regional and South-South initiatives should also support the promotion of SDG investment, especially through cross-border infrastructure development and regional clusters, e.g. through so-called "green zones".
New forms of partnership are also needed, such as between outward investment agencies in home countries and investment promotion agencies (IPAs) in host countries. The Report proposes a multi-agency technical assistance consortium to support LDCs, for example.
Innovative financing mechanisms can also reorient the financial markets towards sustainability. These should include innovative tradable financial instruments and dedicated SDG funds, seed funding mechanisms, and new "go-to-market" channels for SDG projects. The reorientation of financial markets also requires integrated reporting.
Finally we need to work to change the business mindset and develop SDG investment expertise. Our report proposes a curriculum for business schools to engender greater awareness of investment opportunities in poor countries. At the same time, such a curriculum would also provide students the skills and tools needed to successfully operate in developing-country environments.
Our Action Plan for Private Investment in the SDGs, which is spelled out in more detail in the Report, is meant to serve as a point of reference for policymakers at national and international levels in their discussions on ways and means to implement the SDGs. It constitutes a basis for further stakeholder engagement. UNCTAD aims to provide a platform for further such engagement through its biennial World Investment Forum, and online through the Investment Policy Hub.
I look forward to seeing you at the World Investment Forum in October, with its theme "Investing in Sustainable Development".