WORLD´S LARGEST TNCs OPT FOR EXPANSIONARY STRATEGIES

The world´s largest transnational corporations are optimistic about the short- and medium-term prospects (2004-2005 and 2006-2007, respectively) for foreign direct investment, with three quarters of respondents to UNCTAD´s latest survey expecting global flows to increase in both periods (figure 1).

The survey polled 335 top TNCs from developed countries, developing economies and Central and Eastern Europe, some 24% of which responded. The respondent companies together control total assets of $1.9 trillion, of which 38% ($725 billion) is foreign assets. Among the likely trends in TNC strategies to emerge:

• Choice of FDI locations. China is the most frequently mentioned country among the most attractive locations for FDI identified by the respondents (figure 2). Brazil ranks second, with some 60% of respondents expecting it to be an attractive location for FDI in the short term, followed by Poland and South Africa, mentioned by about half the respondents. No developed country is among the top five.
• Relocation of corporate functions. Production is the top corporate function most likely to be relocated abroad, followed closely by distribution and sales and logistics and support services (figure 3).
• Modes of investment. Globally, three modes of investment -- mergers and acquisitions (M&As), greenfield investment and other modes (such as licensing or strategic alliances) -- will be equally used by TNCs in their future expansion (figure 4). However, TNC strategies will vary from region to region.

Asia and the Pacific. TNCs are particularly optimistic about the prospects for this region, with almost three fifths of respondents expecting FDI to increase in the short term. China is considered the top magnet for FDI flows, far ahead of other countries. India ranks second, although it has yet to become a major FDI recipient in the region; it is followed by Thailand (table). In terms of mode of entry, the companies that plan to establish in Asia tend to privilege greenfield investments.

Latin America and the Caribbean. TNCs´ expectations for this region are mixed but tilt slightly towards greater optimism (43% expect no change and 46% expect an increase in short-term flows). Brazil, Mexico, Argentina and Chile, the traditional FDI powerhouses, will be the preferred investment locations for TNCs, with Venezuela in fifth place. Greenfield project will be the preferred mode of investment for TNCs in the region.

Africa. Most of the TNCs (67%) expect FDI flows to remain steady in Africa. This suggests that the continent is not yet on the strategic map of the majority of the world´s largest TNCs, or that companies prefer a risk-reducing non-equity engagement. South Africa and Nigeria are the only sub-Saharan countries among the top five destinations for the continent as a whole; the other three are in North Africa. In this region, many foreign TNCs prefer other investment modes (41%), as they favour engaging in non-equity arrangements there.

Central and Eastern Europe. For this region, 70% of the respondent TNCs expect FDI to increase during 2004-2005. This is the highest score. At the regional level, Poland ranks in top place among the most attractive countries for FDI, ahead of Russia, partly due to Poland´s accession to the EU. The high rankings of Hungary and the Czech Republic can also be attributed in part to their EU accession. M&As and greenfield investments (nearly 35%) are expected to be equally significant.

Developed countries. TNCs expect FDI flows to remain the same in the developed-country region (50%), but they are more pessimistic for Western Europe than for North America or Japan. Only one third of respondents expected brighter prospects for FDI in Western Europe, while 20% predicted deterioration. The US is considered the most attractive country for FDI flows, followed by the UK. Canada, Germany and Japan are also ranked among the top five developed-country locations. Cross-border M&A deals are expected to remain the dominant form of international expansion in the region, according to 57% of respondents.

"TNCs are bullish about future FDI prospects, but they are selective as to the precise location of their future investments. This means that for most developing countries, in particular smaller ones, the challenge to attract FDI remains, even given the likelihood of an FDI rebound", says Karl P. Sauvant, Director of UNCTAD´s Division on Investment, Technology and Enterprise Development.

The results of this survey are in tune with the findings of two other surveys conducted earlier this year: one of international investment location experts, conducted jointly by UNCTAD and Corporate Location magazine (see UNCTAD/PRESS/PR/2004/005 of 14 April), and one of investment promotion agencies (see UNCTAD/PRESS/PR/2004/007 of 4 May).