1 economic aspects of foreign direct investment virtual institute-st. petersburg state university...
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Economic aspects of foreign direct investment
Virtual Institute-St. Petersburg State University
Study Tour
Geneva, 18 April 2007
Michael LimUNCTAD-DITE
Source: UNCTAD 2
Outline
I. Basic concepts II. Determinants and Impacts of FDI III. Recent global and regional FDI
trends IV. WIR 2006: FDI from developing
economies
3
I. Basic concepts
Source: UNCTAD 4
What is foreign direct investment?
Balance-of-payments concept Distinguish between portfolio and direct investment
Direct investment: investment of a resident in a foreign company resulting in a lasting and significant management interest (more than 10 per cent of the equity or voting shares).
Portfolio investment: investment of a resident in a foreign company without a lasting and significant management interest (less than 10 per cent of the equity or voting shares).
FDI flows comprise three different components: Equity capital Reinvested earnings Intra-company loans
Source: UNCTAD 5
What is a transnational corporation (TNC)?
A TNC consists of:A parent company (based in a ‘home
country’); andOne or more foreign affiliates (in ‘host
countries’) Foreign affiliates may refer to:
Subsidiaries (majority-owned)Associate (ownership share is>10% but
<50%)Branch (wholly or jointly unincorporated
enterprise)
Source: UNCTAD 6
Modes of FDI
Greenfield investment Acquisition Merger Joint venture Expansion investment
Source: UNCTAD 7
Are TNCs and FDI important to the world economy?
Yes because:
1. TNCs together account for a significant part of international economic activity (eg international trade, generation of technology)2. FDI is the largest single source of private finance for developing countries
3. Their role in the world economy is likely to grow further.
Source: UNCTAD 8
FDI constitutes the largest component of
resource flows to developing countries
Billions of dollars
Total Resource f low s
FDI inflow s
Portfolio f low sCommercial banks loans
Official f low s
-50
0
50
100
150
200
250
300
350
400
450
500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: UNCTAD 9
The role of TNCs is increasing
> 60,000 TNCs > 800,000 foreign affiliates TNCs account for some 2/3 of world
exports 1/3 of world trade is intra-firm TNCs dominate world industrial R&D FDI is the largest source of external
finance for developing countries
Source: UNCTAD 10
Some TNCs are very bigValue added or GDP, 2000, USD billions
41
42
44
46
47
48
51
51
53
53
56
62
63
71
0 10 20 30 40 50 60 70 80
Nigeria
DaimlerChrysler
Ford Motor
Hungary
Bangladesh
United Arab Emirates
New Zealand
Czech Republic
Peru
Algeria
General Motors
Pakistan
ExxonMobil
Chile
11
II. Determinants and impacts of FDI
Source: UNCTAD 12
A typology of FDI is useful for analysis
FDI is diverse, so a typology is useful to create categories of different types of FDI
A typology is useful (necessary in fact) as an analytical aid
Source: UNCTAD 13
A Typology of types of FDI
Natural resource-seekingOil and gas extraction, mining, forestry, fisheries
Market-seeking (horizontal FDI)Access a domestic or regional (e.g. EU, NAFTA,
ASEAN)market
Efficiency-seeking (vertical FDI)Specialize and divide production in line with the comparative
advantages of different locations; export-oriented FDI
Strategic-asset seeking (primarily through M&As)
Access specific (created) assets such as technology, brand name, specialized skills
Source: UNCTAD 14
Economic determinants of FDI
Type of FDI Key determinants Natural resource-seeking FDI
Abundance of natural resources Price movements
Market-seeking FDI (national or regional)
Market size and purchasing power Market growth Tradability of product/service Need for local adaptation Structure and openness of markets
Efficiency-seeking, export-oriented FDI
Quality and cost of human resources Physical infrastructure (electricity, transport, ports, roads, telecoms, etc.) Technical infrastructure Trade costs Quality of suppliers, clusters, etc. Economic and political stability
Strategic asset-seeking FDI
Presence of strategic assets
Source: UNCTAD 15
Two analytical perspectives on FDI impact on host country: financing versus micro and macro (and broader) impacts Financing (BoP): FDI provides valuable
external financing (Simplistic financing version: more
FDI = more financing; therefore more FDI is good)
versus Micro and macro impacts: FDI may have
important impacts (positive and negative) on the host economy – at both the microeconomic and macroeconomic level (A broad analysis could include social, environmental, cultural and political in addition to economic impacts)
Source: UNCTAD 16
Potential benefits from inward FDI
o Provide external financing
o Transfer of hard technology
o Transfer of “soft technology” (knowledge, management skills, organizational methods – spillovers)
o Promote exports (efficiency-seeking, export platform FDI)
o Employment creation (M&As vs. greenfield FDI)
o Promote local skills development through training
o Improve quality of local services
o Introduce new goods and services
o Competitive spur to local economy (spillover – but may crowd out!)
o Contribute to local enterprise development (via spillovers and directly)
o Provide access to international markets
Source: UNCTAD 17
Potential negative impacts and concerns from inward FDI
Balance of Payments problems (potentially large future remittances, possibly high import content of FDI projects)
Crowding out local enterprises (via unfair competition vs. via higher efficiency and better performance)
Lack of local linkages (enclave activities using few local inputs) Low level of local processing (and low local value added) Environmental degradation (from certain activities (e.g. mining)) Limited transfer of technology (an important aspect of linkages) Employment destruction (M&As) Footloose operations (e.g. garments) Excessive use of incentives/race to the top (competition for FDI) Anticompetitive practices (abuse of dominant position) Transfer pricing (low tax contribution locally) Socio-cultural effects
Source: UNCTAD 18
Some key points to remember on TNCs and FDI
The impact of FDI on host countries is not homogenous, but rather depends, inter alia, upon (i) country-specific conditions (notably the level of income, economic development, country size, domestic firms’ development in the industry in question, technological development and human capital and infrastructure development), (ii) the specific TNC investing, their motives and the specific industry in question and (iii) host country policies.
Benefits from FDI are generally not automatic and may depend upon the active use of government policies to promote them.
Source: UNCTAD 19
Some key points to remember on TNCs and FDI (continued)
TNCs are a diverse group and include huge global firms (e.g. General Motors, Citigroup, Exxon-Mobil) as well as small firms with few foreign affiliates.
Government’s should attempt to integrate their policies on FDI into a broader strategy of economic development (comprised of a set of consistent policies) taking into account their specific conditions (advantages and disadvantages) and priorities.
Given the extreme diversity among countries and TNCs, policy recommendations on FDI should in general be country-specific. (But some observations may hold for many countries.)
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III. Recent global and regional FDI trends
Source: UNCTAD WORLD INVESTMENT REPORT 2006
21
FDI inflows grew in 2005 for the second consecutive year …and it was a worldwide phenomenon
World FDI inflows: $916 billions (+ 29%) Developed countries: $542 billions (+ 37%) Developing economies: $334 billions (+ 22%)
– Africa $31b (+ 78%)– LAC $104b (+ 3.1%)– West Asia $35b (+ 85%)– South, East and SE Asia $165b (+ 20%)
SE Europe and CIS $40b (+ 0.3%)
Source: UNCTAD 22
… but remained below the 2000 peak
(Billions of dollars)
0
200
400
600
800
1 000
1 200
1 400
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
05
World total
Developing economies
Developed economies
South-East Europe and CIS
Source: UNCTAD WORLD INVESTMENT REPORT 2006
23
FDI flows by region, 2004-2005
0
50
100
150
200
250
300
Developedcountries
Developingcountries
Africa Latin Americaand the
Caribbean
South, East andSouth-east Asia
and Oceania
West Asia South-EastEurope and CIS
Memorandum: LDCs
2004
2005
Developing countries
396 542 334
(Billions of dollars)
Source: UNCTAD WORLD INVESTMENT REPORT 2006
24
Top 10 recipients of FDI inflows
-20 0 20 40 60 80 100
Spain
Belgium
Germany
Canada
Hong Kong, China
Netherlands
France
China
United States
United Kingdom
2005
2004
165
Source: UNCTAD 25
Largest 10 sources of FDI outflows
… but developing economies are becoming emerging sources … Hong Kong (China) 10th and China 17th
-20 0 20 40 60 80 100
Hong Kong, China
Canada
Spain
Italy
Switzerland
Germany
Japan
United Kingdom
France
Netherlands
2005
2004
119
116
101
Source: UNCTAD WORLD INVESTMENT REPORT 2006
26
Sectoral analysis: the revival of FDI in natural resources
According to cross-border
M&As: The primary sector gained
in importance Services still remain
dominent Main target industries are:
– Petroleum (oil and gas): share of 14% of all industries
– Telecommunications: 14%– Finance: 13%
a) Sales
b) Purchases
2004
63%
5%
32%
Primary Manufacturing Tertiary
2005
56% 28%
16%
Primary Manufacturing Tertiary
2004
67%
28%
5%
Primary Manufacturing Tertiary
2005
21%
64%
15%
Primary Manufacturing Tertiary
2004
63%
5%
32%
Primary Manufacturing Services
2005
56% 28%
16%
Primary Manufacturing Services
2004
67%
28%
5%
Primary Manufacturing Services
2005
21%
64%
15%
Primary Manufacturing Services
Source: UNCTAD WORLD INVESTMENT REPORT 2006
27
A new wave of cross-border M&As:close to the previous boom
… and an increasing number of mega deals (75 in 2004; 141 in 2005).
Value ($ billion) 835 297 381 716
Number of deals 6 974 4 562 5 113 6 134
20051999-2001 averageCross-border M&As 2003 2004
Caracteristics of cross-border M&AsCurrent wave
Financial market boom Economic growthPressures to merge Strategic choicesIT dotcom boom New investors (private-equity firms)Sector No. 1: transport Sector No. 1: natural resources storage
communications
Previous wave
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Regional trends: South-East Europe and the Commonwealth of
Independent States (CIS)
Source: UNCTAD 29
FDI flows to South-East Europe and CIS in 2005:steady after the large increase in the previous year
0
5
10
15
20
25
30
35
40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$ B
illi
on
0
3
6
9
12
15
18
21
Per
cen
t
South-East Europe CIS FDI inflows as a percentage of gross fixed capital formation
Source: UNCTAD 30
FDI inflows, top five economies, 2004, 2005a
(Billions of dollars)
Ranked on the basis of the magnitude of 2005 FDI flows.
CIS: two thirds of inflows; South-East Europe: one-third.
Three countries (Russian Federation, Ukraine and Romania) accounted for three quarters of the regional total in 2005.
In 2005, inflows rose in CIS and declined in South-East Europe
Inflows rose in 8 countries (most notably in Ukraine).
Inflows fell in 11 countries, including Azerbaijan, Kazakhstan and the Russian Federation (the latter marginally).
Inflows and their growth uneven by subregion and country
4.1
3.4
6.5
1.7
1.7
2.2
6.4
7.8
14.6
15.4
0 2 4 6 8 10 12 14 16
Kazakhstan
Bulgaria
Romania
Ukraine
RussianFederation
2005
2004
Source: UNCTAD 31
FDI outflows from South-East Europe and CIS in 2005:fourth year of growth
0
2
4
6
8
10
12
14
16
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$ B
illi
on
0
1
2
3
4
5
6
7
8
9
10
Per
cen
t
Other CIS and South-East Europe Russian Federation FDI outflows as a percentage of gross fixed capital formation
32
FDI from Developing and Transition Economies:
Implications for Development
IV. WIR 2006 Part II:
Source: UNCTAD 33
FDI from developing and transition economies has increased significantly
An acceleration in the 1990s
FDI outflows: $133 billion in 2005 (17% of world total)
Outward FDI stock: $1.4 trillion in 2005 (13% of world total)
Their share in global cross-border M&A purchases rose from 4% in 1987 to 13% in 2005
South-North deals: rapid rise in past two years
Source: UNCTAD 34
- 10 000
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
90 000
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Offshore financial centres
Hong Kong (China)Other developing and transition economies
FDI from developing and transition economies, 1980-2005(Millions of dollars)
Source: UNCTAD WORLD INVESTMENT REPORT 2006
35
The largest investors
Stock of OFDI from developing and transition economies, 2005
(Billions of dollars)
Economy 2005Hong Kong (China) 470British Virgin Islands 123Russian Fed. 120Singapore 111Taiwan POC 97Brazil 72China 46Malaysia 44South Africa 39Korea, Rep. of 36
All developing and transition economies 1 400
Source: UNCTAD WORLD INVESTMENT REPORT 2006
36
Main features of FDI from Developing and Transition Economies
Concentrated (top 10 sources = 83% of FDI stock) but a number of countries are joining in
Asia has grown in importance
Services sector dominates
Developing countries invest primarily in other developing countries (the bulk of their flows) (i.e. large South-South FDI flows)
Larger developing economies along with Russia dominate the numbers, but some smaller, low-income economies (including some LDCs) have OFDI - however, on a much smaller scale
Source: UNCTAD 37
Outward FDI stock, by source region, developing and transition economies, 1980-2005
874 305 755 520 614 605
0
50 000
100 000
150 000
200 000
250 000
300 000
350 000
1980 1985 1990 1995 2000 2004 2005
Africa Latin America and the Caribbean
Asia and Oceania South-East Europe and the CIS
Millions of dollars
Source: UNCTAD 38
Mapping South-South FDI: the role of Asia
South-South FDI flows, excl. offshore financial centres, 2002-2004, millions of dollars
Source: UNCTAD WORLD INVESTMENT REPORT 2006
39
Main drivers and motives of developing and transition economy TNCs
Main driver today: Globalization process Major push factors (home country drivers):
– Limited size of home markets (especially for small economies)
– Rising costs of production in the home economy (rising wages, exchange rate changes)
– Rising competition in the home and foreign markets (notably via globalization), which intensifies the impact of the above two drivers.
Main pull factors (host country drivers):– Markets abroad, natural resources, labour
– Opportunities arising from liberalization