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TRANSCRIPT
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Global oreign direct investment (FDI) ows rose moderately to $1.24 trillion in 2010, but were still15 per cent below their pre-crisis average. This is in contrast to global industrial output and trade,which were back to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.41.6 trillion, approaching its 2007 peak in 2013. This positivescenario holds, barring any unexpected global economic shocks that may arise rom a number orisk actors still in play.
For the frst time, developing and transition economies together attracted more than hal o globalFDI ows. Outward FDI rom those economies also reached record highs, with most o theirinvestment directed towards other countries in the South. Furthermore, interregional FDI betweendeveloping countries and transition economies has been growing rapidly. In contrast, FDI inowsto developed countries continued to decline.
Some o the poorest regions continued to see declines in FDI ows. Flows to Arica, least developedcountries, landlocked developing countries and small island developing States all ell, as did owsto South Asia. At the same time, major emerging regions, such as East and South-East Asia andLatin America, experienced strong growth in FDI inows.
International production is expanding, with oreign sales, employment and assets o transnationalcorporations (TNCs) all increasing. TNCs production worldwide generated value added oapproximately $16 trillion in 2010 about a quarter o global GDP. Foreign afliates o TNCsaccounted or more than one-tenth o global GDP and one-third o world exports.
State-owned TNCs are an important emerging source o FDI. There are some 650 State-ownedTNCs, with 8,500 oreign afliates across the globe. While they represent less than 1 per cent oTNCs worldwide, their outward investment accounted or 11 per cent o global FDI in 2010. The
ownership and governance o State-owned TNCs have raised concerns in some host countriesregarding, among others, the level playing feld and national security, with regulatory implicationsor the international expansion o these companies.
CHAPTER I
GLOBALINVESTMENT
TRENDS
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World Investment Report 2011: Non-Equity Modes of International Production and Development2
A. GLOBAL TRENDS AND PROSPECTS: RECOVERYOVER THE HORIZON
1. Overall trends
As stimulus packages and
other public scal policies
ade, sustained economic
recovery becomes more
dependent on private
investment. At present,
transnational corporations
(TNCs) have not yet
taken up ully their customary lead role as privateinvestors.
Global oreign direct investment (FDI) infows
rose modestly in 2010, ollowing the large
declines o 2008 and 2009. At $1.24 trillion in
2010, they were 5 per cent higher than a year
beore (gure I.1). This moderate growth was
mainly the result o higher fows to developing
countries, which together with transition
economies or the rst time absorbed more
than hal o FDI fows.
While world industrial production and trade are
back to their pre-crisis levels, FDI fows in 2010
remained some 15 per cent below their pre-crisis
average, and 37 per cent below their 2007 peak
(gure I.1).
The moderate recovery o FDI fows in 2010
revealed an uneven pattern among components
and modes o FDI. Cross-border mergers and
acquisitions (M&As) rebounded gradually, yet
greeneld projects which still account or the
majority o FDI ell in number and value. Increased
prots o oreign aliates, especially in developing
countries, boosted reinvested earnings one o the
three components o FDI fows while uncertainties
surrounding global currency markets and European
sovereign debt resulted in negative intra-companyloans and lower levels o equity investment the
other two components o FDI fows. While FDI by
private equity rms regained momentum, that rom
sovereign wealth unds (SWFs) ell considerably in
2010.
FDI inward stock rose by 7 per cent in 2010, reaching
$19 trillion, on the back o improved perormance
o global capital markets, higher protability, and
healthy economic growth in developing countries.
UNCTAD predicts FDI fows will continue their recov-
ery to reach $1.4 1.6 trillion, or the pre-crisis level,
in 2011. In the rst quarter o 2011, FDI infows rose
compared to the same period o 2010, although
this level was lower than the last quarter o 2010
(gure I.2). They are expected to rise urther to $1.7
trillion in 2012 and reach $1.9 trillion in 2013, the
peak achieved in 2007. The record cash holdings o
TNCs, ongoing corporate and industrial restructur-
ing, rising stock market valuations and gradual ex-
its by States rom nancial and non-nancial rms
shareholdings built up as supporting measures
during the crisis, are creating new investmentopportunities or companies across the globe.
However, the volatility o the business environment,
particularly in developed countries, means that
TNCs have remained relatively cautious regarding
their investment plans. In addition, risk actors such
as unpredictability o global economic governance,
a possible widespread sovereign debt crisis and s-
cal and nancial sector imbalances in some devel-
oped countries, rising infation and apparent signs o
overheating in major emerging market economies,
among others, might derail FDI recovery.
1 472
1 971
1 744
1 185 1 244
2005-2007average
2007 2008 2009 2010
~15%
~37%
Figure I.1. Global FDI inows, average 20052007and 2007 to 2010(Billions o dollars)
Source: UNCTAD, based on annex table I.1 and the FDI/TNC
database (www.unctad.org/distatistics).
Global FDI ows rose
modestly in 2010, but
the share o developing and
transition economies in
both global inows
and outows reached
record highs.
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CHAPTER I Global Investment Trends 3
Figure I.2. UNCTADs Global FDI Quarterly Index,a 2007 Q12011 Q1(Base 100: quarterly average o 2005)
Figure I.3. FDI inows, global and by group o economies, 19802010(Billions o dollars)
Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/distatistics).
Developing economies
Developed economies
Transition economies
0
500
1 000
1 500
2 000
2 500World total
52%
1980 1985 1990 1995 2000 2005 2010
a. Current trends
Global FDI infows in 2010
reached an estimated
$1,244 billion (gure I.1) a
small increase rom 2009s
level o $1,185 billion. How-
ever, there was an uneven
pattern between regions
and also between subregions. FDI infows to devel-
oped countries and transition economies contract-
ed urther in 2010. In contrast, those to developing
economies recovered strongly, and together with
transition economies or the rst time surpassed
the 50 per cent mark o global FDI fows (gure I.3).
FDI fows to developing economies rose by 12
per cent (to $574 billion) in 2010, thanks to their
relatively ast economic recovery, the strength
o domestic demand, and burgeoning South
South fows. The value o cross-border M&As into
developing economies doubled due to attractive
valuations o company assets, strong earningsgrowth and robust economic undamentals (such
as market growth).
As more international production moves to
developing and transition economies, TNCs are
increasingly investing in those countries to maintain
cost-eectiveness and to remain competitive in the
global production networks. This is now mirrored
The shit o FDI inows to
developing and transition
economies accelerated in
2010: or the frst time,
they absorbed more thanhal o global FDI ows.
0
50
100
150
200
250
300
350
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2007 2008 2009 2010 2011
Source: UNCTAD.a The Global FDI Quarterly Index is based on quarterly data o FDI inlows or 87 countries, which
together account or roughly 90 per cent o global lows. The index has been calibrated such thatthe average o quarterly lows in 2005 is equivalent to 100.
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World Investment Report 2011: Non-Equity Modes of International Production and Development4
by a shit in international consumption, in the wake
o which market-seeking FDI is also gaining ground.
This changing pattern o FDI infows is conrmed
also in the global ranking o the largest FDI
recipients: in 2010, hal o the top 20 host
economies were rom developing and transition
economies, compared to seven in 2009 (gure I.4).
In addition, three developing economies ranked
among the ve largest FDI recipients in the world.
While the United States and China maintained their
top position, some European countries moved
down in the ranking. Indonesia entered the top 20
or the rst time.
The shit towards developing and transition
economies in total FDI infows was also refected
in a change in the ranking o host countries by
UNCTADs Inward FDI Performance Index, which
measures the amount o FDI that countries receive
relative to the size o their economy (GDP). The
index or developed countries as a group is below
unity (the point where the countrys share in global
FDI fows and the countrys share in global GDP are
equal), and their ranking has allen in the ater-crisis
period compared to the pre-crisis period o 2005
2007. In contrast, developing countries increasedtheir perormance index in the period 20052010,
and they all have indices above unity (gure I.5).
The rise o FDI to devel-
oping countries hides
signicant regional di-
erences. Some o the
poorest regions con-
tinued to see declines
in FDI fows. In addition
to least developed countries (LDCs), landlocked
developing countries (LLDCs) and small island de-veloping States (SIDS) (chapter II), fows to Arica
continued to all, as did those to South Asia. In
contrast, major emerging regions, such as East and
South-East Asia and Latin America experienced
strong growth in FDI infows (gure I.6).
FDI fows to South, East and South-East Asia picked
Figure I.4. Global FDI inows, top 20 host economies, 2009 and 2010 a
(Billions o dollars)
Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/distatistics).a Ranked on the basis o the magnitude o 2010 FDI inlows.Note: The number in bracket ater the name o the country reers to the ranking in 2009. Brit ish
Virgin Islands, which ranked 12th in 2010, is excluded rom the list .
153
5
13
15
30
21
9
36
26
32
26
34
15
36
71
38
26
24
52
95
13
15
19
20
23
25
25
2628
32
34
39
41
46
46
48
62
69
106
0 20 40 60 80 100 120 140
Indonesia (43)
Chile (26)
Mexico (21)
Luxembourg (12)
Canada (18)
Spain (30)
India (8)
Ireland (14)
Saudi Arabia (11)
Australia (16)
France (10)
Singapore (22)
Russian Federation (7)
United Kingdom (3)
Germany (6)
Brazil (15)
Belgium (17)
Hong Kong, China (4)
China (2)
United States (1) 228
2010
2009
Slow growth o FDI ows
globally masks diverging
trends between and within
regions. Some o the poor-
est regions continued to see
declines.
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CHAPTER I Global Investment Trends 5
Developing economies
Developed economies
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2005-2007 2008 2009 2010
Figure I.5. Inward FDI Perormance Index,a developedand developing economies, average o 20052007
and 20082010
Source: UNCTAD, based on data rom FDI/TNC database(www/unctad.org/distatistics).
a The Inward FDI Perormance Index is the ratio o a country/regions share in global FDI inlows to its share in globalGDP. A value greater than 1 indicates that the country/region receives more FDI than its relative economic size, avalue below 1 that it receives less.
Note: A ull list o countries ranked by the index is availableat www.unctad.org/wir.
up markedly, outperorming other developing
regions. Infows to the region rose by about 24 per
cent in 2010, reaching $300 billion, rising especially
in South-East Asia and East Asia. Similarly, strong
economic growth, spurred by robust domesticand external demand, good macroeconomic
undamentals and higher commodity prices, drove
FDI fows to Latin America and the Caribbean to
$159 billion. Cross-border M&As in the region rose
to $29 billion in 2010, ater negative values in 2009.
Nearly all the big recipient countries saw inward
fows increase, with Brazil the largest destination.
In contrast, infows to Arica, which peaked in
2008 driven by the resource boom, continued the
downward trend which started in 2009. Infows to
South Arica declined to little more than a quartero those or 2009. North Arica saw its FDI fows all
slightly (by 8 per cent) in 2010; the uprisings which
broke out in early 2011 impeded FDI fows in the
rst quarter o 2011 (see box II.1).
FDI fows to West Asia, at $58 billion decreased,
despite the steady economic recovery registered by
the economies o the region. Sizeable increases in
government spending by oil-rich countries helped
bolster their economies, but business conditions
in the private sector remained ragile in certain
countries.
The transition economies o South-East Europe
and the Commonwealth o Independent States
(CIS) registered a marginal decrease in FDI infows
in 2010, o roughly 5 per cent, to $68 billion, having
allen by 41 per cent in 2009. FDI fows to South-
East Europe continued to decline sharply due to
sluggish investment rom EU countries traditionally
the dominant source o FDI in the subregion. The
CIS economies saw their fows increase by less
than 1 per cent despite stronger commodity prices,
a aster economic recovery and improving stockmarkets.
FDI infows to developed countries contracted
moderately in 2010, alling by less than 1 per cent
to $602 billion. Europe stood out as the subregion
where fows ell most sharply, refecting uncertainties
about the worsening sovereign debt crisis. However,
Figure I.6. FDI inows to developing and transition economies, by region, averageo 20052007 and 2008 to 2010
(Billions o dollars)
Source: UNCTAD, FDI/TNC database (www.unctad.org/distatistics).
0
100
200
300
Africa Latin Americaand the
Caribbean
South, Eastand South-East Asia
West Asia Transitioneconomies
average 2005-2007 2008 200 9 2 010
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CHAPTER I Global Investment Trends 7
strong growth in FDI outfows. Outfows rom the
largest FDI sources Hong Kong (China) and China
increased by more than $10 billion each, reaching
historical highs o $76 billion and $68 billion,
respectively. Chinese companies continued their
buying spree, actively acquiring overseas assets
in a wide range o industries and countries, and
overtaking Japanese companies in total outward
FDI.
All o the big outward investor countries rom Latin
America Brazil, Chile, Colombia and Mexico
bolstered by strong economic growth at home,
increased their acquisitions abroad, particularly in
developed countries where investment opportunities
have arisen in the atermath o the crisis.
In contrast, outfows rom major investors in West
Asia ell signicantly, due to large-scale divestments
and redirection o outward FDI rom government-
controlled entities to support their home economiesweakened by the global nancial crisis.
FDI outfows rom transition economies grew by 24
per cent, reaching a record $61 billion. Most o the
outward FDI projects, as in previous years, were
carried out by Russian TNCs, ollowed by TNCs
rom Kazakhstan. The quick recovery o natural
resource-based companies in transition economies
was boosted by strong support by the State,1 and
by recovering commodity prices and higher stock
market valuations, easing the cash fow problems
these rms had aced in 2009.
Developed countries as a group saw only a
limited recovery o their outward FDI. Refecting
their diverging economic situations, trends in FDI
outfows diered markedly between countries and
regions: outfows rom Europe and the United
States were up (9.6 and 16 per cent, respectively),
while Japanese outward FDI fows dropped urther
in 2010 (down 25 per cent). The lingering eects
o the crisis and subdued prospects in developedcountries orced many o their TNCs to invest in
emerging markets in an eort to keep their markets
and prots: in 2010 almost hal o total investment
(cross-border M&A and greeneld FDI projects)
rom developed countries took place in developing
and transition economies, compared to only 32 per
cent in 2007 (gure I.8).2
In 2010, six developing and transition economies
were among the top 20 investors (gure I.9).
UNCTADs World Investment Prospects Survey
20112013 (WIPS) conrms that developing andtransition economies are becoming important
investors, and that this trend is likely to continue in
the near uture (UNCTAD, orthcoming a).
Many TNCs in developing and transition economies
are investing in other emerging markets, where
recovery is strong and the economic outlook better.
Indeed, in 2010, 70 per cent o FDI projects (cross-
border M&A and greeneld FDI projects) rom these
economies were invested within the same regions
(gure I.8). TNCs, especially large State-owned
enterprises, rom the BRIC countries Brazil, the
Figure I.7. FDI outows rom developing and transition economies, by region,average o 20052007 and 2008 to 2010
(Billions o dollars)
Source: UNCTAD, FDI/TNC database (www.unctad.org/d istatistics) .
0
100
200
300
average 2005-2007 2009 2010
Africa Latin America andthe Caribbean
South, East andSouth-East Asia
West Asia Transitioneconomies
2008
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World Investment Report 2011: Non-Equity Modes of International Production and Development8
Russian Federation, India and China have gained
ground as important investors in recent years as
the result o rapid economic growth in their home
countries, abundant nancial resources and strong
motivations to acquire resources and strategic
assets abroad (section C).
In 2010 there were seven mega-deals (over
$3 billion) involving developing and transition
economies (or 12 per cent o the total) (annex table
I.7), compared to only two (or 3 per cent o the total)
in 2009. Firms rom developing Asia expanded their
acquisitions in 2010 beyond their own regions. For
example Chinas outward FDI showed substantial
increases in Latin America (chapter II; ECLAC,
2011). Transition-economy rms also increased
their purchases in other transition economies in
2010.
b. FDI by sector and industry
The unchanged level o
overall FDI in 2010 also
obscures some major
sectoral dierences. Data
on FDI projects (both cross-
border M&As and greeneld
investment) indicate that the value and share o
manuacturing rose, accounting or almost hal o
the total. The value and share o the primary and
services sector declined (gure I.10). Compared
with the pre-crisis level (20052007), the picture
In the atermath o the
crisis, FDI in manuactur-
ing bounced back while
services sector FDI is still
in decline.
is quite dierent. While the primary sector has
recovered, services are still less than hal, and
manuacturing is 10 per cent below their pre-crisis
levels (annex table I.5).
The value o FDI projects in manuacturing rose by
23 per cent in 2010 compared to 2009, reaching
$554 billion. The nancial crisis hit a range omanuacturing industries hard, but the shock could
eventually prove to be a boon to the sector, as many
companies were orced to restructure into more
productive and protable activities with attendant
eects on FDI. In the United States, or example,
FDI in manuacturing rose by 62 per cent in 2010,
accompanied by a substantial rise in productivity
(Bureau o Labor Statistics, 2011).
Within manuacturing, business-cycle sensitive
industries such as metal and metal products,
electrical and electronics equipment and woodand wood products were hit by the crisis, in terms
o sales and prots (annex table I.5). As a result,
investment ell in these industries, which suered
rom serious overcapacity and wished to use cash
to restore their balance sheet. In addition, their
prospects or higher demand and market growth
remained gloomy, especially in developed countries.
Some manuacturing industries such as chemicals
(including pharmaceuticals) remained more resilient
to the crisis; while other industries, such as ood,
beverages and tobacco, textile and garments, and
Figure I.8. Distribution o FDI projects,a by host region, 2007 and 2010(Per cent)
Source:UNCTAD, based on UNCTAD cross-border M&A database and inormation romthe Financial Times Ltd, Di Markets (www.Dimarkets.com).
a Including both cross-border M&As and greenield FDI projects.
To transition economies
To developing economies
To developed economies
2007 2010 2007 2010
68
51
38 30
5863
5 7
26
45
6 4
(b) by developing and transition country TNCs(a) by developed country TNCs
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CHAPTER I Global Investment Trends 9
Figure I.9. Global FDI outows, top 20 home economies, 2009 and 2010a
(Billions o dollars)
Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/distatistics).a Ranked on the basis o the magnitude o 2010 FDI outlows.Note: The number in bracket ater the name o the country reers to the ranking in 2009. British
Virg in Islands, which ranked 16th in 2010, is excluded rom the li st.
16
27
19
17
18
21
10
16
26
27
42
44
75
33
57
64
103
78
15
18
18
19
20
21
22
26
30
32
38
39
52
56
58
68
76
84
105
0 50 100 150 200
India (21)
Ireland (13)
Luxembourg (17)
Korea, Republic of (19)
Singapore (18)
Italy (16)
Spain (23)
Australia (20)
Sweden (14)
Netherlands (12)
Belgium (156)
Canada (9)
Russian Federation (8)
Japan (4)
Switzerland (10)
China (6)
Hong Kong, China (5)
France (2)
Germany (3)
United States (1) 329283
20102009
Figure I.10. Sectoral distribution o FDI projects,a20092010
(Billions o dollars and per cent)
Source: UNCTAD.a Comprises cross-border M&As and greenield investments.
The la tter re ers to the estimated amounts o capi ta linvestment.
554
361
449392
254
338
0
100
200
300
400
500
600
Primary Manufacturing Services
2009 2010
37% 48%30% 22% 33% 30%
automobiles, recovered in 2010. The pharmaceutical
industry, or example, remained attractive to oreign
investment, thanks to the dynamism o its nal
markets especially in emerging economies.
This rests, rst, on the necessity o setting up
or acquiring production acilities, as the patent
protection or a number o major drugs marketed
by global pharmaceutical rms is about to expire,
and secondly on the ageing demography o most
developed countries. Restructuring continued in
2010, as witnessed by two large deals that took
place in the industry.3 Opportunities or business
deals exist due to rapid growth in the number oscientists and pharmaceutical rms in emerging
economies, most notably in China and India.
In ood, beverages and tobacco the recovery was
due to the sustained demand or basic items,
especially in developing countries. For many large
TNCs in this industry, prots soared in 2010, and a
number o large acquisitions were made.4 In the case
o textiles and clothing, the recovery is prompted
by a growth in consumer spending, particularly in
some emerging countries. Garment production is
airly cost-sensitive, which may prompt accelerated
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World Investment Report 2011: Non-Equity Modes of International Production and Development10
relocation to countries where there is cheap labour.
FDI in the primary sector decreased in 2010 despite
growing demand or raw materials and energyresources, and high commodity prices. FDI projects
(including cross-border M&A and greeneld
investments) amounted to $254 billion in 2010,
raising the share o the primary sector to 22 per cent,
up rom 14 per cent in the pre-crisis period. Natural
resource-based companies with sound nancial
positions, mainly rom developing and transition
economies, made some large acquisitions in the
primary sector. Examples include the purchase o
Repsol (Brazil) by Chinas Sinopec Group or $7
billion, and the purchase o the Carabobo block in
the Bolivarian Republic o Venezuela by a group o
investors rom India or $4.8 billion (annex table I.7).
The value o FDI projects in the services sector
continued to decline sharply in 2010, with respect
to both 2009 and the pre-crisis level o activity. All
main service industries (business services, nance,
transport and communications and utilities) ell,
although at dierent speeds. Business services
declined by 8 per cent compared to the pre-
crisis level, as TNCs are outsourcing a growing
share o their business support unctions toexternal providers, seeking to cut internal costs
by externalizing non-core business activities
(chapter IV). Transportation and telecommunication
services suered equally in 2010 as the industrys
restructuring is more or less completed ater
the round o large M&A deals beore the crisis,
particularly in developed countries.
FDI in the nancial industry the epicentre o the
current crisis experienced the sharpest decline,
and is expected to remain sluggish in the medium
term. Over the past decade, its expansion wasinstrumental in integrating emerging economies
into the global nancial system, and it has brought
substantial benets to host countries nancial
systems in terms o eciency and stability. However,
it also produced a bubble o unsustainable lending,
which had to burst. In the period o post-bubble
correction, issues relating to the management o
country risk and the assessment o conditions in
host-country nancial systems play a major role in
supporting expansion abroad.
Utilities were also strongly aected by the crisis, as
some investors were orced to reduce investment or
even divest due to lower demand and accumulated
losses.
c. FDI by modes of entry
There are diverging
trends between the two
main modes o FDI entry:
M&As and greeneld
(new) investment. The
value o cross-border
M&A deals increased by
36 per cent in 2010, to
$339 billion, though it was still roughly one-third o
the previous peak in 2007 (gure I.11). Higher stock
prices increased the purchasing power o investors
to invest abroad, as higher values o corporate
assets in 2010 raised the leverage o investors
in undertaking M&As by using shares in part-
payment. At the same time, the ongoing corporate
and industrial restructuring is creating new
acquisition opportunities, in particular or cash-rich
TNCs, including those rom emerging markets. On
the other hand, greeneld investment the other
mode o FDI declined in 2010. Diering trends
between cross-border M&As and greeneld FDIare not surprising, as to some extent companies
tend to consider the two modes o market entry as
alternative options. However, the total project value
o greeneld investments has been much higher
than that o cross-border M&As since the crisis.
Developing and transition economies tend to
host greeneld investment rather than cross-
border M&As. More than two-thirds o the total
value o greeneld investment is directed to these
economies, while only 25 per cent o cross-border
M&As are undertaken there. At the same time,investors rom these economies are becoming
increasingly important players in cross-border M&A
markets, which previously were dominated by
developed country players.
During the rst ve months o 2011, both greeneld
investments and cross-border M&As registered
a signicant rise in value (gure I.11; annex
tables I.36 and I.8). Cross-border M&As rose by
58 per cent, though rom a low level, compared
with the corresponding period o 2010.
Greenfeld investment has
become much larger than
cross-border M&As.
Recovery o FDI ows in
2011 relies on the rise o
both greenfeld investments
and cross-border M&As.
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CHAPTER I Global Investment Trends 11
Figure I.11. Value and number o cross-border M&As and greenfeld FDI projects, 2007May 2011
Source: UNCTAD, based on UNCTAD cross-border M&A database and inormation rom the Financial Times
Ltd, Di Markets (www.Dimarkets.com).Note: Data or value o greenield FDI projects reer to estimated amounts o capital investment.
M&A value Greenfield FDI value M&As number Greenfield FDI number
$ billion
0
2
4
6
8
10
12
14
1618
0
200
400
600
800
1 000
1 200
1 400
1 6001 800
2007 2008 2009 2010
Thousands
0
1
2
3
4
5
6
7
0
50
100
150
200
250
300
350
400
2010(Jan-May)
2011(Jan-May)
d. FDI by components
Stagnant global fows in
2010 were accompanied
by diverging trends in the
components o FDI infows
(igure I.12). Improved
economic perormance in
many parts o the world, andincreased prots o oreign
aliates, lited reinvested earnings to nearly double
their 2009 level (gure I.13). This refects the general
increase in prots globally. For example, the prots
to sales ratio o the United States S&P 500 rms
in 2010 improved urther, while prots o Japanese
rms also rose in 2010. Also in developing countries,
operating prots o companies rom China and the
Republic o Korea rose signicantly in 2010.
However, not all reinvested earnings are actually
reinvested in productive capacity. They may beput aside to await better investment opportunities
in the uture, or to nance other activities (box
I.2), including those that are speculative (box I.5).
About 40 per cent o FDI income was retained
as reinvested earnings in host countries in 2010 (
gure I.13).
The increase in reinvested earnings compensated
or the decline in equity capital fows, which were
down slightly despite an up-tick in cross-border
M&As. The continuing depressed level o equity
investments was still the key actor keeping FDI
In 2010, reinvested
earnings grew ast, while
equity capital investment
and intra-company loans
declined. Cash reserves
o oreign afliates grew
substantially.
Figure I.12. FDI inows by component, 20072010a
(Billions o dollars)
Source: UNCTAD, based on data rom FDI/TNC database(www/unctad.org/distatistics).
a Based on 106 countries that account or 85 per cent ototal FDI inlows during the period 2007-2010.
0
200400
600
800
1 000
1 200
1 400
1 600
1 800
2007 2008 2009 2010
Other capital Reinvested earnings Equity
Figure I.13. FDI income, 20052010a
(Billions o dollars and per cent)
Source: UNCTAD.a Based on 104 countries that account or 81 per cent o total
FDI inlows during the period 2005-2010.
$ billion Per cent
0
5
10
15
20
25
30
3540
45
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010
Reinvested earningsRepatriated earnings on Inward FDIReinvested earnings as a % share of income
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World Investment Report 2011: Non-Equity Modes of International Production and Development12
Box I.2. FDI ows and the use o unds or investment
FDI is traditionally broken down into three components: equity capital, intra-company loans, and reinvested earnings
o oreign aliates. These component parts can be considered as sources o unds or investment, additional tounds raised on local and international capital markets. However, the decision by a TNC to nance an investment inproductive assets in a host country through an increase in equity capital, a loan, or by using income earned in thehost country is driven by a wide range o actors, most o which are beyond the reach o host-country policymakersto infuence.
From a policymakers perspective, it may be more relevant to see how FDI fows are used (use o unds). TNCs canemploy FDI (1) or the creation, expansion or improvement o productive assets, generating additional productivecapacity, (2) to nance changes in ownership o assets (M&As), or (3) to add to the nancial reserves o oreignaliates. The latter may be motivated by decisions on the level o nancial leverage o the rm, by the need to retaincash or planned uture investments, by scal considerations (e.g. to deer tax liabilities upon repatriation o prots),or by other actors, including opportunistic behaviour on the part o TNCs to prot rom changes in exchange ratesor local asset-price rises.
The traditional method o analysing FDI by sources o unds tends to overlook the signicance o such parkedunds held in oreign aliates o TNCs. Reinvested earnings consist o income earned by oreign aliates that isnot repatriated to the home country o the parent rm; rms do not necessarily reinvest this income in additionalproductive capacity. The dierence between FDI fows and actual capital expenditures by oreign aliates representsFDI not immediately employed or the creation o additional productive capacity and, as such, it is a good proxy or
the increase in cash reserves in oreign aliates.
Box fgure I.2.1. Estimated value o the non-used part o FDI byUnited States TNCs, 20012010
(Billions o dollars)
Source: UNCTAD based on FDI database and Bureau o Economic Analysis.
This proxy indicator or overseas cash reserves o United States rms over the last 10 years shows a peak in 2004,
a steep drop in 2005 and an ascent to new heights in 2008 with estimates or 2009 and 2010 equally high (boxgure I.2.1). The 2004 peak and the 2005 trough can be explained by the Homeland Investment Act which provideda tax break on repatriated prots in 2005. Anticipating the tax break, rms hoarded cash in their overseas aliatesin 2004 and brought back several years worth o retained earnings in 2005 (some $360 billion). For the last threeyears, levels have been similar to the anomalous 2004 peak, leading to the conclusion that cash reserve levels inoreign aliates may well exceed what is required or normal operations.
The sensitivity o overseas cash reserves to the tax rate on und repatriation can also be observed in Japan. A 2009tax change on the repatriation o oreign earnings is estimated to bring back an additional $40 billion in overseasunds annually (chapter II; WIR10).
The implications are signicant. Under-employed cash reserves o TNCs represent untapped unds that could begainully employed to stimulate the global economy, create jobs and nance development.
Source: UNCTAD.
-200
-150
-100
-50
0
50
100
150
200
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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CHAPTER I Global Investment Trends 13
fows relatively low. It is a source o concern, as
among the components o FDI, equity investment
compared with reinvested earnings and intra-
company loans is the one that is related mostdirectly to TNCs long-term international investment
strategies. Intra-company loans declined also, as
parent rms withdrew or were paid back loans
rom their aliates, in particular those in developed
host countries, in order to strengthen their balance
sheets. This was especially true o European
TNCs which, acing ears o a sovereign debt
crisis spreading in many parts o the euro zone,
signicantly reduced loans to their aliates in the
United Kingdom and the United States.
Given the act that oreign aliates hold a signicantamount o retained earnings on their balance
sheets (box I.2), unless they are repatriated to their
parent rms in home countries, reinvested earnings
continue to play an important role in determining
the level o investment fows.
e. FDI by special funds: privateequity and sovereign wealthfunds
Private equity funds
In 2010, the value o privateequity-sponsored cross-
border M&As increased by
14 per cent to $122 billion,
compared to $107 billion
in 2009 ater two years o
consecutive decline (table
I.1).5 At the same time, the
corresponding number
o cross-border M&As
reached a record high, with 2,050 deals completed.
The actors behind the increase in FDI by private
equity unds are largely related to the stabilization
o macroeconomic conditions. Also, investors
were looking or yields, in a declining interest rate
environment. Positive trends were supported by
stronger private equity activity in emerging markets
(Emerging Markets Private Equity Association,
2011). Thus 31 per cent o FDI by private equity
rms, amounting to $38 billion, was directed to
developing and transition economies in 2010
(gure I.14), up rom 26 per cent in 2009. This rise
refects the increasing interest o private equity
Private equity-sponsored
FDI has regained
momentum, although it ell
short o its pre-crisis level.
It is directed more towards
developing and transition
economies, secondary
buyouts and smaller
acquisitions.
rms in developing country rms and venture
capital business, which provide better business
opportunities than beore.
Despite stronger private equity-sponsored cross-
border M&As in 2010, their value is still more than
70 per cent lower than the peak level in 2007. The
relative contribution o private equity to global FDI
continues to decline. The volume share o private
equity in total cross-border M&As ell rom 19 per
cent in 2009 to 17 per cent in 2010 (table I.1). The
relative contribution o private equity unds to total
FDI contracted by nearly 40 per cent rom 2004, its
peak year, to 2010.
A more benign global economic environment should
see undraising and investment picking up in 2011,
also bolstering a more positive outlook or private
equity-sponsored FDI. Private equity investors
were estimated to have held nearly a trillion dollars
o uninvested capital at the beginning o 2010,
including reserves or uture use, that could result
Table I.1. Cross-border M&As by private equityfirms, 1996May 2011(Number o deals and value)
Number of deals Value
Year NumberShare in total
(%) $ billionShare in total
(%)
1996 932 16 42 16
1997 925 14 54 15
1998 1 089 14 79 11
1999 1 285 14 89 10
2000 1 340 13 92 7
2001 1 248 15 88 12
2002 1 248 19 85 18
2003 1 488 22 109 27
2004 1 622 22 157 28
2005 1 736 20 207 222006 1 698 18 271 24
2007 1 917 18 457 27
2008 1 785 18 322 25
2009 1 993 25 107 19
2010 2 050 22 122 17
2011 591 17 91 20
Source: UNCTAD, cross-border M&A database (www.unctad.org/distatistics).
Note: Value is on a gross basis, which is dierent rom otherM&A tables based on a net value. The table includesM&As by hedge unds. Private equity irms and hedgeunds reer to acquirers as investors not elsewhereclassiied. This classiication is based on the Thomson
Finance database on M&As.
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World Investment Report 2011: Non-Equity Modes of International Production and Development14
in a surge in volume o cross-border M&As in 2011
(Bain & Co., 2011).
On the supply side, there are now more opportunities.
There are two actors. First, companies owned by
private equity rms are becoming targets or other
private equity rms. The relative perormance o
these secondary buyouts (i.e. buyouts o private
equity invested rms) is only slightly lower than that
o primary buyouts: this is because the ormer can
be executed aster than the latter in issuing IPOs
(initial public oerings), and because secondary
buyouts entail a lower risk prole.6 Second, private
equity rms are now seeking smaller rms, and are
engaged in smaller-scale buyouts. This is an area
to which private equity rms have not paid much
attention in the past, yet one where many attractive
rms are to be ound.
However, private equity unds continue to ace
regulations in response to the global nancial crisis,
partly due to the G-20s commitment to subject all
signicant nancial market actors to appropriate
regulation and supervision. For example, the EU
Alternative Investment Funds Managers Directive7
and the United States' Dodd-Frank Wall Street
Reorm and Consumer Protection Act8 will aect
directly and indirectly the operations o private
equity unds and their und-raising ability, and in
consequence their contribution to FDI.
Figure I.14. Cross-border M&As by private equityunds directed to developing and transition economies,
20052010
(Billions o dollars and per cent)
Source: UNCTAD, cross-border M&A database (www.unctad.org/distatistics).
Note: Figures in parenthesis reer to the percentage sharein total private equity. Data or 20052007 and20082010 are annual averages.
0
10
20
30
40
50
20052007 20082010 2007 2008 2009 2010
(13%)
(20%)
(10%) (14%)
(26%)
(31%)
Average
Sovereign wealth funds
Sovereign wealth
unds (SWFs) ares p e c i a l - p u r p o s e
investment unds or
arrangements that
are owned by gov-
ernment.9 At the end
o 2009, more than
80 SWFs, with an estimated total o $5.9 trillion in
assets, could be identied.10 In 2010 alone, nearly
20 governments, mostly rom emerging econo-
mies, considered or decided to establish an SWF.
While unds that invest mainly in debt instruments(e.g. government bonds) were largely unaected by
the global nancial crisis, SWFs with considerable
equity exposure suered a dramatic erosion o the
value o their investments. By the end o 2009,
however, with the recovery o stock markets
worldwide, almost all SWFs had been able to
recoup their losses rom 2008.
In 2010 the positive outlook or most SWFs held
rm, supported by the overall recovery in equity
markets. However, total SWF-sponsored FDI in
2010 amounted to only $10.0 billion, a signicantdrop rom 2009s $26.5 billion (gure I.15). The
largest SWF-sponsored deals included investments
in inrastructure, retail, transportation, natural
resources and utilities in Australia, Canada, the
United Kingdom and the United States (table I.2).
The all in SWF-sponsored FDI in 2010 is a
considerable deviation rom the trend o SWFs
becoming more active oreign direct investors,
that started in 2005. There are two reasons or this
slump. First, unlike in earlier years, in 2010 FDI by
SWFs based in the Gul region (e.g. United Arab
Emirates) was almost absent (table I.2). Asian
and Canadian SWFs were the main investors in
2010. Second, while SWF-sponsored FDI is not
necessarily pro-cyclical, the low appetite or direct
investments in 2010 can be traced back to the
exceptionally uncertain global nancial environment
o previous years. Because o that uncertainly,
in 2010 SWFs directed about one-third o their
FDI to acquire shares o, or inject capital into,
private equity unds and other unds,11 rather than
investing in acquiring shares issued by industry
SWF-sponsored FDI declined
substantially because oseverely reduced investment
rom the Gul region.
However, its long-term
potential as a source o
investment remains.
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CHAPTER I Global Investment Trends 15
Figure I.15. Cross-border M&As by SWFs, 20012010(Million dollars and per cent)
Source: UNCTAD, cross-border M&A database (www.unctad.org/distatistics).
0
0.5
1.0
1.5
2.0
2.5
3.0
0
5
10
15
20
25
30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Per cent$ billion
ValueShare in global outflows
Table I.2. Selected large FDI deals by SWFs in 2010
Value($ million)
Acquiring companyAcquiring
nationTarget company Target nation
Industry of the acquiredcompany
3 090Canada Pension PlanInvestment Board
Canada Intoll Group Australia Finance
2 227 Qatar Holding LLC Qatar Harrods United Kingdom Retail1 581 China Investment Corp China AES Corp United States Electricity, gas and water
881Canada Pension PlanInvestment Board
Canada 407 ETR Concession Co CanadaTransport, storage andcommunications
800 China Investment Corp China Penn West Energy Trust CanadaMining, quarrying andpetroleum
576 Ontario Teachers PensionPlan
Canada Camelot Group PLC United Kingdom Community, social andpersonal service activities
400 Temasek Holdings(Pte)Ltd Singapore Odebrecht Oleo & Gas SA BrazilMining, quarrying andpetroleum
259Caisse de Depot &Placement du Quebec
Canada HDF(UK)Holdings Ltd United Kingdom Finance
194 GIC Real Estate Pte Ltd SingaporeSalta Properties-IndustrialProperty Portfolio
Austra lia Business services
100 Temasek Holdings(Pte)Ltd Singapore Platmin Ltd South AfricaMining, quarrying andpetroleum
91Canada Pension PlanInvestment Board
Canada Vornado Realty Trust United States Business services
43 Oman Investment Fund OmanPetrovietnam InsuranceJoint Stock Corp
Viet Nam Finance
Source: UNCTAD, cross-border M&A database (www.unctad.org/distatistics).
(e.g. the Canadian Pension Plan Investment Boards
investment in Intoll Group, an inrastructure und,
or $3 billion table I.2).
While expenditure on FDI has declined, the
undamental drivers or stronger SWF-sponsored
FDI activity remain robust. Strong commodity prices
in 2010 in particular have created a positive unding
environment or SWFs, including those that have
been actively involved in FDI in previous years. The
oreign assets o the Qatar Investment Authority, an
active strategic investor, were estimated to grow
rom $65 billion in 2009 to $90 billion in 2010, and
$120 billion in 2011.12 It has been suggested that
the China Investment Corporation, established in
2007 with a mandate to diversiy Chinas oreign
exchange holdings, and an active investor in energy,
natural resources, and inrastructure-related assets,
received $100200 billion in new unds in 2010.13
Other SWFs have seen strong returns in 2010,
supporting policy decisions to become more
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World Investment Report 2011: Non-Equity Modes of International Production and Development16
proactive sponsors o FDI. Since 2009, or example,
the Norwegian Government Pension Fund Global,
with more than $400 billion under management and
owning roughly 1 per cent o the worlds equity, isnow allowed to own up to 10 per cent o a listed
company the threshold to be considered FDI
making the und a considerable potential source o
FDI.14 Greater availability o unds, as well as policies
that give SWFs more leeway to acquire larger
stakes in attractive assets, together with improved
in-house und management capacity, will result in
SWFs becoming more visible sources o FDI.
2. Prospects
Judging rom the data on FDIfows, cross-border M&As and
greeneld investment or the rst
ew months o 2011, the recovery
o FDI is relatively strong. This
trend may well continue into the remaining period
o 2011. New investment opportunities await or
cash-rich companies in developed and developing
countries. Emerging economies, particularly Brazil,
China, India and the Russian Federation, have
gained ground as sources o FDI in recent years. A
recovery in FDI is on the horizon.However, the business environment remains volatile,
and TNCs are likely to remain relatively cautious
regarding their investment plans. Consequently,
medium-term prospects or FDI fows which have
not really picked up yet ater the sharp slump in
2008 and 2009, and which had only a moderate
recovery in 2010 may vary substantially, depending
on whether or not the potential risks in the global
economy materialize or not.
To illustrate these uncertainties, UNCTAD proposes
baseline and pessimistic scenarios or utureFDI growth (gure I.16). The ormer scenario is
based on the results o various leading indicators,
including UNCTADs World Investment Prospects
Survey 20112013 (WIPS) (UNCTAD, orth-
coming a), an econometric model o orecasting
FDI infows (box I.3), and data or the rst our to
ve months o 2011 or cross-border M&As and
greeneld investment values. Taking these various
indicators together, FDI fows could range rom
$1.41.6 trillion in 2011 (with a baseline scenario
o $1.52 trillion) the pre-crisis average o
Recovery is
underway, but risks
and uncertainties
remain.
20052007. They are expected to rise urther to
$1.7 trillion in 2012 and reach $1.9 trillion in 2013,
the peak achieved in 2007.
However, there is also a possibility o stagnant FDI
fows (pessimistic scenario) i the abovementioned
risks such as the unpredictability o global economic
governance, worsening sovereign debt crisis, and
scal and nancial imbalances were to materialize.
Ater the sharp recession at the end o 2008 and
beginning o 2009, the economic environment has
improved signicantly over the past two years. The
recovery in world output growth rests on a number
o actors, including stabilization o the nancial
system, the resilient growth o emerging markets,
the stimulus package programmes implemented in
various major economies in the world, and the pick-
up in nal demand in developed countries, ollowing
a return to condence or both households and
companies. Recent orecasts suggest that global
GDP will grow by 3 per cent in 2011. Moreover,
domestic investment, is expected to pick upstrongly not only in developing countries but
also in advanced economies (table I.3). Take or
example the Republic o Korea, where investment
expenditure in 2011 is expected to rise by nearly 10
per cent, to a record high.15
The improvement in the global macroeconomic
outlook has had a direct positive eect on the
capacity o TNCs to invest. Ater two years o
slump, prots o TNCs picked up signicantly in
2010 (gure I.17), and have continued to rise in
2011: in the rst quarter the S&P 500 United States
Figure I.16. Global FDI ows, 20022010,and projection or 20112013
(Billions o dollars)
Source: UNCTAD.
500
1 000
1 500
2 000
2 500
2 00 2 2 00 3 2 00 4 2 0 05 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1 2 0 12 2 01 3
Pessimisticscenario
Baseline
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CHAPTER I Global Investment Trends 17
Box I.3. Forecasting global and regional ows o FDI
Part o UNCTADs orecast or FDI fows is based on an econometric model, by which not only global but also
regional estimations are made possible or 20112013. As FDI decisions are a strategic choice by rms choosingamong alternative locations, the single country/region model cannot demonstrate how a TNC chooses a particularlocation over others. Existing studies typically portray FDI as reacting to individual host country/region actors,but ail to capture the impact o actors elsewhere on the other regions that may attract investment to, or divertinvestment rom, the country in question. Consequently, in order to explain and orecast global and regional FDI,actors in all regions must be taken into consideration simultaneously.
UNCTADs econometric model or FDI uses panel dataor the period 19952010 rom 93 countries, whichaccount or more than 90 per cent o FDI in their ownrespective regions (Arica, West Asia, South, East andSouth-East Asia, Latin America and the Caribbean,EU and other developed countries).a The variablesemployed in the model include: market growth o
G-20 countries as main home and host countries oglobal FDI (G-20 growth rate), market size (one yearlagged GDP o each individual country), the one-yearlagged price o oil to capture natural-resource FDIprojects, trade openness (the share o exports plusimports over GDP), and the lagged dependent variableo FDI to capture the eects o FDI in the previousperiods (autocorrelation). The regression results aresummarized in box table I.3.1.
Based on this model, FDI fows are projected to pickup in 2011 reaching the pre-crisis level mainly due todynamism in the economic growth o G-20 countries.FDI infows are expected to reach the peak level o
2007 in 2013 (box table I.3.2).
However, the results o the model are based mainly oneconomic undamentals and do not take into accountthe various risk actors mentioned in the Report. This
is due to diculties in quantiying them.
Source: UNCTAD.a The only exception is Latin America and the Caribbean,
where the countries included represent around 70 percent o FDI inlows. Lower coverage is due to the absenceo macroeconomic data or the Caribbean.
rms increased their prots by 12 per cent over the
corresponding period o 2010. For Japan, despite
a negative economic growth rate due to the natural
disaster, listed rms still achieved prots,16 and even
in the atermath o the disaster, Japanese rms are
vigorously investing abroad (box I.4). Firms now
Box table I.3.1. Regression results o FDI orecasting
model, fxed eects panel regressiona
Explanatory variable Coefcients
G20 growth0.37
(3.87)***
GDP (-1) 0.01(3.32)***
Openness0.01
(3.48)***
Oil price (-1)0.02
(3.9)***
FDI(-1)0.50
(7.2)***
Constant-0.63(-0.58)
R2 0.81
Observations 1395Source: UNCTAD estimates, based on UNCTAD (or FDI inlows),
IMF (G20 growth, GDP and openness), United Nations(oil price) rom the Link project.
a The o l lowing model FDIjt=
o+
1*G20
t+
2*GDP
jt -1
+3*Openess
jt+
4*Oil_price
jt-1+
5*FDI
jt-1+e
jtis estimated with
ixed eect panel regression using estimated generalized leastsquares with cross-sections weights. Coeicients computedby using white heteroscedasticity consistent standard errors.Statistical signiicance at the 1 per cent (***) and 5 per cent(**) levels.
Box table I.3.2. Summary o econometric medium-term baseline scenarios
o FDI ows, by groupings(Billions o dollars)
Averages Projections2005-2007 2008-2010 2009 2010 2011 2012 2013
Global FDI ows 1 471 799 1 390 934 1 185 030 1 243 671 1 523 598 1 685 792 1 874 620Developed countries 967 947 723 284 602 835 601 906 790 183 887 729 1 026 109Developing countries 444 945 580 716 510 578 573 568 655 800 713 946 749 531Transition economies 58 907 86 934 71 618 68 197 77 615 84 117 98 980
Source: UNCTAD.
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World Investment Report 2011: Non-Equity Modes of International Production and Development18
Table I.3. Real growth rates of GDP and grossfixed capital formation (GFCF), 20102012
(Per cent)
Variable Region 2010 2011 2012
World 3.6 3.1 3.5
GDPgrowth rate
Developed economies 1.6 1.3 1.7
Developing economies 7.1 6.0 6.1
Transition economies 3.8 4.0 4.2
World 5.9 6.5 7.2
GFCFgrowth rate
Advanced economiesa 2.5 4.2 6.2
Emerging and developingeconomiesa
9.6 8.9 8.2
Source: UNCTAD, based on United Nations, 2011 or GDPand IMF, 2011a or GFCF.
a IMFs classiications o advanced, emerging and developingeconomies are not the same as the United Nationsclassiications o developed and developing economies.
have record levels o cash holdings. TNCs sales
have also increased signicantly as compared to2009, both globally and or their oreign aliates
(section C).
These improvements at both the macroeconomic
and microeconomic levels are refected in TNCs
opinions about the global investment climate.
According to 2011s World Investment Prospects
Survey (WIPS),17TNCs exhibit a growing optimism
going towards 2013 (gure I.18). Some 34 per
cent o respondents expressed optimistic or
very optimistic views or the global investment
environment in 2011, compared to more than hal
Figure I.17. Proftability a and proft levels o TNCs,19972010
(Billions o dollars and per cent)
Source: UNCTAD, based on data rom Thomson One Banker.a Proitability is calculated as the ratio o net income to total
sales.Note: The number o TNCs covered in this calculation is
2,498.
-10123
45678
- 2000
200400
600800
1 0001 2001 400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Per cent$ billion
Profits Profitability
(53 per cent) in 2013. Perhaps more strikingly,
the share o TNCs responding that they were
pessimistic or very pessimistic or 2013 ell to
1 per cent.
Responses to the WIPS also suggest strongly the
continuing importance o developing and transition
economies as destinations or FDI (gure I.19).
While the composition o the top ve destinations
has not changed much in recent years or
example, in 2005 the top ve were China, India,
United States, Russian Federation, and Brazil
the mix o the second tier o host economies has
shited over time. Refecting the spread o FDI in
developing Asia beyond the top destinations, the
rankings o economies such as Indonesia, Viet
Nam, and Taiwan Province o China have risen
markedly compared to previous surveys. Peru and
Chile have likewise improved their position as Latin
American destinations, thanks largely to their stable
investment climates and strong macroeconomicactors. Arican countries are conspicuous by
their absence rom the list o top potential host
economies or TNCs.
While improving macro- and microeconomic
undamentals, coupled with rising investor optimism
and the strong pull o booming emerging markets,
should signal a strong rebound in global FDI
fows, risks and uncertainties continue to hamper
the realization o new investment opportunities.
Such actors include the unpredictability o global
governance (nancial system, investment regimes,
Figure I.18. Level o optimism o TNCs regarding theinvestment environment, 20112013
(Percentage o responses by TNCs surveyed)
Source: UNCTAD, orthcoming a.
34%
49%53%
2011 2012 2013
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CHAPTER I Global Investment Trends 19
Box I.4 Eects o the natural disaster on Japanese TNCs and outward FDI
On 11 March 2011, the northern part o Japan experienced a devastating earthquake and tsunami. The region
that was most badly aected is home to a number o niche hi-tech companies, all major producers o specializedcomponents (e.g. Renasas Electronics, which controls a 30 per cent share o the global market or microcontrollers).The earthquake itsel and the subsequent interruption o power supplies resulted in a severe disruption o supplychains, not only in Japan but internationally. Despite the severity o the damage, by June most o the supply chainshad been restored: or example, production at Toyota had recovered to 90 per cent o its pre-earthquake level.
While Japanese rms have shown remarkable resilience, the chain o events has prompted Japanese manuacturersto reconsider their procurement strategies. In a recent survey o Japanese rms by the Nikkei,a one-quarter o therespondents said that they would increase procurement rom abroad, while a urther th intended to diversiy theirprocurement sources within Japan. The survey indicated that about two-thirds o the rms intended to maintain orincrease their level o total investment in the atermath o this natural disaster.
In the short term, the supply disruption will have reduced the revenues o those oreign aliates o Japanese TNCsthat were aected by supply disruption, and thus their reinvested earning. On the other hand, the temporary loss orevenues might have induced the parent companies o these aliates to extend intra-company loans. In the mediumterm, the strategy o diversiying procurement sources could strengthen outward FDI. However, the overall impacto the earthquake on outward FDI rom Japan is likely to be limited, especially against the backdrop o buoyantoutward FDI through M&A by Japanese rms. Over the long run, Japan will again be a leading investor or outward
FDI.
Source: UNCTAD.a Based on a survey o 100 CEOs by the Nikkei(29 May 2011).
etc.); the worsening sovereign debt crisis in some
developed countries and the resultant scal
austerity; regional instability; energy price hikes and
risks o infation; volatility o exchange rates; and
ears o investment protectionism. Although each
can serve as a disincentive to investment in its own
right, the prominence o all o these risks at the
same time could seriously obstruct FDI globally.
0
10
20
30
40
50
60
70
80
90
China
Un
itedStates
India
Brazil
Russian
Federation
Poland
Indonesia
Australia
Germany
Mexico
Viet
Nam
Thailand
Unite
dKingdom
Singapore
TaiwanProvinceof
China
Peru
Czec
hRepublic
Chile
France
Colombia
Malaysia
Figure I.19. Top host economies or FDI in 20112013(Number o times the country is mentioned as a
top FDI priority by respondent TNCs)
Source: UNCTAD, orthcoming a.
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World Investment Report 2011: Non-Equity Modes of International Production and Development20
* * *
UNCTADs WIPS and econometric model
projections or FDI fows in the coming years paint
a picture o cautious but increasing optimism,
with global FDI fows set to increase to between
$1.4 and $1.6 trillion in 2011, building upon
the modest recovery experienced in 2010. At
the high end o that range, FDI fows would
be slightly more than the average pre-crisis
level, yet would still be below the 2007 peak o
$2 trillion. World trade, by contrast, is already back
at pre-crisis levels (table I.5).
While the FDI recovery resumes, the worldwide
demand or private productive investment is
increasing as public investment, which rescued
the global economy rom a prolonged depression,
declines in one country ater another. With
unsustainably high levels o public debt at both
national and sub-national levels in many countries,
and with nervous capital markets, governments
must now rein in their decits and let private
investment take over the lead role in generating and
supporting a sustained recovery.
The FDI recovery in 2010 was slow not because
o a lack o unds to invest, or because o a lack
o investment opportunities. Responses by TNCs
to UNCTAD's WIPS (UNCTAD, orthcoming a)
indicate increasing willingness to invest, and clear
priority opportunity areas. However, the perception
among TNC managers o a number o risks in
the global investment climate, including nancial
instability and the possibility o a rise in investment
protectionism, is acting as a brake on renewed
capital expenditures.
A number o developed countries, where the need
or private investment to take over rom dwindling
public investment is greatest, are ranked ar
lower on the investment priority list o TNCs than
either the size o their economies or their past FDI
perormance would seem to warrant. Policymakers
rom those countries would be well advised to
take a lead role among their international peers in
continuing to ensure a avourable and stable global
investment climate.
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CHAPTER I Global Investment Trends 21
Domestic investment still accounts or the majority
o the total investment in developing and transition
economies.18 Foreign investment can only
complement this. However, each orm o oreign
investment plays a distinct and important role in
promoting growth and sustainable development,
boosting countries competitiveness, generating
employment, and reducing social and income
disparities.
Non-FDI fows may work either in associationwith FDI, or separately rom it. As no single type
o fow alone can meet investment needs, it is vital
to leverage their combinations to maximize their
development impact. This section will discuss
the development implications o various orms o
investment, and the benets o combining FDI with
other sources o external nance, be they private
or public.
Foreign investors may nance their activities using
a range o instruments in addition to FDI. These
have dierent motivations, behave dierently,and consequently have dierent impacts on
development. This makes it necessary to review
each instrument and the synergies between
them. Diering motivations, characteristics and
responses also drive dierent groups o investors
in an enterprise or instance, private investors
(individuals, enterprises, unds etc.) and public
investors (e.g. via ODA and other ocial nance).
There is a sign o continued
recovery in capital fows, but
caution is needed. Sincethe rst hal o 2009, private
capital fows to emerging
and developing economies
have been rebounding, led
by FDI, but these remain below their peak o 2007
(table I.4).
However, is the recovery in development nance to
developing and transition economies sustainable?
The recovery is due to a combination o structural
(long-term) and cyclical (short-term) pull and push
actors. High expected GDP growth in developing
B. FDI AS EXTERNAL SOURCES OF FINANCETO DEVELOPING COUNTRIES
The recovery o external
capital ows to developing
countries is under way, ledby FDI. However, caution is
needed as to its sustainabil-
ity, as FDI may be volatile.
Table I.4. Capital flows to developing countries,20052010
(Billions o dollars)
Type o ows 2005 2006 2007 2008 2009 2010
Total 579 930 1 650 447 656 1 095
FDI 332 435 571 652 507 561
Portolio investment 154 268 394 -244 93 186
Other investmenta 94 228 686 39 56 348
Memorandum
Ofcial grants,
excluding technical
cooperation
56.9 106.9 76.1 86.4 95 ..
Change in reserves 539 647 1 063 774 673 927
Workers' remittances 173 204 245 288 281 297
Source: UNCTAD, based on data rom IMF, 2011a (on portolio,other investment and reserve assets), rom UNCTAD(on FDI inlows and workers remittances) and romthe World Bank (on oicial grants excluding technicalcooperation).
a Other investments include loans rom commercial banks,
oicial loans and trade credits.
countries is heralding protable investment
opportunities (cyclical pull), while policy rameworks
are perceived to be more resilient to uture shocks,
especially in Asia (structural pull). Developed
countries with excess liquidity, thanks to quantitative
easing and low interest rates, are motivated to
invest in developing countries with relatively higher
rates and returns (cyclical push) (Akyuz, 2011; IMF,
2011b).19 However, there remain concerns about
volatility.
First, the capital surge is exposing developing and
transition economies to greater instability, putting
direct upward pressure on their exchange rates.
And the low interest rate environment in developed
economies cannot be sustained indenitely.20
As a positive sign or emerging and developing
economies, FDI has been the main source o infows
during 20092010, implying greater stability and a
return to condence or longer-term, productive
investment. Less positively, the global recovery
may be more ragile, because FDI is relatively less
signicant this time in developed economies, whichare now highly exposed to volatile portolio and
especially other capital elements such as bank
loans.
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World Investment Report 2011: Non-Equity Modes of International Production and Development22
Second, FDI in recent years is gradually becoming
more volatile in developing and transition economies,
although it remains much less volatile than portolio
and other investments (such as commercial loansand trade credits) (gure I.20). It is argued that this
might refect its changing composition, or example
a shit rom equity to debt components, which
would also make it more sensitive to the changes in
United States monetary policy that have triggered
previous crises. As a consequence, assumptions
about FDIs stability relative to other types o
capital should be treated with caution especially or
emerging economies (IMF, 2011a), bearing in mind
the dramatic rise and all in FDI infows to such
countries as Brazil ($45 billion in 2008, $26 billionin 2009 and $48 billion in 2010), the Republic o
Korea ($8.4 billion in 2008, $7.5 billion in 2009 and
$6.9 billion in 2010) and South Arica ($9 billion in
2008, $5.4 billion in 2009 and $1.6 billion in 2010).
FDI is also likely to contain some short-term and
volatile fows, or hot money. Stabilization o capital
fows now represents an important challenge to
many developing countries (box I.5).
Each o the three components o FDI fows (equity
investment, reinvested earnings and intra-company
loans) has reasons or fuctuation. Intra-companydebt generally comes with more fexible terms and
conditions than commercial loans, being related
more to the decisions o the parent company in
order to help its oreign aliates to expand or cover
the running costs during start-up, restructurings,
or upswings.21 Reinvested earnings fuctuate quite
signicantly, depending on protability and the level
o repatriation rom abroad in the orm o dividend
payments. Although equity investment continues
to be the most stable component o FDI, global
production chains have changed considerably and
it has become much easier or equity to relocate.
Despite the instability o FDI fows in recent years,
the act that net private fows to developing
countries remain positive is largely due to FDI: the
recovery has not extended yet to all private fows
in all regions, and non-FDI fows were negative in
many years and regions even during the FDI boom(gure I.21). FDI would thereore appear to be much
less volatile than these other private fows (namely
private portolio and private other capital).
All private oreign capital fows portolio investment,
bank loans and FDI contribute to development.
Thus, the recent crisis, and the nature and inherent
ragility o the current upswing, are both matters
o concern to developing countries. This makes
the role o ocial development assistance (ODA)
very important. ODA is less prone to fuctuations;
however, ailure by developed countries to meet
stipulated objectives has led to deep scepticism
about its eectiveness in addressing core
development needs o beneciary countries.
Figure I.20. The volatility o private capital ows, by type, 20032010
Source: UNCTAD.a In 2003 and 2004, the value o standard deviation exceeded 3.
Note: The volatility o each type o capital low is calculated as relative standard deviation or the immediately preceding 10
years. The relative standard deviation o 2010 is based on lows between 2001 and 2010.
0
1
2
3
20 03 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 00
1
2
3
2003a 2004a 2005 2006 2007 2008 2009 2010
Other investment
FDI
Portfolio investment
Other investment
FDI
Portfolio investment
Developed countries Developing and transition economies
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CHAPTER I Global Investment Trends 23
Some developing countries are concerned that a
surge in capital infows could exacerbate imbalanc-es and complicate their macroeconomic policies.Against this backdrop, capital controls are back ontheir policy agenda. The IMF also has now sotenedits customary stance against capital controls (Ostry etal., 2011), making it easier or some Asian and LatinAmerican countries to introduce measures to restrictshort-term, volatile fows, while maintaining the morepreerential treatment o long-term capital. In principle,these measures should not aect FDI, as the lattershould contain only long-term fows. Reality is morecomplex, as fows recorded statistically under FDIcould encompass some short-term fows.
In 2010, FDI fows rose signicantly to some develop-ing countries. In certain cases, the increase o FDI was
not necessarily accompanied by investment in xedassets or cross-border acquisitions. A part o thismoney might have entered developing host countriesor the purpose o short-term capital gains. In coun-tries where FDI infows exceed considerably the capi-tal expenditures o oreign aliates, the latter may holdpart o the unds received rom their parent rms inassets other than immediate investment, or examplespeculative unds.
Moreover, short-term speculative fows may be misre-ported under FDI outfows when they leave the homecountry, but are not recorded as FDI infows in hostcountries as the money transerred is spent instanta-neously or speculative purposes, and does not stay
long enough in the accounts o oreign aliates. Thiskind o money is either reserved or special-purposeentities and nancial holding companies, or is invest-ed in real estate and property which may easily beliquidated. Indeed FDI in real estate is rising in manycountries, in particular in China (chapter II) and in LatinAmerica as it at one time was in pre-crisis West Asia.Such misreporting happens because the distinctionbetween long-term capital fows (FDI) and short-termcapital fows is increasingly blurred. As a result o thegrowth o this short-term capital, recently FDI fowshave become more volatile than beore (gure I.20).
While some speculative short-term private capitalfows may have become part o FDI statistics, mostcontinue to be recorded under errors and omissions,as they usually escape being captured in the estab-lished items o the balance o payments. In 2009 (themost recent year or which data are available), the val-ue o errors and omissions was equivalent to almosthal that o all FDI infows globally, up rom only about10 per cent in previous years.
As the markets or dierent types o capital fows areinterrelated, the establishment o measures targetingexclusively short-term capital fows is increasingly di-cult. Take or example the capital controls introduced in20092010 in the real estate markets o various Asianeconomies: direct controls to limit the size o fowsaected both short- and long-term capital fows (IMF,2011a).
Source: UNCTAD
Box I.5. FDI and capital controls Figure I.21. Composition o private capital ows todeveloping and transition economies, 20042010
(Billions of dollars)
- 40
- 20
-
20
40
60
80
100
- 300
- 200
- 100
-
100
200
300
400
2004 2005 2006 2007 2008 2009 2010
2004 2005 2006 2007 2008 2009 2010
-
- 150
- 100
- 50
-
50
100
150
200
250
2004 2005 2006 2007 2008 2009 2010
Africa
South, East, and South-East Asia
Latin America and the Caribbean
FDI Portfolio Other Capital
Source: UNCTAD, based on data rom IMF, 2011a.
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World Investment Report 2011: Non-Equity Modes of International Production and Development24
1. Accelerating internationalization o frms
International production is expanding, with sales,
employment and assets o oreign aliates all
increasing (table I.5). UNCTAD estimates that TNCs
worldwide, in their operations both at home and
abroad, generated value added o approximately
$16 trillion in 2010 (gure I.22), accounting or
more than a quarter o global GDP. In 2010, oreign
aliates accounted or more than one-tenth o
global GDP and one-third o world exports.
International production by TNCs (i.e. value addedby oreign aliates) accounts or around 40 per
cent o TNCs total value added (gure I.22), up
rom around 35 per cent in 2005. International
production networks thus continue to expand,
although the rate o growth was slower during the
crisis, due to the drop in FDI fows.
This continuing expansion refects the consistentlyhigh rates o return obtained by TNCs on FDI
back up to 7.3 per cent in 2010, ater a one-year
dip during the crisis (table I.5). Returns are thus
back to pre-crisis levels, despite a steady decrease
in leverage, as proxied by outward FDI stock over
oreign assets. Leverage peaked during the FDI
boom years rom 2005 to 2007, with the stock
(equity) over assets ratio declining rom nearly 40
per cent to 25 per cent, but it has since decreased,
with the equity/asset ratio climbing up to 36 per
cent in 2009 and 2010.Other indicators o international production also
showed positive gains in 2010. Sales o oreign
aliates rose 9.1 per cent, refecting strong
revenues in developing and transition economies.
Employment continued to expand, as eciency-
seeking investments expanded during the crisis.
C. FURTHER EXPANSION OF INTERNATIONAL PRODUCTION
Table I.5. Selected indicators of FDI and international production, 19902010
Item
Value at current prices Annual growth rate or change on return(Billions o dollars) (Per cent)
199020052007
average 2008 2009 201019911995
19962000
20012005 2009 2010
FDI inows 207 1 472 1 744 1 185 1 244 22.5 40.1 5.3 -32.1 4.9FDI outows 241 1 487 1 911 1 171 1 323 16.9 36.3 9.1 -38.7 13.1FDI inward stock 2 081 14 407 15 295 17 950 19 141 9.4 18.8 13.4 17.4 6.6FDI outward stock 2 094 15 705 15 988 19 197 20 408 11.9 18.3 14.7 20.1 6.3Income on inward FDI 75 990 1 066 945 1 137 35.1 13.1 32.0 -11.3 20.3
Rate of return on inward FDIa 6.6 5.9 7.3 7.0 7.3 -0.5 - 0.1 -0.3 0.3
Income on outward FDI a 122 1 083 1 113 1 037 1 251 19.9 10.1 31.3 -6.8 20.6Rate of return on outward FDIa 7.3 6.2 7.0 6.9 7.2 -0.4 - - -0.2 0.3
Cross-border M&As 99 703 707 250 339 49.1 64.0 0.6 -64.7 35.7
Sales o oreign afliates 5 105 21 293 33 300 30 213b 32 960b 8.2 7.1 14.9 -9.3 9.1Value-added (product) o oreign afliates 1 019 3 570 6 216 6 129b 6 636b 3.6 7.9 10.9 -1.4 8.3Total assets o oreign afliates 4 602 43 324 64 423 53 601b 56 998b 13.1 19.6 15.5 -16.8 6.3Exports o oreign afliates 1 498 5 003 6 599 5 262c 6 239c 8.6 3.6 14.7 -20.3 18.6Employment by oreign afliates (thousands) 21 470 55 001 64 484 66 688b 68 218b 2.9 11.8 4.1 3.4 2.3
GDP 22 206 50 338 61 147 57 920d 62 909d 6.0 1.4 9.9 -5.3 8.6Gross fxed capital ormation 5 109 11 208 13 999 12 735 13 940 5.1 1.3 10.7 -9.0 9.5Royalties and licence ee receipts 29 155 191 187 191 14.6 10.0 13.6 -1.9 1.7Exports o goods and non-actor services 4 382 15 008 19 794 15 783d 18 713d 8.1 3.7 14.7 -20.3 18.6
Source: UNCTAD.a Calculated with FDI income or the countries that have the data or both this and FDI stock.b Data or 2009 and 2010 are estimated based on a ixed eects panel regression o each variable against outward stock and a lagged
dependent variable or the period 1980-2008.c Data or 19951997 are based on a linear regression o exports o oreign ailiates against inward FDI stock or the period 1982 1994.
For 19982010, the share o exports o oreign ailiates in world export in 1998 (33.3%) was applied to obtain values.d Based on data rom IMF, 2011a.Note: Not included in this table are the value o worldwide sales by oreign ailiates associated with their parent irms through non-equity
relationships and o the sales o the parent irms themselves. Worldwide sales, gross product, total assets, exports and employmento oreign ailiates are estimated by extrapolating the worldwide data o oreign ailiates o TNCs rom Australia, Austria, Belgium,Canada, Czech Republic, Finland, France, Germany, Greece, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Portugal, Slovenia,Sweden, and the United States or sales; those rom the Czech Republic, France, Israel, Portugal, Slovenia, Sweden, and theUnited States or value-added (product); those rom Austria, Germany, Japan and the United States or assets; those rom CzechRepublic, Japan, Portugal, Slovenia, Sweden, and the United States or exports; and those rom Australia, Austria, Belgium, Canada,Czech Republic, Finland, France, Germany, Italy, Japan, Latvia, Lithuania, Luxembourg, Macao (China), Portugal, Slovenia, Sweden,Switzerland, and the United States or employment, on the basis o the shares o those countries in worldwide outward FDI stock.
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CHAPTER I Global Investment Trends 25
Underlying this improvement in international
production has been an acceleration o the
internationalization o TNCs and, indeed, o the
initial internationalization o previously non-TNCrms. Three o the major actors driving this new
burst o internationalization are: rst, the crisis
caused rms to rationalize their corporate structure
and increase eciencies wherever possible
(including the options to close down or to sell to
others), oten by relocating business unctions to
cost-advantageous locations; second, the rapid
recovery in emerging market economies, compared
to the relatively weak response in developed
economies, orced many TNCs to embrace these
markets, in an eort to protect prots and generategrowth; and the rise o emerging market TNCs
including State-owned TNCs.
During the economic
and nancial crisis,
many companies
embarked on sig-
nicant layos and
organizational restructuring in order to remain pro-
itable. For TNCs in developed economies, which
make up nearly 80 per cent o the TNCs in the
world, and account or some 70 per cent o globalFDI outfows, this oten meant making cuts in their
In 2010, oreign activity o
the largest non-fnancial TNCs
rebounded, and its share in total
activity remained high.
home economy operations, while moving or open-
ing new acilities abroad to take advantage o spe-
cic comparative advantages in those locations. In
2010, oreign activity o the largest non-nancialTNCs rebounded, and its share in total activity re-
mained high. However not all o the largest TNCs
increased their internationalization. Financial TNCs,
or example, experienced signicant diculties in
2010 (box I.6).
These trend