United Nations Conference on Trade and Development

WorldInvestmentReport

United NationsNew York and Geneva, 2003

2003 FDI Policies for Development:National and InternationalPerspectives

ii

NOTE

UNCTAD serves as the focal point within the United Nations Secretariat for all matters related toforeign direct investment and transnational corporations. In the past, the Programme on TransnationalCorporations was carried out by the United Nations Centre on Transnational Corporations (1975-1992) andthe Transnational Corporations and Management Division of the United Nations Department of Economicand Social Development (1992-1993). In 1993, the Programme was transferred to the United NationsConference on Trade and Development. UNCTAD seeks to further the understanding of the nature oftransnational corporations and their contribution to development and to create an enabling environmentfor international investment and enterprise development. UNCTAD’s work is carried out throughintergovernmental deliberations, technical assistance activities, seminars, workshops and conferences.

The term “country” as used in this study also refers, as appropriate, to territories or areas; thedesignations employed and the presentation of the material do not imply the expression of any opinionwhatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country,territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.In addition, the designations of country groups are intended solely for statistical or analytical convenienceand do not necessarily express a judgement about the stage of development reached by a particular countryor area in the development process. The reference to a company and its activities should not be construedas an endorsement by UNCTAD of the company or its activities.

The boundaries and names shown and designations used on the maps presented in this publicationdo not imply official endorsement or acceptance by the United Nations.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have beenomitted in those cases where no data are available for any of the elements in the row;

A dash (-) indicates that the item is equal to zero or its value is negligible;

A blank in a table indicates that the item is not applicable, unless otherwise indicated;

A slash (/) between dates representing years, e.g., 1994/95, indicates a financial year;

Use of a hyphen (-) between dates representing years, e.g., 1994-1995, signifies the full period involved,including the beginning and end years;

Reference to “dollars” ($) means United States dollars, unless otherwise indicated;

Annual rates of growth or change, unless otherwise stated, refer to annual compound rates;

Details and percentages in tables do not necessarily add to totals because of rounding.

The material contained in this study may be freely quoted with appropriate acknowledgement.

UNITED NATIONS PUBLICATION

Sales No. E.03.II.D.8

ISBN 92-1-112580-4

Copyright © United Nations, 2003All rights reserved

Manufactured in Switzerland

iii

PREFACE

� � � Kofi A. AnnanNew York, July 2003 Secretary-General of the United Nations

With its enormous potential to create jobs, raise productivity, enhance exports and transfertechnology, foreign direct investment is a vital factor in the long-term economic development of theworld’s developing countries. Yet global investment inflows have declined significantly, from $1.4trillion in 2000 to $650 billion in 2002, raising considerable concerns about prospects for achievingthe Millennium Development Goals.

The World Investment Report 2003 looks in detail at what lies behind the downturn, how variousregions and countries have fared, and what the chances are for recovery and growth in FDI flows atthe global and regional levels.

The Report also assesses the interaction between national and international FDI policies andthe implications this has for development. As competition for foreign direct investment increases,policies vis-à-vis transnational corporations are evolving. While national policies are the most importantconsideration in attracting such investment and benefiting more from it, they are increasingly beingaffected by rule-making at the international level. The challenge is to find a development-orientedbalance.

Toward that end, the Report highlights some of the key issues, from the perspective of development,that need to be considered in investment agreements. Whether, how and where governments negotiateinvestment agreements is, of course, their own sovereign decision. But if such agreements are negotiated,the need to reduce poverty and stimulate development should take a central place as a guiding principleof such negotiations. Only then will we be able to say that investment can truly achieve its objectives.

iv

ACKNOWLEDGEMENTS

The World Investment Report 2003 (WIR03) was prepared — under the overall direction of KarlP. Sauvant — by a team comprising Americo Beviglia Zampetti, Persephone Economou, Kumi Endo,Torbjörn Fredriksson, Masataka Fujita, Kálmán Kalotay, Michael Lim, Padma Mallampally, AbrahamNegash, Hilary Nwokeabia, Ludger Odenthal, Miguel Pérez-Ludeña, Kee Hwee Wee, Katja Weigl andZbigniew Zimny. Specific inputs were prepared by Rory Allan, Victoria Aranda, Douglas van den Berghe,Sirn Byung Kim, Anh-Nga Tran-Nguyen, Jörg Simon, James Xiaoning Zhan and Yong Zhang.

Principal research assistance was provided by Mohamed Chiraz Baly, Bradley Boicourt, JohnBolmer, Lizanne Martinez and Tadelle Taye. Eva Oskam and Jeroen Dickhof assisted as interns at variousstages. The production of the WIR03 was carried out by Christopher Corbet, Lilian Mercado, LyndaPiscopo, Chantal Rakotondrainibe and Esther Valdivia-Fyfe. Graphics were done by Diego Oyarzun-Reyes. WIR03 was desktop published by Teresita Sabico. It was edited by Bruce Ross-Larson andMeta de Coquereaumont.

Sanjaya Lall and Peter Muchlinski were principal consultants.

The Report benefited from inputs provided by participants in a Global Seminar in Geneva inMay 2003, organized in cooperation with the Development Policy Forum of InWEnt on the specialtopic of WIR03. Participants were Florian Alburo, Sanchita Chatterjee, Benno Ferrarini, Susan Hayter,Yao-Su Hu, Datin Kaziah Abdul Kadir, Nagesh Kumar, Mariano Laplane, Howard Mann, RichardNewfarmer, Farooq Sobhan, M. Sornarajah and Miklos Szanyi.

Inputs were also received from Stanimir A. Alexandrov, Lorraine Eden, David Frans, Xing Houyuan,Mark Koulen, Julia Mikerova, Lilach Nachum, Roger Nellist, Assad Omer, Pedro Roffe, Pierre Sauvé,Frank Roger, Len Trevino and Rob van Tulder.

Comments and feedback were received during various stages of preparation from Robert Anderson,Audo Araújo Faleiro, Yoko Asuyama, Vudayagiri Balasubramanyam, Maria Borga, Peter Brimble, PhilipBrusick, Peter Buckley, José Durán, Richard Eglin, Roderick Floud, Rainer Geiger, Andrea Goldstein,Kathryn Gordon, Charles Gore, Jim Gunderson, Jeffery Heinrich, Barry Herman, Pinfang Hong, Marie-France Houde, Anna Joubin-Bret, Joachim Karl, John Kline, Jesse Kreier, Tatjana Krylova, Sam Laird,Martha Lara, Don Lecraw, Robert Lipsey, Henry Loewendahl, Mina Mashayekhi, Raymond J. Mataloni,Anne Miroux, Hafiz Mirza, Juan Carlos Moreno-Brid, Michael Mortimore, Peter Nunnenkamp, HerbertOberhänsli, Sheila Page, Antonio Parra, Carlo Pettinato, Craig Parsons, Sol Picciotto, Gwenael Quere,Prasada Reddy, Lorraine Ruffing, Hassan Qaqaya, Maryse Roberts, Patrick Robinson, Rodrigo Sabbatini,Nicolo Gligo Saenz, A. Edward Safarian, Magdolna Sass, Christoph H. Schreuer, Prakash Sethi, AngelikaSitz, Marjan Svetlicic, Taffere Tesfachew, Peter Utting, Thomas Wälde, Jörg Weber, Louis Wells, GeraldWest and Christopher Wilkie. Comments were also received from delegates participating in the WTOWorking Group on the Relationship between Trade and Investment.

Numerous officials of central banks, statistical offices, investment promotion and other governmentagencies, and officials of international organizations and non-governmental organizations, as well asexecutives of a number of companies, also contributed to WIR03, especially through the provision ofdata and other information. Most particularly, they include BusinessMap from South Africa and theparticipants of the OGEMID network led by Thomas Wälde, and UNCTAD’s network of experts oninternational investment agreements.

The Report benefited from overall advice from John H. Dunning, Senior Economic Advisor.

The financial support of the Governments of Germany, Norway, Sweden and the United Kingdomis gratefully acknowledged.

Table of contents

Page

PREFACE ..................................................................................................................................... iii

ACKNOWLEDGEMENTS........................................................................................................ iv

OVERVIEW ............................................................................................................................... xiii

PART ONEFDI FALLS AGAIN—UNEVENLY

CHAPTER I. FDI DOWN 21% GLOBALLY ...................................................................... 3

A. The downturn continues ................................................................................................................... 4

B. The unevenness of the downturn ................................................................................................... 5

C. Performance Index captures the downturn’s unevenness ..................................................... 9

D. Why the downturn? ......................................................................................................................... 151. Macroeconomic factors ............................................................................................................................. 152. Microeconomic factors .............................................................................................................................. 173. Institutional factors .................................................................................................................................... 19

E. Softening the impact ........................................................................................................................ 19

F. Towards mega blocks? .................................................................................................................... 23

G. Prospects .............................................................................................................................................. 26

CHAPTER II. UNEVEN PERFORMANCE ACROSS REGIONS ............................... 33

Introduction ............................................................................................................................................... 33

A. Developing countries ....................................................................................................................... 331. Africa ....................................................................................................................................................... 33

a. FDI down by two-fifths .................................................................................................................... 34b. Policy developments—improving the investment climate .......................................................... 36c. Prospects—quick recovery likely ................................................................................................... 37

2. Asia and the Pacific ................................................................................................................................... 40a. FDI down again, but several countries receiving significantly higher flows .......................... 40b. Policy developments—more unilateral measures to improve the investment environment .. 48c. Long-term prospects promising but short-term outlook uncertain ............................................ 49

3. Latin America and the Caribbean ........................................................................................................... 52a. The downturn—concentrated in Argentina, Brazil and Chile .................................................... 52b. Policy developments—linking FDI to development strategies .................................................. 55c. Prospects—not much change ........................................................................................................... 58

B. Central and Eastern Europe ......................................................................................................... 591. Defying the global trend ........................................................................................................................... 602. FDI in the Russian Federation—taking off? ........................................................................................ 623. The challenge of EU enlargement ........................................................................................................... 644. Prospects—mostly sunny .......................................................................................................................... 66

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesvi

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C. Developed countries ......................................................................................................................... 681. FDI down, as cross-border M&As dwindle .......................................................................................... 682. Policy developments—continuing liberalization ................................................................................ 733. Prospects—hinging on economic recovery ........................................................................................... 74

PART TWOENHANCING THE DEVELOPMENT DIMENSION OF

INTERNATIONAL INVESTMENT AGREEMENTS

INTRODUCTION....................................................................................................................... 83

CHAPTER III. KEY NATIONAL FDI POLICIES AND INTERNATIONALINVESTMENT AGREEMENTS ............................................................................................ 85

A. Key national FDI policies .............................................................................................................. 861. Attracting investment ................................................................................................................................ 862. Benefiting more from FDI ........................................................................................................................ 873. Addressing concerns about TNCs ........................................................................................................... 88

B. The growth of IIAs ........................................................................................................................... 881. Bilateral agreements .................................................................................................................................. 892. Regional and interregional agreements ................................................................................................. 913. Multilateral agreements ............................................................................................................................. 91

C. Features of IIAs at different levels ............................................................................................ 931. Bilateral approaches ................................................................................................................................... 932. Regional and interregional approaches ................................................................................................. 943. Multilateral approaches ............................................................................................................................. 94

CHAPTER IV. EIGHT KEY ISSUES: NATIONAL EXPERIENCESAND INTERNATIONAL APPROACHES ........................................................................... 99

A. Definition of investment ................................................................................................................. 991. Why the definition of investment matters ............................................................................................ 992. Scope of definitions ................................................................................................................................. 1003. Options for the future .............................................................................................................................. 101

B. National treatment ......................................................................................................................... 1021. The centrality of national treatment..................................................................................................... 1022. Patterns of national policy ..................................................................................................................... 1023. National treatment and economic impact ............................................................................................ 103

a. Pre-establishment ............................................................................................................................. 104b. Post-establishment ........................................................................................................................... 107

4. National treatment in IIAs ...................................................................................................................... 1075. Options for the future .............................................................................................................................. 109

C. Nationalization and expropriation ............................................................................................ 1101. The sensitivity of indirect takings and national policy dilemmas ................................................ 1102. Coverage in IIAs ....................................................................................................................................... 112

D. Dispute settlement ......................................................................................................................... 1141. National policies on dispute settlement in the investment field ................................................... 1142. Legal effectiveness ................................................................................................................................... 1153. Coverage in IIAs ....................................................................................................................................... 1154. Key issues and options for the future .................................................................................................. 116

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E. Performance requirements .......................................................................................................... 1191. Why use them? .......................................................................................................................................... 1192. Declining incidence .................................................................................................................................. 1193. How effective are they? .......................................................................................................................... 1204. Coverage in IIAs ....................................................................................................................................... 1205. Options for the future .............................................................................................................................. 121

F. Incentives .......................................................................................................................................... 1231. Why use them? .......................................................................................................................................... 1232. Incentives-based competition for FDI intensifies ............................................................................. 1243. Are incentives worth their cost? ........................................................................................................... 1254. Few international agreements restrict the use of incentives—but some do ............................... 1265. Options for the future .............................................................................................................................. 127

G. Transfer of technology .................................................................................................................. 1291. The need for policies to promote technology transfer ..................................................................... 1292. Shifting towards a more market-friendly approach in national policies ..................................... 1303. The right mix of policy instruments and conditions ........................................................................ 1304. International agreements mirror the shift in national policies ...................................................... 131

H. Competition policy ......................................................................................................................... 1341. Policy challenges ...................................................................................................................................... 1342. International cooperation arrangements .............................................................................................. 135

CHAPTER V. THE IMPORTANCE OF NATIONAL POLICY SPACE ................. 145

A. Objectives of IIAs ........................................................................................................................... 147

B. Structure ............................................................................................................................................ 147

C. Content ............................................................................................................................................... 149

D. Implementation of IIAs ................................................................................................................ 151

CHAPTER VI. HOME COUNTRIES AND INVESTORS ........................................... 155

A. Home country measures ............................................................................................................... 1551. Broad scope of measures ......................................................................................................................... 1552. Current use by developed countries ..................................................................................................... 1563. Effectiveness .............................................................................................................................................. 1584. The IIA dimension .................................................................................................................................... 1595. Enhancing the development dimension ............................................................................................... 161

B. Good corporate citizenship ......................................................................................................... 1641. The concept ................................................................................................................................................ 1642. Its international dimension ..................................................................................................................... 166

PART TWO CONCLUSIONS: THE CHALLENGEOF THE DEVELOPMENT DIMENSION ........................................................................ 171

REFERENCES ......................................................................................................................... 173

ANNEX A. ADDITIONAL TEXT TABLES ..................................................................... 185

ANNEX B. STATISTICAL ANNEX ................................................................................... 231

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesviii

PageSELECTED UNCTAD PUBLICATIONS ON TRANSNATIONALCORPORATIONS AND FOREIGN DIRECT INVESTMENT .................................. 299

QUESTIONNAIRE ................................................................................................................. 305

Boxes

I.1. The world’s largest transnational corporations ............................................................................................ 5I.2. FDI booms and busts since 1970 ................................................................................................................. 16I.3. Divestment: factors and evidence ................................................................................................................ 18I.4. Technology payments by developing countries and the FDI downturn ................................................ 20I.5. UNCTAD’s survey of investment promotion agencies ............................................................................ 28I.6. Is a recovery in FDI flows on the way? ..................................................................................................... 30II.1. What Investment Policy Reviews show ...................................................................................................... 36II.2. The need for an integrated approach to attract FDI to Africa and benefit more from it:

an African Investment Initiative .................................................................................................................. 39II.3. The FDI census in Bangladesh ..................................................................................................................... 42II.4. China and India–what explains their different FDI performance? ........................................................ 43II.5. Effects of regional agreements on FDI in Asia ......................................................................................... 47II.6. Indonesia’s Investment Year 2003 ............................................................................................................... 48II.7. The Indo–Lanka free trade agreement and FDI ........................................................................................ 49II.8. Regional integration and TNC production networks in ASEAN ............................................................ 51II.9. A new FDI strategy in Chile ........................................................................................................................ 55II.10. NAFTA and FDI ............................................................................................................................................. 58II.11. What made Luxembourg the world’s largest FDI recipient and investor in 2002? ............................ 69II.12. What reverse flows mean for Germany’s FDI statistics .......................................................................... 73II.13. Measures to promote inward FDI in Japan ................................................................................................ 77III.1. The contents of BITs ..................................................................................................................................... 89III.2. Investment highlights of a new-age economic partnership ..................................................................... 90III.3. The Free Trade Area of the Americas ......................................................................................................... 92IV.1. How serious is crowding out? .................................................................................................................... 105IV.2. The impact of NAFTA on Mexico’s policy on admission and establishment .................................... 109IV.3. Regulatory takings under Chapter 11 of NAFTA—four cases ............................................................. 113IV.4. Calculating compensation—the Santa Elena–Costa Rica arbitration .................................................. 114IV.5. Investment arbitration and the control of claims made by investors .................................................. 117IV.6. The OECD’s checklist on FDI incentives ................................................................................................ 128IV.7. Implementation of transfer of technology provisions ............................................................................ 133V.1. Regulatory discretion in international trade agreements ....................................................................... 145V.2. The right to regulate .................................................................................................................................... 146V.3. Emergency safeguard mechanisms in the area of investment ............................................................... 150V.4. The effect of the MFN clause in BITs—the example of performance requirements ........................ 152VI.1. The Business Linkages Challenge Fund ................................................................................................... 157VI.2. Support for investment and private-sector development in the Cotonou Agreement ....................... 160VI.3. Home country measures to mitigate risk linked to FDI in LDCs ........................................................ 162VI.4. The OECD Guidelines for Multinational Enterprises ............................................................................ 168

Figures

I.1. Total resource flows to developing countries, by type of flow, 1990–2002 ........................................... 4I.2. FDI inflows, private domestic investment and public investment in developing countries

and Central and Eastern Europe, 1990–2000 ............................................................................................... 4I.3. Transnationality index of host economies, 2000 ......................................................................................... 6I.4. Inward FDI flows, by sector, 1999–2000 and 2001 .................................................................................... 8I.5. FDI inflows, by type of financing, 1990–2002 ............................................................................................ 8I.6. Main gainers and losers in Inward FDI Performance ranking, 1998–2000 to 1999–2001 .................11I.7. Inward FDI Performance Index, by main region, 1988–1990, 1993–1995,

1998–2000 and 1999–2001 ........................................................................................................................... 12I.8. The share of cross-border M&As in total M&As worldwide, 1987–2002 ........................................... 17I.9. Profitability of the largest 99 non-financial TNCs, 1990–2002 ............................................................. 17I.10. Types of changes in FDI laws and regulations, 2002 .............................................................................. 21I.11. Number of BITs and DTTs concluded, 1990–2002 .................................................................................. 21I.12. Density mapping on BITs worldwide, 1 January 2003 ............................................................................ 22I.13. Density mapping on DTTs worldwide, 1 January 2003 ........................................................................... 22

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I.14. FDI stocks among the Triad and economies in which FDI from the Triad membersdominates, 1985 and 2001 ............................................................................................................................ 24

I.15. BITs and DTTs between the Triad and their geographical distribution, 2002 ..................................... 25I.16. Reinvested earnings as a percentage of FDI inflows, by region, 1990–2001 ...................................... 28II.1. Africa: FDI inflows, top 10 countries, 2001 and 2002 ............................................................................ 34II.2. Africa: FDI inflows and their share in gross fixed capital formation, 1990–2002 ............................. 35II.3. Total external resource flows to Africa, by type of flow, 1990–2001................................................... 35II.4. Africa: BITs and DTTs concluded, 1992–2002 ......................................................................................... 37II.5. Africa: selected bilateral, regional and interregional agreements containing FDI provisions,

concluded or under negotiation, 2003 ........................................................................................................ 38II.6. Africa: FDI prospects, 2003–2005 .............................................................................................................. 39II.7. Asia and the Pacific: the share of FDI inflows in gross fixed capital formation, 1990–2002 .......... 41II.8. Asia and the Pacific: FDI flows, top 10 economies, 2001 and 2002 .................................................... 41II.9. Asia and the Pacific: host economies defying the downturn in 2002 ................................................... 42II.10. Asia and the Pacific: BITs and DTTs concluded, 1992–2002 ................................................................ 49II.11. Asia and the Pacific: selected bilateral, regional and interregional agreements containing

FDI provisions, concluded or under negotiation, 2003 ........................................................................... 50II.12. FDI prospects in Asia, 2003-2005 ............................................................................................................... 52II.13. Latin America and the Caribbean: shares of the primary, secondary and tertiary

sectors in total FDI flows in selected countries, 1997–2001 and 2002 ................................................ 53II.14. Latin America and the Caribbean: FDI inflows and their share in gross fixed capital

formation, 1990–2002 ................................................................................................................................... 53II.15. Latin America and the Caribbean: FDI flows, top 10 countries, 2001 and 2002 ................................ 54II.16. FDI inflows into Argentina and Brazil, by type of financing, 1999–2002, by quarter ..................... 55II.17. Latin America and the Caribbean: BITs and DTTs concluded, 1992–2002 ......................................... 56II.18. Latin America and the Caribbean: selected bilateral, regional and interregional agreements

containing FDI provisions, concluded or under negotiation, 2003 ....................................................... 57II.19. CEE: FDI inflows and their share in gross fixed capital formation, 1990–2002 ................................ 59II.20. CEE: FDI flows, top 10 countries, 2001 and 2002 .................................................................................. 60II.21. Expansion and reduction of capacity by foreign affiliates in Hungary— the “ins” and the

“outs”, 2002–June 2003 ............................................................................................................................... 62II.22. The Russian FDI roller coaster, 1993–2002 .............................................................................................. 63II.23. Russian Federation: industry composition of inward FDI stock, 2002 ................................................. 64II.24. CEE: BITs and DTTs concluded, 1992–2002 ............................................................................................ 66II.25. CEE: selected bilateral and regional agreements containing FDI provisions, concluded or

under negotiation, 2003 ................................................................................................................................ 67II.26. CEE: forecast mostly sunny, 2003–2005 .................................................................................................... 68II.27. Developed countries: FDI flows, top 10 countries, 2001 and 2002 ...................................................... 70II.28. Developed countries: FDI inflows and their share in gross fixed capital formation,

1990–2002 ....................................................................................................................................................... 71II.29. United States: FDI flows, by major partner, 1990-2002 ......................................................................... 71II.30. United States: FDI flows, by major sector and industry, 1990-2002 .................................................... 72II.31. Developed countries: BITs and DTTs concluded, 1992–2002 ................................................................ 74II.32. Western Europe: selected bilateral, regional and interregional agreements containing

FDI provisions, concluded or under negotiation, 2003 ........................................................................... 75II.33. Canada and the United States: selected bilateral, regional and interregional agreements

containing FDI provisions, concluded or under negotiation, 2003 ....................................................... 76II.34. Developed countries: FDI prospects, 2003–2005 ..................................................................................... 78IV.1. Reservations in the negotiations of the Multilateral Agreement on Investment,

by industry, 1998 .......................................................................................................................................... 103

Tables

I.1. Selected indicators of FDI and international production, 1982–2002 ..................................................... 3I.2. FDI inflows to major economies, 2001 and 2002 ........................................................................................ 7I.3. Outward FDI flows, by geographical destination, 1999–2001 .................................................................. 9I.4. Ranks in the UNCTAD Inward FDI Performance Index, 1999–2001 ................................................... 10I.5. Leading and lagging 20 economies in Inward FDI Performance and Potential Indices,

1998–1990, 1993–1995 and 1999–2001 ..................................................................................................... 13I.6. Matrix of inward FDI performance and potential, 1988–1990, 1993–1995 and 1999–2001 ............ 14I.7. Cross-border M&As with values of over $1 billion, 1987–2002 ........................................................... 17I.8. Changes in national regulations of FDI, 1991–2002 ............................................................................... 21

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I.9. The similarity index between the geographical distribution pattern of BITs and DTTs andthat of FDI outward stocks of the United States, the EU and Japan, 2001 .......................................... 25

I.10. The propensity to sign BITs and DTTs with associate partners and non-associate partnersof the Triad members ..................................................................................................................................... 26

II.1. Intra-regional FDI flows in developing Asia, 1999–2001 ....................................................................... 46II.2. Catching up—inward FDI stock as a percentage of GDP in CEE, 1995 and 2001 ............................. 61II.3. CEE: a car-assembly bonanza, 2003 ........................................................................................................... 61II.4. Who competes with whom? .......................................................................................................................... 63II.5. Inward FDI stock as a percentage of GDP, selected economies, 2001 ................................................. 64II.6. Key greenfield FDI projects started in the Russian Federation, January–April 2003 ........................ 65II.7. Making corporate taxes attractive in the Visegrad-4 countries—rates announced by

June 2003 for the rest of the year and 2004 .............................................................................................. 66II.8. Matrix of specialization between accession countries and non-accession

countries of CEE, 2003 ................................................................................................................................. 67III.1. Host country determinants of FDI ............................................................................................................... 85III.2. How much FDI is covered by BITs—and how much by DTTs, 2000 ................................................... 89IV.1. Examples of IIAs prohibiting various types of performance requirements not covered under

the TRIMs Agreement ................................................................................................................................. 122IV.2. Technology import strategies, policies and conditions .......................................................................... 132V.1. A thought experiment to help analysis—applying the positive list approach to investment .......... 148

Box figures

I.2.1. Growth rates of world FDI flows and GDP, 1980–2002 ......................................................................... 16I.2.2. How big are cross-border M&As? The share of cross–border M&As in the market

capitalization of world stock exchange markets, 1990–2002 ................................................................. 16I.4.1. FDI inflows and royalty and licence fee payments, by region and the world, 1990–2001 ............... 20I.5.1. IPAs perceive that FDI prospects in their countries will be improving ................................................ 29I.5.2. Perceptions of FDI prospects vary from region to region ....................................................................... 29I.5.3. A shift is expected in the industrial composition of FDI ........................................................................ 29II.5.1. Asia and the Pacific: FDI flows to ASEAN and SAPTA, 1990–2002 ................................................... 47II.12.1. Germany: cumulative FDI flows, by component, January 1996-June 2002 ......................................... 73

Box tables

I.1.1. Snapshot of the world’s 100 top TNCs, top 50 from developing economies and top 25 fromCEE, 2001 .......................................................................................................................................................... 5

I.3.1. Divestment after mergers: changes in the number of foreign affiliates and host countriesin selected cases ............................................................................................................................................. 18

I.6.1. World Bank’s estimates of FDI inflows to developing countries, 2002–2004..................................... 30II.4.1. China and India: selected FDI indicators, 1990, 2000-2002 .................................................................. 44II.11.1. FDI flows to and from Luxembourg, by component, 2002 ..................................................................... 69

Annex A. Additional text tables

A.I.1. The world’s top 100 non-financial TNCs, ranked by foreign assets, 2001 ........................................ 187A.I.2. The top 50 non-financial TNCs from developing economies,

ranked by foreign assets, 2001 .................................................................................................................. 189A.I.3. The top 25 non-financial TNCs from Central and Eastern Europe,

ranked by foreign assets, 2001 .................................................................................................................. 191A.I.4. Inward FDI flows, by industry, 1999–2001 ............................................................................................. 192A.I.5. Inward FDI Performance Index rankings, 1990–2001 ........................................................................... 193A.I.6. Inward FDI Performance Index, by region, 1988-1990, 1993-1995,

1998-2000 and 1999-2001 .......................................................................................................................... 196A.I.7. Raw data and scores for the variables included in the UNCTAD Inward

FDI Potential Index, 1999–2001 ............................................................................................................... 197A.I.8. Inward FDI Potential Index rankings, 1990–2001 ................................................................................. 200A.I.9. Cross-border M&A deals with values of over $1 billion completed in 2002 .................................... 203A.I.10. Gross FDI and divestment in France, Germany, the United Kingdom and the United States,

1983–2002 ..................................................................................................................................................... 205

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A.I.11. Germany, Japan and the United States: receipts of royalties and licence fees from affiliatedfirms, by country, 1985–2001 .................................................................................................................... 206

A.I.12. Receipts of royalties and licence fees by affiliated firms and by country, Germany andthe United States, 1998 and 2000–2001 ................................................................................................... 207

A.I.13. Main international instruments dealing with FDI, 1948–2003 ............................................................. 208A.I.14. Bilateral association, cooperation, framework and partnership agreements including investment-

related provisions, signed by the European Community, by the European Free TradeAssociation, by the United States and by Canada with third countries, as of July 2003 ............... 219

A.I.15. Number of parent corporations and foreign affiliates, by area and economy,latest available year ..................................................................................................................................... 222

A.II.1. Asia and the Pacific: sources of FDI finance in selected economies, 1999–2002 ............................ 225A.II.2. Asia and the Pacific: rates of return on FDI, selected economies, 1999–2001 ................................. 226A.II.3. Asia and the Pacific: possible effects of selected regional agreements on FDI ................................ 227A.II.4. Selected cases of expansion and reduction of production capacities by foreign affiliates in

Hungary, 2002-June 2003 ........................................................................................................................... 229A.II.5. Developed countries: components of FDI flows in selected countries, 2001–2002 ......................... 230

Annex B: Statistical annex

Definitions and sources ........................................................................................................................ 231

A. General definitions ......................................................................................................................... 2311. Transnational corporations ..................................................................................................................... 2312. Foreign direct investment ....................................................................................................................... 2313. Non-equity forms of investment ........................................................................................................... 232

B. Availability, limitations and estimates of FDI datapresented in the World Investment Report .............................................................................. 2321. FDI flows .................................................................................................................................................... 232

a. FDI inflows ....................................................................................................................................... 233b. FDI outflows ..................................................................................................................................... 239

2. FDI stocks .................................................................................................................................................. 244

C. Data revisions and updates ......................................................................................................... 247

D. Data verification ............................................................................................................................. 247

E. Definitions and sources of the data in annex tables B.5 and B.6 ................................... 248

F. Definitions and sources of the data oncross-border M&As in annex tables B.7-B.10 ....................................................................... 248

Annex tables

B.1. FDI inflows, by host region and economy, 1991-2002 .......................................................................... 249B.2. FDI outflows, by home region and economy, 1991-2002 ..................................................................... 253B.3. FDI inward stock, by host region and economy,

1980, 1985, 1990, 1995, 2000, 2001 and 2002 ....................................................................................... 257B.4. FDI outward stock, by home region and economy,

1980, 1985, 1990, 1995, 2000, 2001 and 2002 ....................................................................................... 262B.5. Inward and outward FDI flows as a percentage of gross fixed capital formation,

by region and economy, 1991-2002 .......................................................................................................... 267B.6. Inward and outward FDI stocks as a percentage of gross domestic product, by region and

economy, 1980, 1985, 1990, 1995, 2000, 2001 and 2002 ..................................................................... 278B.7. Cross-border M&A sales, by region/economy of seller, 1988-2002 ................................................... 289B.8. Cross-border M&A purchases, by region/economy of purchaser, 1988-2002 ................................... 293B.9. Cross-border M&As, by sector and industry of seller, 1988-2002 ...................................................... 296B.10. Cross-border M&As, by sector and industry of purchaser, 1988-2002 .............................................. 297

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesxii

OVERVIEW

FDI FALLS AGAIN—UNEVENLY

Global FDI flows fall again in 2002amid weak economic performance.

Global FDI inflows declined in 2002 for thesecond consecutive year, falling by a fifth to $651billion—the lowest level since 1998. Flowsdeclined in 108 of 195 economies. The main factorbehind the decline was slow economic growth inmost parts of the world and dim prospects forrecovery, at least in the short term. Also importantwere falling stock market valuations, lowercorporate profitability, a slowdown in the pace ofcorporate restructuring in some industries and thewinding down of privatization in some countries.A big drop in the value of cross-border mergersand acquisitions (M&As) figured heavily in theoverall decline. The number of M&As fell froma high of 7,894 cases in 2000 to 4,493 cases in2002—and their average value, from $145 millionin 2000 to $82 million in 2002. The number ofM&A deals worth more than $1 billion declinedfrom 175 in 2000 to only 81 in 2002—again, thelowest since 1998.

For the largest transnational corporations(TNCs) most indicators of the size of their foreignoperations declined slightly in 2001 (the latest yearfor which data are available), the beginning of theFDI downturn. Despite the burst of the bubble inthe information and communication technologymarket, there has been no significant shift in theindustrial composition of FDI—nor in the rankingof the world’s top 100 TNCs, the top 50 TNCs fromdeveloping countries and the top 25 TNCs fromCentral and Eastern Europe (CEE).

The decline in FDI in 2002 was unevenacross regions and countries. It was also unevensectorally: flows into manufacturing and servicesdeclined, while those into the primary sector rose.The equity and intra-company loan components ofFDI declined more than reinvested earnings. FDIentering host economies through M&As went downmore than that through greenfield projects.

Geographically, flows to developed anddeveloping countries each fell by 22% (to $460billion and $162 bill ion, respectively). Twocountries, the United States and the United

Kingdom, accounted for half of the decline in thecountries with reduced inflows. Among developingregions, Latin America and the Caribbean was hithard, suffering its third consecutive annual declinein FDI with a fall in inflows of 33% in 2002. Africaregistered a decline of 41%; but after adjusting forthe exceptional FDI inflows in 2001, there was nodeclline. FDI in Asia and the Pacific declined theleast in the developing world because of China,which with a record inflow of $53 billion becamethe world’s biggest host country. CEE did the bestof all regions, increasing its FDI inflows to a record$29 billion.

The main developments by region were:

• There was a sizable decline in FDI inflows todeveloped countries, accompanying a continuingslowdown in corporate investment, decliningstock prices and a slowdown in the consolidationof activities in some industries—all influencedby weak economic conditions. In severalcountries, repayments of intra-company loanscontributed to lower FDI flows. For instance,a large part of the decline in the United Stateswas due to repayments of loans by foreignaffiliates to parent companies, presumably totake advantage of the lower interest rates in theUnited States as well as for other reasons (suchas improving the debt-to-equity ratio of parentfirms). The most notable feature of the declinein FDI in the developed countries was the plungein cross-border M&As, especially in the UnitedStates and the United Kingdom. In all, FDIinflows declined in 16 of the 26 developedcountries. Australia, Germany, Finland and Japanwere among the countries with higher FDIinflows in 2002.

FDI outflows from the developed countries alsodeclined in 2002 to $600 billion; the fall wasconcentrated in France, the Netherlands and theUnited Kingdom. Outflows from Austria,Finland, Greece, Norway, Sweden and theUnited States increased. In both outflows andinflows Luxembourg headed the list of largesthost and home countries (for special reasons).The prospects for 2003 depend on the strengthof the economic recovery, investor confidence

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesxiv

and a resumption of cross-border M&As. Withmany TNCs continuing to follow cautiousgrowth and consolidation strategies, M&As arenot yet showing much dynamism. As a group,developed countries are not likely to improvetheir FDI performance in 2003.

• Africa suffered a dramatic decline in FDIinflows—from $19 billion in 2001 to $11 billionin 2002, largely the result of exceptionally highinflows in 2001 (two M&As in South Africa andMorocco, not repeated in 2002). Flows to 23of the continent’s 53 countries declined. FDIin the oil industry remained dominant. Angola,Algeria, Chad, Nigeria and Tunisia accountedfor more than half the 2002 inflows. Only SouthAfrican enterprises made significant investmentsabroad. Oil exploration by major TNCs inseveral oil-rich countries make the 2003 outlookfor FDI inflows more promising.

• The Asia-Pacific region was not spared, either,from the global decline in FDI inflows in 2002.FDI inflows to the region declined for the secondconsecutive year—from $107 billion in 2001to $95 billion, uneven by subregion, country andindustry. All subregions, except Central Asiaand South Asia, received lower FDI flows thanin 2001. Flows to 31 of the region’s 57economies declined. However, several countriesreceived significantly higher flows. Intra-regional investment flows, particularly in South-East Asia and North-East Asia, remained strong,partly as a result of the relocation of productionactivities, expanding regional productionnetworks and continued regional integrationefforts. FDI in the electronics industry continuedto decline due to the rationalization ofproduction activities in the region andadjustments to weak global demand. While long-term prospects for an increase in FDI flows tothe region remain promising, the short-termoutlook is uncertain.

• In Latin America and the Caribbean, FDI flowsdeclined for the third consecutive year, from $84billion in 2001 to $56 billion, affecting allsubregions and 28 of the region’s 40 economies.Factors specific to the region contributed to thisdecline, especially the acute economic crisis inArgentina and economic and politicaluncertainty in some other countries. The servicessector was affected most by the decline.Manufacturing FDI proved to be quite resilient,with barely any change, despite the slowdownfrom the region’s major export destination, theUnited States, and the growing relocation oflabour-intensive activities to Asia. FDI isexpected to remain at the same level in 2003and to start rising thereafter.

• CEE again bucked the global trend by reachinga new high of $29 billion in FDI inflows,compared to $25 billion in 2001. That increasemasked divergent trends, however, with FDIfalling in 10 countries and rising in 9. FDI flowsvaried across industries as well, with theautomobile industry doing quite well, and theelectronics industry facing problems. There wasalso a tendency of firms (including foreignaffiliates) in several CEE countries, particularlythose slated for accession to the EU, to shedactivities based on unskilled labour and toexpand into higher value-added activities, takingadvantage of the educational level of the locallabour force. Led by a surge of flows into theRussian Federation, and fuelled by themomentum of EU enlargement, the region’s FDIinflows are likely to increase further in 2003.Of the two factors determining this trend, thesurge of FDI into the Russian Federation seemsto be more fragile in the medium and long termthan the spur of EU enlargement. In the shortterm, however, both factors are helpingovercome the impact of the completion ofprivatization programmes and the slowdown ofGDP growth expected in some key CEEcountries.

UNCTAD’s Inward FDI Performance Indexranks countries by the FDI they receive relativeto their economic size, calculated as the ratio ofthe country’s share in global FDI inflows to itsshare in global GDP. The Index for 1999–2001indicates that Belgium and Luxembourg remainedthe top performer. Of the top 20 performers, 6 areindustrialized, 2 are mature East-Asian tigereconomies, 3 are economies in transition and theremaining 9 are developing economies, includingthree from sub-Saharan Africa. UNCTAD’s 1999–2001 Inward FDI Potential Index, measuring thepotential—based on a set of structural variables—of countries in attracting FDI, indicates that 16 ofthe 20 leading countries are developed countriesand four of them, mature East-Asian tigereconomies.

Many industrial, newly industrializing andadvanced transition economies are in the front-runner category (with high FDI potential andperformance), while most poor (or unstable)economies are in the under-performer category(with both low FDI potential and performance).Economies in the above-potential category (withlow FDI potential but strong FDI performance)include Brazil , Kazakhstan and Viet Nam.Economies in the below-potential category (withhigh FDI potential but low FDI performance)include Australia, Italy, Japan, Republic of Korea,Taiwan Province of China and the United States.

OVERVIEW xv

Prospects remain dim for 2003, butshould improve thereafter.

All in all, UNCTAD predicts that FDI flowswill stablized in 2003. Flows to the developingcountries and developed countries are likely toremain at levels comparable to those in 2002, whilethose to CEE are likely to continue to rise. In thelonger run, beginning with 2004, global flowsshould rebound and return to an upward trend. Theprospects for a future rise depend on factors at themacro-, micro- and institutional levels.

The fundamental economic forces drivingFDI growth remain largely unchanged. Intensecompetition continues to force TNCs to invest innew markets and to seek access to low-costresources and factors of production. Whether theseforces lead to significantly higher FDI in themedium term depends on a recovery in worldeconomic growth and a revival in stock markets,as well as the resurgence of cross-border M&As.Privatization may also be a factor. FDI policiescontinue to be more favourable, and new bilateraland regional arrangements could provide a betterenabling framework for cross-border investment.

Findings of surveys of TNCs and investmentpromotion agencies (IPAs) carried out by UNCTADand other organizations paint an optimistic picturefor the medium term. IPAs in developing countriesare far more sanguine than their developed worldcounterparts. Developing countries are alsoexpected to be more active in outward FDI. IPAsexpect greenfield investment to become moreimportant as a mode of entry, especially indeveloping countries and CEE. Tourism andtelecom are expected to lead the recovery.

Government policies are becoming moreopen, involving more incentives andfocused promotion strategies…

Facing diminished FDI inflows, manygovernments accelerated the liberalization of FDIregimes, with 236 of 248 regulatory changes in 70countries in 2002 facilitating FDI. Asia is one of themost rapidly liberalizing host regions. An increasingnumber of countries, including those in Latin Americaand the Caribbean, are moving beyond opening toforeign investment to adopting more focused andselective targeting and promotion strategies.

Financial incentives and bidding wars forlarge FDI projects have increased as competitionintensified. IPAs, growing apace in recent years,are devoting more resources to targeting greenfieldinvestors and to mounting after-care services forexisting ones.

… as well as participation in moreinvestment and trade agreements.

More countries are concluding bilateralinvestment treaties (BITs) and double taxationtreaties (DTTs), as part of a longer trend, and notsolely in response to the FDI downturn. In 2002,82 BITs were concluded by 76 countries, and 68DTTs by 64 countries. Many countries areconcluding BITs with countries in their own regionto promote intra-regional FDI. Asian and Pacificcountries, for instance, were party to 45 BITs,including 10 signed with other countries in thatregion.

There has also been an increase in thenumber of trade and investment agreements. Manyrecent trade agreements address investmentdirectly—or have indirect implications forinvestment, a trend conspicuously different fromearlier regional and bilateral trade agreements. Thelargest number in developed countries wereconcluded by the EU, mainly involving partnersin CEE and Mediterranean countries. The EUenlargement through the accession of 10 newmembers in 2004 and the forthcoming negotiationsof ACP-EU Economic Partnership Agreementsmight also have an impact on FDI in the respectiveregions.

In Asia and the Pacific, the number of suchagreements has increased rapidly—to improvecompetitiveness, attract more FDI and better meetthe challenges emanating from heightenedcompetition. ASEAN is taking the lead. In LatinAmerica and the Caribbean, NAFTA has been themost prominent example, leading to increased FDIflows especially into the assembly of manufacturedgoods for the United States market. The Free TradeArea of the Americas, now under negotiation, couldexpand market access, promoting efficiency-seeking FDI. In Africa, progress towards thecreation of functioning free trade and investmentareas has been slow, though several agreements,mostly subregional, have been concluded. AGOA(not a free trade agreement but a unilateralpreference scheme) holds some promise for theexpansion of trade and investment in the region.

For the EU-accession countries of CEE, apolicy challenge is to harmonize FDI regimes withEU regulations, with the twin aims of conformingto EU regulations and maximizing the potentialbenefits from EU instruments, such as regionaldevelopment funds. Successful adjustment to EUmembership in the accession countries will alsodepend on their ability to establish and developthe institutional framework required to administerand properly channel the variety of funds availablefrom European Community sources for assisting

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesxvi

economic development. The non-accessioncountries face the challenge of updating andmodernizing their FDI promotion to optimize thepotential benefits being on a “new frontier” forefficiency-seeking FDI—by attracting firms choosingto switch to lower cost locations within CEE.

Converging patterns of FDI links andinvestment and trade agreements aregenerating mega blocks.

The global stock of FDI, owned by some64,000 TNCs and controlling 870,000 of theirforeign affiliates, increased by 10% in 2002—tomore than $7 trillion. Technology payments, mostlyinternal to TNCs, held steady in 2001 despite thenear halving of FDI flows. Value added by foreignaffiliates in 2002 ($3.4 trillion) is estimated toaccount for about a tenth of world GDP. FDIcontinues to be more important than trade indelivering goods and services abroad: global salesby TNCs reached $18 trillion, as compared withworld exports of $8 tri l l ion in 2002. TNCsemployed more than 53 million people abroad.

The developed world accounts for two-thirdsof the world FDI stock, in both ownership and

location. Firms from the EU have become by farthe largest owners of outward FDI stock, some $3.4trillion in 2002, more than twice that of the UnitedStates ($1.5 trillion). In developing countries, theinward FDI stock came to nearly one-third of GDPin 2001, up from a mere 13% in 1980. OutwardFDI stocks held by developing countries havegrown even more dramatically, from 3% of theirGDP in 1980 to 13% in 2002.

Over time, the concentration of outward andinward FDI in the Triad (EU, Japan and the UnitedStates) has remained fairly stable. By 2002 thepattern of DTTs was quite similar to the Triadpattern of FDI flows, while the pattern of BITs hada weaker resemblance. For both BITs and DTTs,the Triad’s associate partners (countries with morethan 30% of their FDI with a Triad member) scorehigher than non-associate partners. This suggeststhat the “economic space” for Triad members andtheir developing country associates is beingenlarged from national to regional—and thattreaties are making investment blocks stronger. Theemerging nexus of mutually reinforcing trade andinvestment agreements may be providing gains forthe developing countries that are “insiders” in suchmega blocks.

ENHANCING THE DEVELOPMENTDIMENSION OF INTERNATIONAL

INVESTMENT AGREEMENTS

Countries seek FDI to help them grow anddevelop. Their national policies are key toattracting FDI and increasing its benefits.

To help attract FDI, countriesincreasingly conclude IIAs …

Countries conclude international investmentagreements (IIAs)—at the bilateral, regional andmultilateral levels—for various reasons. For mosthost countries, it is mainly to help attract FDI. Formost home countries, it is mainly to make theregulatory framework for FDI in host countriesmore transparent, stable, predictable and secure—and to reduce obstacles to future FDI flows. Ineither case, the regulatory framework for FDI, atwhatever level, is at best enabling. Whether FDIflows actually take place depends in the main oneconomic determinants.

The number of IIAs, especially at thebilateral and regional levels, has greatly increasedin the past decade, reflecting the importance of FDIin the world economy (see Part One of this WIR).

At the bilateral level, the most importantinstruments are bilateral investment treaties (BITs)and double taxation treaties (DTTs), with 2,181BITs and 2,256 DTTs signed by the end of 2002.BITs are primarily instruments to protect investors,although recent agreements by a few countries alsohave more of a liberalizing effect. (They are notconcluded between developed countries.) Theycover an estimated 7% of the stock of world FDIand 22% of the FDI stock in developing and CEEcountries. DTTs are primarily instruments toaddress the allocation of taxable income, includingto reduce the incidence of double taxation. Theycover some 87% of world FDI and some 57% ofFDI in developing and CEE countries.

OVERVIEW xvii

Although a few regional agreements dealexclusively with investment issues, the trend sofar has been to address such issues in tradeagreements. (The same applies to bilateral tradeagreements.) In effect, free trade agreements todayare often also free investment agreements.

At the multilateral level the few agreementsthat exist deal with specific investment-relatedissues (such as trade-related investment measures,insurance, dispute settlement, social policy matters)or they are sectoral (such as the General Agreementon Trade in Services (GATS)). There is nocomprehensive multilateral agreement forinvestment, although issues pertaining to such anidea are currently being discussed in the WTO.

Overall, the growth in the number of IIAsand their nature reflect the fact that nationalpolicies in the past decade have become morewelcoming to FDI. During 1991–2002, 95% of1,641 FDI policy changes had that effect.

Issues relating to IIAs are therefore comingto the fore in international economic diplomacy.This is so irrespective of what will or will nothappen at the multilateral level, simply becauseof what is happening now at the bilateral andregional levels. But if negotiations should takeplace at the multilateral level, these issues willacquire even greater importance. Whethergovernments negotiate IIAs, at what level and forwhat purpose is their sovereign decision. Theobjective of this WIR is simply to throw light ona range of issues that needs to be considered whennegotiating IIAs, seeking to clarify them from adevelopment perspective (and regardless of theoutcome of the ongoing multilateral investmentdiscussions).

Almost by definition, IIAs affect, to a greateror lesser extent, the regulatory framework for FDI,depending on their exact content. As a rule, theytend to make the regulatory framework moretransparent, stable and predictable—allowing theeconomic determinants to assert themselves. Theexpectation is that, if the economic determinantsare right, FDI will increase. In that respect,therefore, IIAs can influence FDI flows when theyaffect their determinants.

… which, by their nature, entail a lossof national policy space.

Experience shows that the best way ofattracting FDI and drawing more benefits from itis not passive liberalization alone. Liberalizationcan help get more FDI. But it is certainly notenough to get the most from it. Attracting types

of FDI with greater potential for benefiting hostcountries (such as FDI in technologically advancedor export oriented activities) is a more demandingtask than just liberalizing FDI entry and operations.And, once countries succeed in attracting foreigninvestors, national policies are crucial to ensurethat FDI brings more benefits. Policies can inducefaster upgrading of technologies and skills, raiselocal procurement, secure more reinvestment ofprofits, better protect the environment andconsumers and so on. They can also counter thepotential dangers related to FDI. For example, theycan contain anticompetitive practices and preventforeign affiliates from crowding out viable localfirms or acting in ways that upset local sensitivities.The instruments needed to put these policies inplace tend to be limited—or excluded altogether—by entering into IIAs.

The challenge for developing countriesis to find a development-orientedbalance…

What are the issues?

For developing countries, the most importantchallenge in future IIAs is to strike a balancebetween the potential contribution of suchagreements to increasing FDI flows and thepreservation of the ability to pursue development-oriented FDI policies that allow them to benefitmore from them— that is, the right to regulate inthe public interest. This requires maintainingsufficient policy space to give governments theflexibili ty to use such policies within theframework of the obligations established by theIIAs to which they are parties. The tension thiscreates is obvious. Too much policy space impairsthe value of international obligations. Too stringentobligations overly constrain national policy space.Finding a development-oriented balance is thechallenge—for the objectives, structure,implementation and content of IIAs.

… when negotiating the objectives,structure and implementation of IIAs…

Many IIAs incorporate the objective ofdevelopment among their basic purposes orprinciples, as a part of their preambular statementsor as specific declaratory clauses articulatinggeneral principles. The main advantage of suchprovisions is that they may assist in theinterpretation of substantive obligations, permittingthe most development friendly interpretation. Thispromotes flexibility and the right to regulate byensuring that the objective of development is

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesxviii

implied in all obligations and exceptions thereto—and that it informs the standard for assessing thelegitimacy of governmental action under anagreement.

The structure of agreements may reflectdevelopment concerns through special anddifferential treatment for developing countryparties. This entails differences in the extent ofobligations of developed and developing countryparties, with the latter assuming, either temporarilyor permanently, less onerous obligations that arealso non-reciprocal. Particularly important is theapproach to determine the scope of commitments.

• Under a “negative list” approach, countries agreeon a series of general commitments and then list,individually, all the areas these commitmentsdo not apply to. This approach tends to producean inventory of non-conforming measures. Italso increases predictability because it locks inthe status quo.

• Under a (GATS-type) “positive list” approach,countries list commitments they agree to makeand the conditions they attach to them. Thisapproach has the advantage that countries canmake commitments at their own pace anddetermine the conditions for doing this. For thesereasons the positive list approach is generallyregarded as more development friendly than thenegative list approach.

In theory, both approaches should arrive atthe same result, if countries had the capacity tomake proper judgments about individualactivities—or, more broadly, about makingcommitments—when concluding an agreement. Inpractice, it is unlikely that developing countrieswould have all the information necessary to makethe necessary judgments at the time of concludingagreements. As a result, the negative list approachmight involve greater liberalization than countriesmay wish to commit themselves to start with. Buteven a positive list approach can lead to significantliberalization—because in practice, negotiationsgenerate pressures on countries to assume higherand broader commitments. And once a commitmenthas been made, it is difficult to reverse it.

The implementation of IIAs can also bedesigned with flexibility for development as theorganizing principle. Two approaches areparticularly relevant here: first, the legal character,mechanisms and effects of an agreement, andsecond, promotional measures and technicalassistance:

• Whether an agreement is legally binding orvoluntary affects the intensity of particular

obligations. Indeed, it is possible to have a mixof binding commitments and non-binding “besteffort” provisions in one agreement. So,development-oriented provisions could be eitherlegally binding or hortatory, depending on howmuch the parties are willing to undertakecommitments.

• The asymmetries between developed anddeveloping country parties to IIAs can be tackledby commitments of the developed countryparties to provide assistance to the developingparties, especially LDCs. An example is theTRIPS Agreement, in which developed countrieshave made commitments to facilitate technologytransfer to LDCs. Also relevant here is the widerissue of home country commitments to promotethe flow of FDI to developing countries, perhapscomplemented by provisions for technicalassistance through relevant internationalorganizations. These are important, given thecomplexity of the subject matter and the limitedcapacity of many developing countries,especially LDCs, to fund FDI-related policyanalysis and development and for human andinstitutional development. Institutionaldevelopment also involves assistance todeveloping countries to attract FDI and benefitmore from it.

... and especially their content …

The quest for a development friendly balanceplays itself out most importantly in the negotiationsof the content of IIAs. Central here is the resolutionof issues that are particularly important for theability of countries to pursue development-orientednational FDI policies—and that are particularlysensitive in international investment negotiations,because countries have diverging views about them.

From a development perspective, these issuesare:

• The definition of investment, because itdetermines the scope and reach of thesubstantive provisions of an agreement.

• The scope of national treatment (especially asit relates to the right of establishment), becauseit determines how much and in what wayspreferences can be given to domestic enterprises.

• The circumstances under which governmentpolicies should be regarded as regulatorytakings, because it involves testing the boundaryline between the legitimate right to regulate andthe rights of private property owners.

• The scope of dispute settlement, because thisraises the question of the involvement of non-State actors and the extent to which the

OVERVIEW xix

settlement of investment disputes is self-contained.

• The use of performance requirements,incentives, transfer-of-technology policies andcompetition policy, because they can advancedevelopment objectives.

Other important matters also arise innegotiations for IIAs, especially most-favoured-nation treatment, fair and equitable treatment andtransparency. But these appear to be lesscontroversial.

For each of these issues, more developmentfriendly and less development friendly solutionsexist. From the perspective of many developingcountries, the preferable approach is a broad GATS-type positive list approach that allows each countryto determine for itself for which of these issuesto commit itself to in IIAs, under what conditions,and at what pace, commensurate with its individualneeds and circumstances.

In pursuit of an overall balance, furthermore,future IIAs need to pay more attention tocommitments by home countries. All developedcountries (the main home countries) already havevarious measures to encourage FDI flows todeveloping countries in place. And a number ofbilateral and regional agreements contain suchcommitments. Developing countries would benefitfrom making home country measures moretransparent, stable and predictable in future IIAs.

TNCs, too, can contribute more to advancingthe development impact of their investments indeveloping countries, as part of good corporatecitizenship responsibili t ies, whether throughvoluntary action or more legally-based processes.Areas particularly important from a developmentperspective are contributing fully to publicrevenues of host countries, creating and upgradinglinkages with local enterprises, creatingemployment opportunities, raising local skill levelsand transferring technology.

… by making development objectives anintegral part of international investmentagreements.

These issues are all complex. Because thepotential implications of some provisions in IIAsare not fully known, it is not easy for individualcountries to make the right choices. Thecomplexities and sensitivities are illustrated by theexperience of NAFTA for the regional level, thatof the MAI negotiations for the interregional leveland that of the GATS and the TRIMs Agreementfor the multilateral level. Given the evolving natureof IIAs, other complexities tend to arise in applyingand interpreting agreements. Indeed, disputes mayarise from these processes, and their outcome isoften hard to predict.

That is why governments need to ensure thatsuch difficulties are kept to a minimum. How? Byincluding appropriate safeguards at the outset toclarify the range of special and differential rightsand qualifications of obligations that developingcountry parties might enjoy. Moreover, theadministrative burden arising from newcommitments at the international level is likely toweigh disproportionately on developing countries,especially the least developed, because they oftenlack the human and financial resources needed toimplement agreements. This underlines theimportance of capacity-building technicalcooperation—to help developing countries assessbetter various policy options before entering newagreements and in implementing the commitmentsmade.

The overriding challenge for countries is tofind a development-oriented balance whennegotiating the objectives, content, structure andimplementation of future IIAs at whatever leveland in whatever context. In short: the developmentdimension has to be an integral part of internationalinvestment agreements—in support of policies toattract more FDI and to benefit more from it.

Rubens RicuperoGeneva, July 2003 Secretary-General of UNCTAD

World Investment Report 2003 FDI Policies for Development: National and International Perspectivesxx

PART ONE

FDI FALLS AGAIN — UNEVENLY

CHAPTER I

FDI DOWN 21% GLOBALLYGlobal foreign direct investment (FDI)

inflows, down by 41% in 2001, fell by another fifthin 2002—to $651 billion, or just half the peak in2000 (table I.1). Driving the most significantdownturn of the past three decades were weakeconomic growth, tumbling stock markets (whichcontributed to a plunge in cross-border mergersand acquisitions (M&As)) and institutional factorssuch as the winding down of privatization inseveral countries. The United States and the UnitedKingdom alone accounted for 54% of the fall inthe countries with reduced inflows. In 2002,

• inflows in the developed world declined by22%, with nine countries experiencing

increases and 16 countries decreases. TheUnited States alone accounted for more thanhalf of the fall in the latter countries;

• the decline in the developing world (23%),which faced even sharper declines in otherprivate external capital flows, was steepestin Africa (41%), followed by Latin Americaand the Caribbean (33%). Flows to the world’smost populous region, Asia and the Pacific,fell only a little, thanks to higher flows to China;

• Central and Eastern Europe (CEE) resisted theglobal decline, with its FDI inflows rising by15%, although flows to 10 countries in theregion fell; and

Table I.1. Selected indicators of FDI and international production, 1982-2002(Billions of dollars and per cent)

Value at current prices Annual growth rateItem (Billion dollars) (Per cent)

1982 1990 2002 1986-1990 1991-1995 1996-2000 1999 2000 2001 2002

FDI inflows 59 209 651 23.1 21.1 40.2 57.3 29.1 -40.9 -21.0FDI outflows 28 242 647 25.7 16.5 35.7 60.5 9.5 -40.8 -9.0FDI inward stock 802 1 954 7 123 14.7 9.3 17.2 19.4 18.9 7.5 7.8FDI outward stock 595 1 763 6 866 18.0 10.6 16.8 18.2 19.8 5.5 8.7Cross-border M&As a .. 151 370 25.9b 24.0 51.5 44.1 49.3 -48.1 -37.7Sales of foreign affiliates 2 737 5 675 17 685c 16.0 10.1 10.9 13.3 19.6 9.2c 7.4c

Gross product of foreign affiliates 640 1 458 3 437d 17.3 6.7 7.9 12.8 16.2 14.7d 6.7d

Total assets of foreign affiliates 2 091 5 899 26 543e 18.8 13.9 19.2 20.7 27.4 4.5e 8.3e

Export of foreign affiliates 722 1 197 2 613f 13.5 7.6 9.6 3.3 11.4 -3.3f 4.2f

Employment of foreign affiliates (thousands) 19 375 24 262 53 094g 5.5 2.9 14.2 15.4 16.5 -1.5g 5.7g

GDP (in current prices) 10 805 21 672 32 227h 10.8 5.6 1.3 3.5 2.6 -0.5 3.4h

Gross fixed capital formation 2 286 4 819 6 422i 13.4 4.2 1.0 3.5 2.8 -3.9 1.3i

Royalties and licences fees receipts 9 30 72j 21.3 14.3 6.2 5.7 8.2 -3.1 ..Export of goods and non-factor services 2 053 4 300 7 838k 15.6 5.4 3.4 3.3 11.4 -3.3 4.2k

Source : UNCTAD, based on its FDI/TNC database and UNCTAD estimates.a Data are only available from 1987 onward.b 1987-1990 only.c Based on the following regression result of sales against FDI inward stock (in mil l ions dollars) for the period 1980-2000:

Sales=934.0435+2.351837*FDI inward stock.d Based on the following regression result of gross product against FDI inward stock (in millions dollars) for the period 1982-2000: Gross

product=436.3332+0.421268*FDI inward stock.e Based on the following regression result of assets against FDI inward stock (in millions dollars) for the period 1980-2000: Assets=

-1 443.239+3.929293*FDI inward stock.f For 1995-1998, based on the regression result of exports of foreign affiliates against FDI inward stock (in millions dollars) for the period

1982-1994: Exports=291.5394+0.453183*FDI inward stock. For 1999-2002, the share of exports of foreign affiliates in world exportin 1998 (33.3 per cent) was applied to obtain the values.

g Based on the following regression result of employment (in thousands) against FDI inward stock (in millions dollars) for the period1982-1999: Employment=13 865.43+5.507718*FDI inward stock.

h Based on data from the International Monetary