xxxiWord investment Report 2006.FDI trom Developing and Transiton Econmes:Implicaons or Development ...and for international rule making. orporate go As far as the recipient countries are there increase business leaders.trade sas wel IAs as a means to promote inward FDI,some aimed t pro orrhorcetievandes nte to evelopment l impact of this recent adherence to various interationally adopted CSR opportunities for cross-border investments and South-North perspective.there need -country TNCs have rsiaesnram2atedmCofeiecneeoHe for dialogue inreased awarenessand eaders in this area.For example,more than hal the South and of their potential impacts.UNCTAD from developing and transition economies. governmental organizations or international organizations. Geneva.august 2006 seereryGener UNCTAD
xxxii World Investment Report 2006. FDI from Developing and Transition Economies: Implications for Development growing pressure to address more fully issues related to corporate governance and transparency. As far as the recipient countries are concerned, business leaders, trade unions as well as policymakers may have to get used to an increased frequency of transactions involving companies from developing and transition economies as acquirers of domestic firms. There may be important benefits to a host country from having more companies competing to acquire local assets. Countries need to be careful in their use of legislation aimed at protecting national security interests, keeping in mind the risk of fuelling possible retaliation and protectionism. …and it has implications also for the management of CSR issues… Issues of corporate social responsibility (CSR) may also become more important as developing-country firms expand abroad. Discussions related to CSR have traditionally revolved around developed-country TNCs and their behaviour abroad; more recently the managements of TNCs from developing and transition economies are also being exposed to similar issues. While adherence to various internationally adopted CSR standards may entail costs for the companies concerned, it can also generate important advantages – not only for the host country, but also for the investing firms and their home economies. A number of developing-country TNCs have already incorporated CSR policies into their business strategies, some of them even becoming leaders in this area. For example, more than half of the participating companies in the United Nations Global Compact are based in developing countries. Moreover, some developing countries are establishing a regulatory and cultural environment that supports CSR standards. These initiatives are sometimes driven by governments and at other times by business associations, nongovernmental organizations or international organizations. …and for international rule making. Beyond the national level of policy-making, there is a marked increase in South-South investment cooperation through IIAs, in parallel to the growth of FDI from the South. The increase of FDI from some of these economies is also likely to generate growing demand from their business community for greater protection of their overseas investments. As a consequence, in addition to using IIAs as a means to promote inward FDI, some developing-country governments will increasingly consider using IIAs to protect and facilitate outward investments. This may influence the content of future treaties and result in an additional challenge for those developing country governments to balance their need for regulatory flexibility with the interests of their own TNCs investing abroad. * * * Policymakers in countries at all levels of development need to pay greater attention to the emergence of new sources of FDI with a view to maximizing the developmental impact of this recent phenomenon. There is scope for policymakers from developing and transition economies to share their experience in this area. South-South cooperation between host and home countries may enhance opportunities for cross-border investments and contribute to their mutual development. From a South-North perspective, there is a similar need for dialogue, increased awareness and understanding of the factors that drive FDI from the South and of their potential impacts. UNCTAD and other international organizations can play an important role in this context by providing analysis, technical assistance and, not least, forums for an exchange of views and experiences, in order to help countries realize the full benefit of the rise of FDI from developing and transition economies. Supachai Panitchpakdi Geneva, August 2006 Secretary-General of UNCTAD
PART ONE ANOTHER YEAR OF FDI GROWTH
CHAPTER I GLOBAL TRENDS: RISING FDI INFLOWS A.Overall trends and increase in cross-border M&As,both in value and developments in FDI eopofdrabEDnnosincreasednbo Global foreign direet investment(FDI)flows grew substantially in 2005 over those in 2004.As somerehighvenaccent n the late 1990s, sectors and the level o 1990s when FDI distribution was particularly Furthermore,by dosonmec2ybeiaenMshc5venhou out of 200 ec s in 2005.compared to shorier time horizon than those by ore sed geographically as in the previous year bu countries the share of does no increasing the gap in FDI inflows between data on FDI flows include items unrelated to developing countries to over $200 section issues related to United States.China and France (annex table B.1) FDI statistics. nd 1.Trends o pick un in 2004 following three vears of decline patterns and characteristics while their number has been growing since 200 a.Global FDI between cross-bo n1n20 increase in companies tend to consider these two modes of market entry as alternative options
CHAPTER I GLOBAL TRENDS: RISING FDI INFLOWS A. Overall trends and developments in FDI Global foreign direct investment (FDI) flows grew substantially in 2005 over those in 2004. As in the late 1990s, that growth was spurred by crossborder mergers and acquisitions (M&As). Recent increases in FDI have been concentrated in certain sectors and regions/countries, and the level of concentration of FDI worldwide has also risen again. Furthermore, investments by collective investment funds (e.g. private equity and hedge funds) – a relatively new source of FDI – have been growing. As investments by these funds often have a shorter time horizon than those by more conventional transnational corporations (TNCs), current FDI growth may not be sustainable. In addition, the way in which the rise in global FDI flows is measured, does not necessarily translate fully into capital formation in host economies, as data on FDI flows include items unrelated to investment in production capacity. This section discusses recent trends in FDI, its composition and characteristics, as well as some issues related to FDI statistics. 1. Trends, patterns and characteristics a. Global FDI Global FDI inflows rose by 29% to $916 billion in 2005, compared to a 27% increase in 2004 (figure I.1), largely reflecting a significant increase in cross-border M&As, both in value and in number of deals. FDI inflows increased in both developed and developing countries. The concentration of FDI flows between certain countries remains high, even accentuating somewhat since 2000 for developing countries and since 2003 for developed countries (figure I.2). However, its level is considerably lower than in the 1980s when not many countries received FDI inflows on any significant scale, or in the late 1990s when FDI distribution was particularly distorted by large-scale M&As. Even though concentrated, FDI inflows nevertheless grew in 126 out of 200 economies in 2005, compared to 111 economies in 2004. Growth in 2005 was broadbased geographically as in the previous year, but higher in developed than in developing countries. Thus, despite record inflows into developing countries, the share of developing countries in world FDI inflows fell slightly (to 36%), thereby increasing the gap in FDI inflows between developed and developing countries to over $200 billion in 2005.1 The United Kingdom was the largest recipient of FDI in 2005, ahead of the United States, China and France (annex table B.1). The value of cross-border M&As – a key mode of global FDI since the late 1980s – started to pick up in 2004 following three years of decline, while their number has been growing since 2002 (annex tables B.4-B.7). On the other hand, greenfield FDI projects fell after increasing for two consecutive years (annex table A.I.1).2 Diverging trends between cross-border M&As and greenfield FDI are not surprising, because, to some extent, companies tend to consider these two modes of market entry as alternative options
World Investment Report 2006.FDI from Developing and Transition Economies:Implications for Development Figure 1.1.FDI inflows,global and by group of economies,1980-2005 (Billions of dollars) 1400 World total 1200 1000 800 Developed 600 South-East Europe and CIS 400 至要邕显盖留留留墨墨星西星多星墨盘墨蜜員复晨晨爱胃 Source:UNCTAD.based on its FDUTNC database (www unctad org/tdi statistics). Inward FDI in developed countries had United States.France.the Netherlands and Canada already started ase in 2004 decline was mainly due growth in the and Jap Compared was particularly ma ked in the E97m0 Kingdom.each of which experienced an increase ot more thar re than $100 billion ncrease in United Kingdom.the 531 billion Fows t reached an 85%increase over the previous year,and to Figure 1.2. 8n6eapiaienbtwoflesiath96a28cgthetop5 (Per cent) 量豆皇量菌盟留皇留里留器星星墨金置露晨易尉胃莞？ Source:UNCTAD
4 World Investment Report 2006. FDI from Developing and Transition Economies: Implications for Development Inward FDI in developed countries had already started to increase in 2004, after three years of significant decline between 2000 and 2003. That decline was mainly due to sluggish growth in the developed countries, in particular in the euro area and Japan. While developed countries other than those of the European Union (EU) contributed to the growth of inflows in 2004, the increase in 2005 was particularly marked in the EU (97%), most notably in Germany, the Netherlands and the United Kingdom, each of which experienced an increase of more than $40 billion (more than $100 billion in the case of the United Kingdom). The five largest host economies in 2005 – the United Kingdom, the Figure I.1. FDI inflows, global and by group of economies, 1980–2005 (Billions of dollars) Source: UNCTAD. Source: UNCTAD, based on its FDI/TNC database (www.unctad.org/fdi statistics). United States, France, the Netherlands and Canada in that order – accounted for 75% of total FDI inflows to developed countries. Inward FDI in developing countries rose by another 22% to $334 billion, following a 57% growth in 2004. Compared to other capital flows, FDI inflows remain the largest component of net resource flows to developing countries (figure I.3) and their share rose in 2005. While all developing regions experienced an increase in FDI flows, Africa saw a rise of 78%, with record inflows of $31 billion. Flows to West Asia reached $34 billion, an 85% increase over the previous year, and to Figure I.2. Concentration of FDI inflows: the share of the top 5 FDI recipients in the world total, 1980-2005 (Per cent)
CHAPTERI 5 Figure 1.3.Total net resource flows developing countries,by type of flow,1990-2005 150 100 50+ 0 .50 90199119021993199419951996199719991999200020012002200320042005 Source UNCTAD. on World Ba gin matur The World Ban of Korea and Singapore and South-East Asia they increased by ts di fferences in the way other hand.there was only a increase.a much epariiedowpaEbcdaotUheasaicsapare lower rate than in 2004 when flows to the region mpanies in 2005 partly explains,for instance decline FDL innows in the so leas deved o a sig of the Congo, earnings in their FDI ows more than doublec Developing countries as emerging sources not fluctuated widely since the mid-1980s of FDI t117 28gtonrmbe ompared than in the previous year. the five la hos Asia economies almost eve of total flows to amounts of petrodollars and strong economic rowth.Flowsfom South East and S outh-East In South East Euror e and the commonwealth rease in outward ir of Independent States(CIS),FDI inflows remaine most at th n same level as in 20 at round $40 aeDao in inflows Ukraine in other maior recipient from Latin America and the Caribbean rose y196 countries(Bulgaria,Kazakhstan,Romania and the on.led by Co lombia an Russian Federation)they declined from South-East Europe and the CIS rose modest Russian Federation declining developi countries invested a total of $133 billion abroad,the largest amount since 2000
CHAPTER I 5 South, East and South-East Asia they increased by 20%. In Latin America and the Caribbean, on the other hand, there was only a 3% increase, a much lower rate than in 2004 when flows to the region rose by 118% after four consecutive years of decline. FDI inflows in the 50 least developed countries (LDCs) recorded a historic high of $9.7 billion, mainly due to a significant rise in flows to Cambodia, the Democratic Republic of the Congo, the Gambia, Guinea-Bissau and Mauritania, in each of which inflows more than doubled. Overall, FDI had been less concentrated and has not fluctuated widely since the mid-1980s compared to developed countries. Brazil, China, Hong Kong (China), Mexico and Singapore – that have been the five largest host developing economies almost every year since 1996 – accounted for some 48% of total flows to developing countries. In South-East Europe and the Commonwealth of Independent States (CIS), FDI inflows remained almost at the same level as in 2004, at around $40 billion. While there was a considerable increase in inflows in Ukraine, in other major recipient countries (Bulgaria, Kazakhstan, Romania and the Russian Federation) they declined. Global outflows in 2005 showed a somewhat different picture than did inflows, declining by 4% to $779 billion. It should be pointed out in this regard that the divergence in trends in FDI inflows Figure I.3. Total net resource flowsa to developing countriesb, by type of flow, 1990-2005 (Billions of dollars) Source: UNCTAD, based on World Bank 2006. a Defined as net liability transactions or original maturity of greater than one year. b The World Bank’s classification of developing countries is used here. It differs from UNCTAD’s classification in that it includes new EU member States from Central and Eastern Europe and excludes high-income countries such as the Republic of Korea and Singapore. and outflows reflects differences in the way countries compile FDI data. The size of earnings repatriated by a number of United States parent companies in 2005 partly explains, for instance, the divergence noted for that year: repatriated profits from foreign affiliates of United States firms are recorded in United States FDI data as negative outflows, while the host countries of these affiliates do not necessarily take into account reinvested earnings in their FDI data.3 Developing countries as emerging sources of FDI strengthened their global position further in 2005, investing $117 billion in 2005 – 4% more than in the previous year. The most notable growth of outflows was from West Asia: FDI outflows more than doubled, to $16 billion, backed by huge amounts of petrodollars and strong economic growth. Flows from South, East and South-East Asia declined by 11%, although China saw a sixfold increase in outward investments, amounting to $11 billion, while the other giant in this region, India, experienced a decline, after an almost twofold increase the year before. FDI outflows from Latin America and the Caribbean rose by 19%, to $33 billion, led by Colombia and Mexico (excluding offshore financial centres). Outflows from South-East Europe and the CIS rose modestly, with flows from the Russian Federation declining somewhat. Altogether, transition economies and developing countries invested a total of $133 billion abroad, the largest amount since 2000.4