World Investment Report 2006.FDI from Developing and Transition Economies:Implications for Development The changes discussed above reflect recent to its previous level,even though FDI flows to the region are again on the rise changes in the relative positions of countries and Data on FDI outflows from developing as sts and ho me bases for FDI.Ind cou ED 2gctanedbcig and 15%over the pas apan tat has fluctuated at around 60-70%.Howeve small until the mid-1980s,such flo billion or about 15%of world outflows in has been a ma d sh 2005(annex table B.1).Their FDI outward $149m 1990372 tha 00.More of deve loping countries have emerged as are now considered a new and importan outward FDI flows and stocks is even more flows and stocks has declined:since the stron firms,related d importance of e e in th siderably as an accounted for over half of globa rts and for two remains marginal as a host country Developing countries have gained thirds of global foreign exchange srecipient rms o 6 the share in total world inflows rose from a aerae-1 to an average nost com ve ec Pro vince of China.Singapore.the Republic of the different The share in 1978 980 In the c outh-East Europe and the CIS E vears it has ase from the early onwards in The share of Asia and the wake of their transition to marke e small China which appeared on theDI on the rise.Within the region,the Russian then slowed dou the end n the 2000s.Latin America and the Caribbean region has experienced a The emere early 1980s.And so far it has not recovered the CIS as significant outward investors-one of
6 World Investment Report 2006. FDI from Developing and Transition Economies: Implications for Development The changes discussed above reflect recent FDI trends and changes in the geographic patterns of FDI flows. There are also significant long-term changes in the relative positions of countries and regions as hosts and home bases for FDI. Indeed, over the past few decades, the geography of FDI has undergone some major shifts, as noted below: • Over the past few decades the share of the Triad (the EU, Japan and the United States) in total world inward FDI flows and stocks has fluctuated at around 60-70%. However, within the Triad, there has been a marked shift towards the EU. The share of the EU in FDI inflows into the Triad was 75% in 2003-2005, compared to 62% in 1978-1980 (table I.1). The EU – which now also includes eight economies formerly classified under Central and Eastern Europe – today accounts for almost half of global inward and outward flows and stocks. The rise of the EU in outward FDI flows and stocks is even more pronounced. Conversely, the importance of the United States in both inward and outward FDI flows and stocks has declined: since the beginning of the 1980s for outward FDI and the beginning of the 1990s for inward FDI (table I.1). Japan, which had emerged as an important source of FDI in the 1980s, has declined considerably in importance as an outward investor over the past 15 years, but gained somewhat as a recipient. However, it remains marginal as a host country. • Developing countries have gained in importance as recipients of FDI in terms of both inward flows and stocks (table I.1). Their share in total world inflows rose from an average of 20% in 1978-1980 to an average of 35% in 2003-2005, though the performance of the different regional groups was uneven. The share of African countries gradually fell, from 10% of total inflows to developing countries in 1978-1980 to around 5% in 1998- 2000, but in the past few years it has recovered. The share of Asia and Oceania, particularly South, East and South-East Asia, increased rapidly – driven partly by flows to China which appeared on the FDI scene only in the late 1970s – until the end of the 1990s and then slowed down somewhat in the early 2000s. Latin America and the Caribbean region has experienced a noticeable decline from its dominant position of the 1970s and early 1980s. And so far it has not recovered to its previous level, even though FDI flows to the region are again on the rise. • Data on FDI outflows from developing countries point to the increasing dynamism of this group of countries as sources of FDI. Their share in global outward FDI stock has fluctuated between 8% and 15% over the past 25 years, while their share in outflows points to a clearly increasing trend. Negligible or small until the mid-1980s, such flows from developing countries amounted to $117 billion, or about 15% of world outflows in 2005 (annex table B.1). Their FDI outward stock increased from $72 billion in 1980 to $149 billion in 1990 and to more than $1 trillion in 2005. More importantly, a number of developing countries have emerged as significant sources of FDI in other developing countries (chapter III), and their investments are now considered a new and important source of capital and production know-how, especially for host countries in developing regions. The increasing importance of FDI from developing countries reflects stronger ownership advantages of developing-country firms, related somewhat to the growing importance of their home countries in the world economy, as demonstrated by various indicators. For example, developing countries accounted for over half of global output at purchasing-power parity value in 2005,5 for more than 40% of world exports, and for two thirds of global foreign exchange reserves. According to the competitiveness rankings of the world’s economies, in 1986 there was only one developing economy (Turkey) among the 20 most competitive economies, and by 2005 the number had increased to five: Taiwan Province of China, Singapore, the Republic of Korea, the United Arab Emirates and Qatar in that order (World Economic Forum 2005). • In the case of South-East Europe and the CIS, where FDI to and from most economies started to increase from the early 1990s onwards in the wake of their transition to market economies, their share in both inward and outward flows and stocks, albeit very small, is on the rise. Within the region, the Russian Federation has always occupied a dominant position in FDI inflows as well as outflows. The emergence of developing countries and the transition economies of South-East Europe and the CIS as significant outward investors – one of
CHAPTER I 7 TbloL1.DstnbutionofFolbyege0agdsolectodcountmies,1980-2o05 Region Outward stock 1980 1990 2000 2005 1980 1990 2000 2005 872 917 10 26 8.8 93 10.0 10.0 Region 1978-19801988-19901998-20002003-20051978-1980198-19901998-20002003-2005 8 978 50. 804 88 d States 71 World 10.0 100.0 Source:UNCTAD.FDI/TNC database(www.unctad.org/fdistatistics)and annex tableB.1 and B.2 the above-mentioe significant changes in the of this menon are discussed in detail in Part arsest ever M&A deal of Vodafone-Manne Two of this Report. distorted the distribution,mainly in favour o ).On the other han the growt b.Sectoral analysis:revival of FDI in natural resources SasndlniepdntiemateCrossboae The sectoral breakdown of FDI data is available for more than sixfold,and the sector's share in both d number of countries, Dprevents a agoh3rtorsalg 1n200 remained almost the same asin accounts for the bulk of the primary sector,has dataon various forms of FDI by secto especially giobalarlyresponsibleiortherecenlgowiha cross-border M&As-show that in 2005 primary Current FDI growth seems to be led primarily industries,rather than bein manufacturing and services declined.Nevertheless nd utilitie were the leading manufacturing is on a downward trend,recording only from tha
CHAPTER I 7 Table I.1. Distribution of FDI by region and selected countries, 1980-2005 (Per cent) Region Inward stock Outward stock 1980 1990 2000 2005 1980 1990 2000 2005 Developed economies 75.6 79.3 68.5 70.3 87.3 91.7 86.2 86.9 European Union 42.5 42.9 37.6 44.4 37.2 45.2 47.1 51.3 Japan 0.6 0.6 0.9 1.0 3.4 11.2 4.3 3.6 United States 14.8 22.1 21.7 16.0 37.7 24.0 20.3 19.2 Developing economies 24.4 20.7 30.3 27.2 12.7 8.3 13.5 11.9 Africa 6.9 3.3 2.6 2.6 1.3 1.1 0.7 0.5 Latin America and the Caribbean 7.1 6.6 9.3 9.3 8.5 3.4 3.3 3.2 Asia and Oceania 10.5 10.8 18.4 15.4 2.9 3.8 9.5 8.2 West Asia 1.4 2.2 1.1 1.5 0.3 0.4 0.2 0.3 South, East and South-East Asia 8.8 8.5 17.2 13.8 2.5 3.4 9.3 7.8 South-East Europe and CIS .. 0.01 1.2 2.5 .. 0.01 0.3 1.2 World 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Region Inflow Outflow 1978-1980 1988-1990 1998-2000 2003-2005 1978-1980 1988-1990 1998-2000 2003-2005 Developed economies 79.7 82.5 77.3 59.4 97.0 93.1 90.4 85.8 European Union 39.1 40.3 46.0 40.7 44.8 50.6 64.4 54.6 Japan 0.4 0.04 0.8 0.8 4.9 19.7 2.6 4.9 United States 23.8 31.5 24.0 12.6 39.7 13.6 15.9 15.7 Developing economies 20.3 17.5 21.7 35.9 3.0 6.9 9.4 12.3 Africa 2.0 1.9 1.0 3.0 1.0 0.4 0.2 0.2 Latin America and the Caribbean 13.0 5.0 9.7 11.5 1.1 1.0 4.1 3.5 Asia and Oceania 5.3 10.5 11.0 21.4 0.9 5.6 5.1 8.6 West Asia -1.6 0.3 0.3 3.0 0.3 0.5 0.1 1.0 South, East and South-East Asia 6.7 10.0 10.7 18.4 0.6 5.1 5.0 7.7 South-East Europe and CIS 0.02 0.02 0.9 4.7 .. 0.01 0.2 1.8 World 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) and annex tables B.1 and B.2. the above-mentioned significant changes in the pattern of FDI – and the development implications of this phenomenon are discussed in detail in Part Two of this Report. b. Sectoral analysis: revival of FDI in natural resources The sectoral breakdown of FDI data is available for only a limited number of countries, and at most up to 2004, which prevents a comprehensive sectoral analyses of FDI. According to available data, the overall sectoral distribution of FDI in 2004 remained almost the same as in previous years (annex tables A.I.2-A.I.5). However, data on various forms of FDI by sector – especially cross-border M&As– show that in 2005 the primary sector gained in importance, in terms of both target and acquiring industries (figure I.4), while both manufacturing and services declined. Nevertheless, services remain the dominant sector in cross-border M&A deals (WIR04). By contrast, FDI in manufacturing is on a downward trend, recording its lowest share ever of cross-border M&A sales and purchases in 2005 (excluding 2000, when the largest ever M&A deal of Vodafone-Mannesmann distorted the distribution, mainly in favour of services) (figure I.5). On the other hand, the growth of FDI in the primary sector, especially in mining activities, is very recent – if viewed over the past 25 years – and indeed dramatic. Cross-border M&A sales as well as purchases in this sector rose more than sixfold, and the sector’s share in both sales and purchases reached close to the peak attained in 1987-1988 (figure I.5 for sales).6 FDI in mining (including oil and other mining), which accounts for the bulk of the primary sector, has been largely responsible for the recent growth of global FDI. Current FDI growth seems to be led primarily by a few specific industries, rather than being broad-based sectorally. Specifically, in 2005, oil and gas, utilities (e.g. telecommunications, energies), banking and real estate were the leading industries in terms of inward FDI. For the first time since 1987 (M&A data are available only from that
World Investment Report 2006.FDI from Developing and Transition Economies:Implications for Development Figure 1.4.Cross-border M&As by sector,2004-2005 (Per cent) (a)Sales 20045 16 32 (b)Purchases 2005 64% Primary 图Manufacturing ☒Services Source:UNCTAD.based on its FDI/TNC database (www.unctad.org/fdistatistics). wards)the petroleun Figure .Sroborder (includes oil and natural gas (Per cent) industry became the larges 14%of all cross-border M&A sales,followed by finance and han one 宝鼠显虽露器是离墨墨岛墨墨得吾昌得吾昌 Manufacturing Servicos estate,which has also be Source:UNCTAD.based on its FDI/TNC database (www.unctad.org/fdi statistics). iberalization of FDI iderable FDI aso example,cross-border M&As in oil refining transport and software businesses that were FDs in the (annex table B.6 Metals. nclaP thd re re gree
8 World Investment Report 2006. FDI from Developing and Transition Economies: Implications for Development Figure I.4. Cross-border M&As by sector, 2004-2005 (Per cent) Source: UNCTAD, based on its FDI/TNC database (www.unctad.org/fdistatistics). Figure I.5. Sectoral breakdown of cross-border M&A sales, 1987-2005 (Per cent) Source: UNCTAD, based on its FDI/TNC database (www.unctad.org/fdi statistics). year onwards), the petroleum (includes oil and natural gas) industry became the largest FDI recipient, accounting for 14% of all cross-border M&A sales, followed by finance and telecommunications – the latter two partly as a result of further liberalization in some countries (chapter II) (annex table B.6). These three activities accounted for more than one third of the total value of M&A deals. They were closely followed by real estate, which has also become an important recipient of FDI since 2004 following the liberalization of FDI entry by various countries (WIR05). Considerable FDI also went to service industries such as construction, transport and software businesses that were responsive to economic growth in 2005 as in the previous year. In manufacturing, FDI in the industries related to primary products rose: for example, cross-border M&As in oil refining doubled and those in rubber and plastic goods quadrupled, while in metals industries they rose sixfold (annex table B.6). Metals, telecommunications and real estate also attracted more greenfield FDI than in 2004.7
CHAPTERI 9 n FDI,according tocros Sectorally.FDI in the primary sector(natura was dwarfed by the special finane indust in the past few decline in importance over the past two decades or more an ine this is a further decine of the manufacturing secto 2005 ases int n tota stoc. ndustry was the second largest acquiring industry, all groups of economies (annex tables A 1.2-A.1.5). followed by telecommunications Table 1.2.Selected indicators of FDI and international production,1982-2005 tem Annual growth rate 19821990200420051986.19901991.19951996-20002002200320042005 916 67891818 180 860 e on inward direct 4776562 55810.4 30.9 17.4 10.837.0 32.30.7 ne on outward direct 47 286 talassetsotoreign 6461481428304517 17.4 8.g 88 1.920.3 22.854 248 00g2880 affiliates (thousands) 19537245515945896209595.4 3.2 11.010.0-0.520.194.49 59 30 d non 97 212 143 78 7.9 14.1 17.017.9 22474261111961264 12.7 87 3.6 4.916.521.012.9 wwundad.dstasic)nd UTA ms ta for 200 005are based on 0or200 1980-2003:As ,2174.209+4.712645 FDI in assets inward stock (in$million) orld ex tn19983 otain the a inward stock (in$million)for the Based on data fro 15 2006 s of tria.Can rapola of f em rg. apan he d Stat or gross prod
CHAPTER I 9 Table I.2. Selected indicators of FDI and international production, 1982-2005 Item Value at current prices Annual growth rate (Billions of dollars) (Per cent) 1982 1990 2004 2005 1986-1990 1991-1995 1996-2000 2002 2003 2004 2005 FDI inflows 59 202 711 916 21.7 21.8 40.0 -25.8 -9.7 27.4 28.9 FDI outflows 28 230 813 779 24.6 17.1 36.5 -29.4 4.0 44.9 -4.2 FDI inward stock 647 1 789 9 545 10 130 16.8 9.3 17.3 9.7 20.6 16.1 6.1 FDI outward stock 600 1 791 10 325 10 672 18.0 10.7 18.9 9.6 17.7 14.1 3.4 Income on inward direct investment 47 76 562 558 10.4 30.9 17.4 10.8 37.0 32.3 -0.7 Income on outward direct investment 47 120 607 644 18.7 18.1 12.7 6.3 37.0 26.6 6.1 Cross-border M&As a .. 151 381 716 25.9b 24.0 51.5 -37.7 -19.7 28.2 88.2 Sales of foreign affiliates 2 620 6 045 20 986c 22 171c 19.7 8.9 10.1 11.2 30.4 11.4c 5.6c Gross product of foreign affiliates 646 1 481 4 283d 4 517d 17.4 6.9 8.8 1.9 20.3 22.8d 5.4d Total assets of foreign affiliates 2 108 5 956 42 807e 45 564e 18.1 13.8 21.0 36.7 27.9 3.5e 6.4e Exports of foreign affiliates 647 1 366 3 733f 4 214f 14.3 8.4 4.8 4.9f 16.5f 21.0f 12.9f Employment of foreign affiliates (thousands) 19 537 24 551 59 458g 62 095g 5.4 3.2 11.0 10.0 -0.5 20.1g 4.4g GDP (in current prices) 10 899 21 898 40 960 44 674h 11.1 5.9 1.3 3.9 12.1 12.1 9.1 Gross fixed capital formation 2 397 4 925 8 700 9 420 12.7 5.6 1.1 0.4 12.4 15.5 8.3 Royalties and licence fee receipts 9 30 111 91 21.2 14.3 7.8 7.9 14.1 17.0 -17.9 Exports of goods and non- factor services h 2 247 4 261 11 196 12 641 12.7 8.7 3.6 4.9 16.5 21.0 12.9 Source: UNCTAD, based on its FDI/TNC database (www.unctad.org/fdistatistics), and UNCTAD estimates. a Data are available only from 1987 onwards. b 1987-1990 only. c Data for 2004 and 2005 are based on the following regression result of sales against FDI inward stock (in $ million) for the period 1980-2003: Sales=1 646.227+2.02618*FDI inward stock. d Data for 2004 and 2005 are based on the following regression result of gross product against FDI inward stock (in $ million) for the period 1982-2003: Gross product=474.0967+0.399066*FDI inward stock. e Data for 2004 and 2005 are based on the following regression result of assets against FDI inward stock (in $ million) for the period 1980-2003: Assets= -2 174.209+4.712645*FDI inward stock. f For 1995-1998, based on the regression result of exports of foreign affiliates against FDI inward stock (in $ million) for the period 1982-1994: Exports=357.6124+0.558331*FDI inward stock. For 1999-2005, the share of exports of foreign affiliates in world exports in 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 $ million) for the period 1980-2003: Employment=16 415.27+4.509468*FDI inward stock. h Based on data from IMF, World Economic Outlook, April 2006. Note: Not included in this table are the values of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and the sales of the parent firms themselves. Worldwide sales, gross product, total assets, exports and employment of foreign affiliates are estimated by extrapolating the worldwide data of foreign affiliates of TNCs from Austria, Canada, the Czech Republic, Finland, France, Germany, Italy, Japan, Sweden, Switzerland and the United States (for employment); those from Austria, Canada, the Czech Republic, Finland, France, Germany, Italy, Japan, Luxembourg, Sweden and the United States (for sales); those from Japan and the United States (for exports); those from the Czech Republic, Portugal and the United States (for gross product); and those from Austria, Germany, Japan and the United States (for assets), on the basis of the shares of those countries in the worldwide outward FDI stock. In terms of outward FDI, according to crossborder M&A purchase data, the petroleum industry was dwarfed by the special finance industry comprising investment and commodity firms, including private equity firms and hedge fund investors (discussed in section 3.c). This special finance industry alone accounted for more than 30% of total cross-border M&A purchases in terms of value in 2005 (annex table B.6). The petroleum industry was the second largest acquiring industry, followed by telecommunications. Sectorally, FDI in the primary sector (natural resources, in particular, mining) has recovered slightly in the past few years, after a considerable decline in importance over the past two decades or more, while the services sector continues to capture an increasing share of FDI. A corollary of this is a further decline of the manufacturing sector in total FDI flows and stock. This is the same scenario for both inward and outward FDI, and in all groups of economies (annex tables A.I.2-A.I.5)
World Investment Report 2006.FDI from Developing and Trans on Economies:Implications for Development c.Trends in international production significant changes were for Costa Rica,up from 113in2002020n 2003Th the imp ant role of cross-border M&As and thei rise in 2005,part of the expansion of international The increase in global FDI flows in 2005 was driven by many factors: domestic firms to TNCs rather than an addition to has been continued economic At the me due to po equity funds.hedge funds led to massive ross over ti oduce9uentia border investments by these funds At the 3 below). measures are being The number of TNCs worldwide has risen takeovers,favourable conditions in financial and markets prompted the growth of the TNCs originate in developing countries.FD However data on EDI flows and stocks 30 vestment (gros nd EDI tois Thus the share should be interpreted with caution, er by the share of value in host economies,as explained in the next sectior On the assumption tha 2.Some e issues erning FD statistics relationship between FDI stock numbers based in developing countries and in South-East Host ounries today generally welcome FDI ibo6onohea on the condition that it w lead to high side their home countries ionafprodndi B.19) ce for investment,because they may have originate The degree of transnationality of hos in that sthe tran oth de oped ar developing as wel g).as and the CIsh measured by UNCTAD FDI in some other country(trans-shipp usse low.And,eveni they are Index. some ED 1n200 economies. in the degree of transnationality of differen n each hos of the value of capital goods used as factor inputs group as in the previous year for production)in ar new
10 World Investment Report 2006. FDI from Developing and Transition Economies: Implications for Development c. Trends in international production International production, as measured by estimates of global FDI stock and of sales, assets, value-added, employment and exports by foreign affiliates, grew further in 2005 (table I.2). Given the important role of cross-border M&As and their rise in 2005, part of the expansion of international production and related assets and activities represents a shift of such assets and activities from domestic firms to TNCs rather than an addition to host countries’ output, employment and value added. However, the shift may itself contribute to a growth in host countries’ production capabilities over time due to possible sequential FDI aimed at expanding acquired production facilities (section 3 below). The number of TNCs worldwide has risen to about 77,000, with at least 770,000 foreign affiliates (annex table A.I.6). More than 20,000 of the TNCs originate in developing countries. FDI has grown faster than domestic investment (gross fixed capital formation), and FDI stock continues to rise. Thus the share of international production in world output, as measured by the share of value added of foreign affiliates in world GDP, is rising and is estimated to have been 10% in 2005, compared to 7% in 1990. On the assumption that a dollar of FDI stock from any home country leads to the same amount of international production everywhere, and based on past estimates of the relationship between FDI stock and foreign sales, employment and value added, respectively, TNCs based in developing countries and in South-East Europe and the CIS are estimated to have accounted for about $2.6 trillion in sales, employed 7.4 million workers and generated more than $500 billion in value added outside their home countries in 2005. (For individual country data on international production, see annex tables B.8- B.19). The degree of transnationality of host countries – both developed and developing, as well as the transition economies of South-East Europe and the CIS – measured by UNCTAD’s Transnationality Index, fell somewhat in 2003 (figure I.6), reflecting a decline in FDI flows in that year. Significant differences continue to prevail in the degree of transnationality of different countries in all three groups, but the most and least transnationalized countries have remained the same in each host group as in the previous year. Some small developing countries experienced large changes in their ranking in 2003. The most significant changes were for Costa Rica, up from ranked 21 in 2002 to 13 in 2003, and the Dominican Republic, down from 13 in 2002 to 20 in 2003. The most transnationalized economy of all in 2003 was Hong Kong (China), followed by Ireland and Belgium. The increase in global FDI flows in 2005 was driven by many factors: macroeconomic, microeconomic (corporate) and institutional. The most important factor at the macroeconomic level has been continued economic growth.8 At the microeconomic level, a surge of financial flows to collective investment institutions (e.g. private equity funds, hedge funds) led to massive crossborder investments by these funds. At the institutional level, although a number of restrictive measures are being adopted to discourage takeovers, favourable conditions in financial and stock markets prompted the growth of cross-border M&As. However, data on FDI flows and stocks should be interpreted with caution, taking into account a number of issues related to FDI statistics. A rise in global FDI flows, for instance, does not necessarily mean increased productive capacities in host economies, as explained in the next section. 2. Some issues concerning FDI statistics: what is behind the numbers? Host countries today generally welcome FDI, on the condition that it will lead to higher value added and/or higher rates of output growth in their economies. FDI flows are expected to represent funds for expenditure on capital formation in host economies. But in reality not all of the flows shown in FDI data represent external financial resources for investment, because they may have originated in that country itself in the first place (roundtripping), or because they are intended mainly for FDI in some other country (trans-shipping), as discussed below. And, even if they are transshipments, they do not necessarily translate into expenditures to build production capacity in host economies. Capital formation is the flow of expenditures that increase or maintain the real capital stock (sum of the value of capital goods used as factor inputs for production) in an economy. FDI that goes into new investment projects in an economy is part of