World Investment Report 2001
Promoting Linkages
United Nations
related to foreign direct investment and transnational corporations. In the past, the Programme on Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations (1975-1992) and the Transnational Corporations and Management Division of the United Nations Department of Economic and Social Development (1992-1993). In 1993, the Programme was transferred to the United Nations Conference on Trade and Development. UNCTAD seeks to further the understanding of the nature of transnational corporations and their contribution to development and to create an enabling environment for international investment and enterprise development. UNCTAD's work is carried out through intergovernmental deliberations, technical assistance activities, seminars, workshops and conferences.
The term “country” as used in this study also refers, as appropriate, to territories or areas; the designations employed and the presentation of the material do not imply the expression of any opinion whatsoever 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 convenience and do not necessarily express a judgement about the stage of development reached by a particular country or area in the development process. The reference to a company and its activities should not be construed as an endorsement by UNCTAD of the company or its activities.
The boundaries and names shown and designations used on the maps presented in this publication do 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 been omitted 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.01.II.D.
ISBN 92-1-112
Copyright © United Nations, 2001 All rights reserved
Manufactured in Switzerland
iii
Investment is of decisive importance for the developing world. The only developing countries that really are developing are those that have succeeded in attracting significant amounts of foreign direct investment (FDI), and have mobilized the savings and resources of their own citizens. Unfortunately, that is only a relative handful of countries. The rest of the developing world, and especially the least developed countries, are almost entirely missing out — in spite of the fact that many of them have put in place highly welcoming regulatory frameworks for foreign investment and are carrying out other major economic, financial and political reforms. Often, however, a country lacks the necessary infrastructure, or its market is too small and too isolated to be of interest. For many local markets trying to compete, the global market can be unforgiving.
Part One of the World Investment Report 2001 focuses on the geography of FDI. Flows of FDI reached unprecedented levels in 2000. Policy makers in developing countries are seeking to increase this volume still further, but more importantly to improve its quality. Towards that end, a new generation of investment promotion strategies is emerging — a more targeted approach that carefully assesses location and other factors for success. These new strategies are being pursued side-by-side with traditional schemes.
The discussion in Part Two of the Report reflects the fact that international production networks span more countries than ever before. There is a need to promote links between foreign affiliates and domestic firms in developing countries, so as to strengthen the domestic enterprise sector. This is the bedrock of economic development, and would go a long way toward giving domestic firms a foothold in international production networks while embedding foreign affiliates more fully in host economies.
Helping the developing-country economies, and in particular those of the least developed countries, to derive more benefits from FDI and from the increasingly integrated global economy remains a crucial goal of the entire United Nations system. The statistics and analysis contained in this thought-provoking Report are meant to contribute to that endeavour, and merit wide readership.
Kofi A. Annan
iv
The World Investment Report 2001 (WIR01) was prepared - under the overall direction of Karl P. Sauvant - by a team led by Anh-Nga Tran-Nguyen and comprising Victoria Aranda, Americo Beviglia Zampetti, Harnik Deol, Kumi Endo, Wilfried Engelke, Torbjörn Fredriksson, Masataka Fujita, Kálmán Kalotay, Gabriele Köhler, Padma Mallampally, Abraham Negash, Ludger Odenthal, Miguel Pérez Ludeña, Katja Weigl and James Xiaoning Zhan. Specific inputs were received from Sung Soo Eun, Fulvia Farinelli, Günter Fischer and Paul Wessendorp.
Principal research assistance was provided by Mohamed Chiraz Baly, Bradley Boicourt and Lizanne Martinez. Research assistance was provided by Tadelle Taye. Three interns assisted with the WIR01 at various stages: Maria Cristina D'Ornellas, Leander Kroezen and Pim Schuitemaker. The production of the WIR01 was carried out by Christopher Corbet, Florence Hudry, Zarah Lim, Mary McGee and Chantal Rakotondrainibe. Graphics were done by Diego Oyarzun-Reyes. WIR01 was desktop published by Teresita Sabico. The Report was edited by Frederick Glover.
Sanjaya Lall was principal consultant and adviser.
Experts from within and outside the United Nations provided inputs for WIR01. Major inputs were received from Jorge Carrillo and Prasada Reddy. Inputs were also received from Peter Brimble, Mike Crone, Sonia Ferencikova, Grazia Ietto-Gillies, Andrej Koperdan, Xiaofang Shen, Lu Yuebing and Xia Youfou.
A number of experts were consulted on various chapters. The special topic of Part Two was discussed at an international workshop in Geneva in May 2001 in cooperation with the Development Policy Forum of the German Foundation for International Development. The assistance of Gudrun Kochendörfer-Lucius and Ina Dettmann-Busch of the Forum, is gratefully acknowledged.
Comments were received during various stages of preparation from Arun Agrawal, Tilman Altenburg, Subash Bijlani, Douglas van der Berghe, Kai Bethke, Mauro Borges Lemos, Andre de Crombrugghe, Chris Darrol, Janelle Diller, László Dubcsák, Nigel Easton, Persephone Economou, Mario Frentz, István Fórián, Axèle Giroud, Anabel González, Khalil Hamdani, Robert Handfield, Tom Hayes, Neil Hood, Paul Hyman, Georg Kell, June-Dong Kim, Mark Koulen, Sushil Kumar, Don Lecraw, Henry Loewendahl, John A. Mathews, Jörg Mayer, Pradeep Mehta, Hafiz Mirza, Tony Mizen, Robert Lipsey, Sándor Molnár, Ricardo Monge, Theodore H. Moran, Michael Mortimore, Lynn K. Mytelka, Njunguna S. Ndungu, Fionan O'Muircheartaigh, José Tomás Páez Fernández, Nicholas Phelps, Anne Caroline Posthuma, Ganesh Rasagam, Pedro Roffe, Lorraine Ruffing, Christiane Stepanek-Allen, Vit Svajcr, Taffere Tesfachew, Art Tolentino, Selma Tozanli, Rob van der Tulder, Peter Unterweger, Louis T. Wells, Archie Workman, Henry Yeung and Stephen Young.
Numerous officials of central banks, statistical offices, investment promotion agencies and other government offices, and officials of international organizations and non-governmental organizations, as well as executives of a number of companies, also contributed to WIR01, especially through the provision of data and other information. The Foreign Investment Advisory Service of the World Bank contributed inputs. A survey of linkages by foreign affiliates was undertaken with the participation of the International Chamber of Commerce.
The Report benefited from overall advice from John H. Dunning, Senior Economic Advisor.
Table of contents
P a g e
PREFACE ...iii
OVERVIEW ...xiii
PART ONE
THE GEOGRAPHY OF INTERNATIONAL PRODUCTION
INTRODUCTION ...3
CHAPTER I. THE GLOBAL PICTURE ...5
A.
The geographical dynamics of FDI: the setting ...5
B.
The growth of FDI in 2000 ...9
1. Developed countries ...
9
a. United States ...
12
b. European Union ...
12
c. Japan ...
18
d. Other developed countries ...
19
2. Developing countries ...
19
a. Africa ...
19
b. Developing Asia ...
23
c. Latin America and the Caribbean ...29
d. The least developed countries ...
30
3. Central and Eastern Europe ...
34
C.
The Inward FDI Index ...39
Notes ...
44
CHAPTER II. MAPPING INTERNATIONAL PRODUCTION ...47
P a g e
1. FDI patterns ...
47
2. Some comparative patterns ...
53
B.
Sub-national patterns ...59
C.
Industrial and functional patterns ...66
1. Industrial location and the role of clusters ...66
2. The location of corporate functions ...72
Notes ...
88
CHAPTER III. THE LARGEST TRANSNATIONAL
CORPORATIONS ...89
A.
The 100 largest TNCs worldwide ...93
1. Highlights ...
93
2. Transnationality ...
96
B.
The largest 50 transnational corporations from
developing countries ...104
C.
The largest 25 TNCs from Central and Eastern Europe ...114
Notes ...
119
CONCLUSION ...121
PART TWO
PROMOTING LINKAGES BETWEEN FOREIGN
AFFILIATES AND DOMESTIC FIRMS
INTRODUCTION ...127
CHAPTER IV. BACKWARD LINKAGES: IMPACT,
DETERMINANTS AND TNC EXPERIENCE ...129
A.
Why backward linkages matter ...129
P a g e
C.
Creating and deepening linkages: what companies do ...140
1.
Finding new local suppliers ...
140
2.
Transferring technology ...
140
3.
Providing training ...
144
4.
Sharing information ...
149
5.
Extending financial support ...
151
D.
Conclusions ...152
Notes ...
153
Annex to chapter IV. Supplier development activities
by foreign affiliates...157
CHAPTER V. POLICIES TO STRENGTHEN LINKAGES ...163
A.
The role of government policy...163
B.
Trade and investment measures influencing linkages ...165
C.
Specific measures to assist the creation and
deepening of linkages ...173
1.
Information and matchmaking ...
174
2.
Technology upgrading ...
175
3.
Training ...
178
4.
Finance ...
180
D.
Specific government linkage promotion programmes ...183
Notes ...
193
Annex to chapter V. Additional country programmes ...197
CHAPTER VI. KEY ELEMENTS OF
A LINKAGE PROMOTION PROGRAMME ...209
A. Setting policy objectives ...211
P a g e
C.
Areas for specific policy measures ...213
D.
Organizational and institutional framework ...214
REFERENCES ...217
ANNEX A. ADDITIONAL TEXT TABLES AND FIGURES ...235
ANNEX B. STATISTICAL ANNEX ...273
SELECTED UNCTAD PUBLICATIONS ON TRANSNATIONAL
CORPORATIONS AND FOREIGN DIRECT INVESTMENT ...347
QUESTIONNAIRE ...356
Boxes
I.1. FDI regimes in 2000 ...6I.2. FDI boom in Hong Kong, China: what ‘s behind the numbers? ...24
I.3. The evolving profile of FDI in China ...26
I.4. FDI in Yugoslavia ...35
I.5. Government support for investors in Hungary ...37
II.1. Cross-border M&As in 2000 ...53
II.2. Inward FDI at the sub-national level: some examples ...62
II.3. FDI in high technology industries in California ...73
II.4. FDI in the electronics industry in Penang, Malaysia ...74
II.5. FDI in financial services in the City of London ...75
III.1. Assessing the international spread of the world’s largest TNCs ...103
III.2. Lukoil’s acquisition of Getty Petroleum ...119
IV.1. ENGTEK: from a backyard business to a global supplier ...129
IV.2. Linkages to first-tier foreign suppliers ...132
IV.3. Evidence on backward linkages ...134
IV.4. Linkages in the Peruvian mining industry ...138
IV.5. Sourcing in the food retailing industry: Carrefour and McDonald’s in Argentina ... 139
IV.6. Nestlé’s supplier development programme in China ...141
IV.7. Cooperation between foreign affiliates and local suppliers: the case of LG Electronics in India ...144
IV.8. Upgrading supplier capabilities in the food processing industry in India ...145
IV.9. Unilever in Viet Nam ...146
IV.10. Fostering linkages with local suppliers: the case of Toyota Motor Thailand ...146
IV.11. The SMART model of Intel Malaysia ...149
IV.12. Motorola’s backward linkage programme in China ...150
V.1. Suzuki’s local sourcing in Hungary ...166
P a g e
V.3. Experiences with local content requirements ...169
V.4. Singapore’s Local Industry Upgrading Programme ...176
V.5. Source Wales ...179
V.6. Partnership for training: the UNIDO Partnership Programme to strengthen the automotive component manufacturing industry in India ...181
V.7. Targeting potential local suppliers ...184
V.8. Ireland’s National Linkage Programme ...185
V.9. National and regional linkage development schemes in Malaysia ...187
V.10 The Czech Republic’s National Supplier Development Programme ...189
V.11. Measuring linkages and their economic impact – an overview ...192
VI.1 Coach an SME! ...213
Figures
I.1. Geographical distribution of foreign affiliates, 1999 ...11I.2. The share of the Triad in world FDI flows and stocks, 1985 and 2000 ...11
I.3. FDI stocks among the Triad and economies in which FDI from the Triad dominates, 1985 and 1999 ...13
I.4. Developed countries: FDI outflows, 1999 and 2000 ...14
I.5. Destination and sources of United States FDI flows, 2000 ...15
I.6. Developed countries: FDI inflows, 1999 and 2000 ...16
I.7. Developed countries: FDI flows as a percentage of gross fixed capital formation, 1997-1999 ...17
I.8. Intra- and extra-EU FDI flows, 1995-1999 ...18
I.9. FDI inflows and their share in gross fixed capital formation in Africa, 1990-2000 ... 19
I.10. Africa: FDI flows as a percentage of gross fixed capital formation, top 20 countries, 1997-1999 ...21
I.11. Africa: FDI inflows, top 10 countries, 1999 and 2000 ...22
I.12. Africa: FDI outflows, top 10 countries, 1999 and 2000 ...22
I.13. FDI inflows and their share in gross fixed capital formation in developing Asia, 1990-2000 ...24
I.14. FDI inflows as a percentage of gross domestic capital formation in developing Asia, 1990-1999 ...27
I.15. Asia and the Pacific: FDI inflows, top 20 economies, 1999-2000 ...28
I.16. Developing Asia: FDI outflows, top 10 economies, 1999-2000 ...29
I.17. FDI inflows and their share in gross fixed capital formation in Latin America and the Caribbean, 1990-2000 ...29
I.18. Latin America and the Caribbean: FDI inflows, top 20 economies, 1999 and 2000 ... 31
I.19. Latin America and the Caribbean: FDI flows as a percentage of gross fixed capital formation, top 20 economies, 1997-1999 ...32
I.20. Latin America and the Caribbean: FDI outflows, top 10 economies, 1999 and 2000 ... 33
I.21. FDI inflows and their share in gross fixed capital formation in Central and Eastern Europe, 1990-2000 ...34
I.22. Central and Eastern Europe: FDI inflows, 1999 and 2000 ...34
I.23. Central and Eastern Europe: FDI flows as a percentage of gross fixed capital formation, 1997-1999 ...36
I.24. Central and Eastern Europe: FDI outflows, 1999 and 2000 ...37
P a g e
I.26. The Inward FDI Index, by host economy: the top 30 and the bottom 20,1988-1990 and 1998-2000 ...41
I.1. Inward FDI stock, 1985 and 2000 ...48
II.2. Outward FDI stock, 1985 and 2000 ...49
II.3. Share of developing countries in world FDI flows, 1980-2000 ...50
II.4. Relative importance of FDI outflows from selected developing economies, 1997-1999 ... 50
II.5. Inward FDI stock per $1,000 GDP, 1999 ...51
II.6. Inward FDI stock per capita, 2000 ...51
II.7. Value of cross-border M&As and its share in world GDP, 1987-2000 ...53
II.8. Cross-border M&A sales, 1987 and 2000 ...54
II.9. Cross-border M&A purchases, 1987 and 2000 ...55
II.10. FDI and trade intensities, by region, 1990 and 1999 ...57
II.11. Location of foreign affiliates in Austria, by region, 1994 ...60
II.12. Distribution of sales by foreign affiliates in Japan, by area, 1997 ...60
II.13. Distribution of FDI inflows in France, by region, 1997 ...61
II.14. Distribution of employees of foreign affiliates in Sweden, by county, 1999 ...61
II.15. Distribution of production of foreign affiliates in the United States, by state, 1992 ... 62
II.16. Industrial distribution of world FDI stock, 1988 and 1999 ...67
II.17. The distribution of foreign affiliates in the semiconductor industry, 1999 ...68
II.18. The distribution of foreign affiliates in the biotechnology industry, 1999 ...69
II.19. The distribution of foreign affiliates in the automobile industry, 1999 ...70
II.20. The distribution of foreign affiliates in the TV and radio receivers industry, 1999 ... 70
II.21. The distribution of foreign affiliates in the textiles and clothing industry, 1999 ... 71
II.22. The distribution of foreign affiliates in food and beverage industry, 1999 ...71
II.23. The distribution of foreign affiliates of the largest 10 automobile TNCs, by function, 1999 ...76
II.24. The distribution of foreign affiliates of the largest 10 electronics TNCs, by function, 1999 ...78
II.25. The distribution of R&D facilities and locations of major universities in Europe, 1999 ... 83
II.26. The distribution of R&D facilities and locations of major universities in the United States, 1999 ...84
II.27. The distribution of R&D facilities and locations of major universities in Asia, 1999 ... 86
II.28. Functional integration of foreign affiliates of Toyota Motor Corporation in ASEAN, 2000 ...87
III.1. Location of the largest 100 TNCs in the world, the largest 50 TNCs in developing countries and largest 25 TNCs based in Central and Eastern Europe, 1999 ...89
III.2. Snapshot of the world’s 100 largest TNCs, 1990-1999 ...96
III.3. Global expansion of Ford Motor Company ...97
III.4. Global expansion of Unilever N.V. ...98
III.5. Global expansion of Siemens A.G. ...99
III.6. Global expansion of Marubeni Corporation ...100
III.7. Average transnationality index of the world’s 100 largest TNCs, 1990-1999 ... 101
III.8. The top 10 increases in transnationality among the world’s 100 largest TNCs, 1998-1999 ...102
III.9. The top 10 decreases in transnationality among the world’s 100 largest TNCs, 1998-1999 ...102
III.10. Trends among the largest 50 TNCs from developing economies, 1993–1999 ... 107
P a g e
III.12. Major industry groups as per cent of largest 50, 1993 and 1999 ...110
III.13. Major industry groups of the largest 50 TNCs and their average transnationalization index, 1993 and 1999 ...111
III.14. Foreign assets of the biggest investors from developing countries, 1998 and 1999 ...113
III.15. Global expansion of Pliva d.d. ...117
IV.1. Strategic options for foreign affiliates with regard to obtaining inputs ...133
V.1. Policy focus for the promotion of backward linkages ...164
V.2. The linkages policy environment ...164
Tables
I.1. Selected indicators of FDI and international production, 1982-2000 ...10I.2. Annual average FDI growth rate, 1986-2000 ...10
I.3. The ten largest cross-border M&A purchases by South African firms, 1987-2000 ... 23
I.4. Concentration ratios of FDI, trade, domestic investment and technology payments, 1985 and 2000 ...39
I.5. The Inward FDI Index, by region, 1988-1990 and 1998-2000 ...43
II.1. Share of the largest ten countries in world FDI flows, 1985 and 2000 ...52
II.2. Share of the largest recipients of FDI flows among developing economies, 1985 and 2000 ...52
II.3. The share of top TNCs in outward FDI stock, selected countries, latest available year ... 52
II.4. Cross-border M&As with values of over $1 billion, 1987-2000 ...56
II.5. Geographical distribution of FDI flows, trade, domestic investment and technology payments ...56
II.6. Geographical concentration of foreign affiliates in selected manufacturing industries, by technological intensity, 1999 ...68
II.7. Corporate networks of Japanese affiliates in the Americas, 1999 ...80
II.8. Regional headquarters of foreign firms in Hong Kong, China, by home economy and by industry, 1996-2000 ...81
II.9. Share of United States patents of world’s largest firms attributable to research in foreign locations, 1969-1995 ...82
III.1. The world’s 100 largest TNCs, ranked by foreign assets, 1999 ...90
III.2. Newcomers to the world’s 100 largest TNCs, ranked by foreign assets, 1999 ... 93
III.3. Departures from the world’s 100 largest TNCs, ranked by foreign assets, 1999a ... 94
III.4. Snapshot of the world’s 100 largest TNCs, 1999 ...94
III.5. Country composition of the world’s largest 100 TNCs by transnationality index and foreign assets, 1990, 1995 and 1999 ...95
III.6. Industry composition of the largest 100 TNCs, 1990, 1995 and 1999 ...101
III.7. The world’s largest 10 TNCs in terms of transnationality, 1999 ...101
III. 8. Averages in transnationality index, assets, sales and employment of the largest 5 TNCs in each industry, a 1990, 1995 and 1999 ...102
III.9. The largest 50 TNCs from developing economies, ranked by foreign assets, 1999 ... 105
III.10. Snapshot of largest 50 TNCs from developing economies, 1999 ...107
III.11. The top five TNCs from developing economies in terms of transnationality, 1999 ... 108
III.12. Newcomers to the largest 50 TNCs from developing economies, 1999 ...109
III.13. Departures from the largest 50 TNCs from developing economies, 1999 ...110
P a g e
III.15. Country composition of the largest 50 TNCs from developing economies,by transnationality index and foreign assets, 1993, 1996 and 1999 ...113
III. 16. The largest 25 non-financial TNCs based in Central and Eastern Europe, ranked by Foreign assets, 1999 ...115
III.17. Gazprom: selected equity investments outside the Russian Federation by 2001 ...116
III.18. Selected publicly announced cross-border mergers and acquisitions involving the largest 25 firms, January 1997 to May 2001 ...118
IV.1. Backward linkages and other relationships between foreign affiliates and local enterprises and organizations ...131
V.I. Notifications submitted under Article 5.1 of the TRIMs Agreement ...168
V.2. Examples from international agreements (or attempts thereof) that prohibit, condition or discourage certain host country operational measures ...170
V.3. The WTO Agreement on Subsidies ...172
VI.1 Specific government measures to create and deepen linkages ...210
VI.2 Measures by foreign affiliates to create and deepen linkages ...214
Box figures
I.1.1. Types of changes in FDI laws and regulations, 2000 ...6I.1.2. BITs concluded in 2000, by country group ...6
I.1.3. Cumulative number of BITs and DTTs, 1990-2000 ...7
I.1.4. DTTs concluded in 2000, by country group ...7
1.2.1. Trends of FDI inflows into Hong Kong, China, 1994-2000 ...24
II.2.1. Distribution of FDI stock in China, by province and major city, 1999 ...63
II.2.2. Distribution of FDI flows in Thailand, by province, 2000 ...63
II.2.3. Location of foreign affiliates in Brazil, by city, 1999 ...64
II.2.4. Location of foreign affiliates in Mexico, by city, 1999 ...64
II.2.5. Distribution of foreign affiliates in Hungary, by region, 1998 ...65
II.2.6 Location of foreign affiliates in Poland, by city, 1999 ...65
II.3.1. Location of foreign affiliates and domestic firms in the microelectronics industry in California, United States, 1999 ...73
II.4.1. Location of foreign affiliates and domestic firms in the electronics industry in Malaysia, 1999 ...74
Box tables
I.1.1. National regulatory changes, 1991-2000 ...6I.3.1. Exports of high-technology products from China by ownership of production, 1996-2000 ...26
I.4.1. FDI inflows into Yugoslavia, 1992-2000 ...35
I.4.2. Countries of origin of FDI inflows into Yugoslavia, 1996-2000 ...35
I.4.3. Number of FDI projects in Yugoslavia, by industry, 1995-2000 ...35
III.1.1. Network Spread Index of the world’s largest 97 TNCs, by country of origin ... 104
III.1.2. Network Spread Index of the world’s largest 94 TNCs, by industry ...104
IV.10.1. Local procurement by Toyota Motor Thailand, 2001, by type of supplier and type of input ...147
F
THE GEOGRAPHY OF
INTERNATIONAL
PRODUCTION
FDI flows reached record levels
in 2000…
oreign direct investment (FDI) continues to expand rapidly, enlarging the role of international production in the world economy. FDI grew by 18 per cent in 2000, faster than other economic aggregates like world production, capital formation and trade, reaching a record $1.3 trillion. FDI flows are, however, expected to decline in 2001.
The global expansion of investment f l o w s i s d r i v e n b y m o r e t h a n 6 0 , 0 0 0 transnational corporations (TNCs) with over 8 0 0 , 0 0 0 a ff i l i a t e s a b r o a d . D e v e l o p e d
countries remain the prime destination of
FDI, accounting for more than three-quarters of global inflows. Cross-border mergers and a c q u i s i t i o n s ( M & A s ) r e m a i n t h e m a i n stimulus behind FDI, and these are still concentrated in the developed countries. As a r e s u l t , i n f l o w s t o d e v e l o p e d c o u n t r i e s increased by 21 per cent and amounted to a little over $1 trillion. FDI inflows to
developing countries also rose, reaching
$240 billion. However, their share in world FDI flows declined for the second year in a row, to 19 per cent, compared to the peak of 41 per cent in 1994. The countries in
Central and Eastern Europe, with inflows
of $27 billion, maintained their share of 2 per cent. The 49 least developed countries ( L D C s ) r e m a i n e d m a r g i n a l i n t e r m s o f attracting FDI, with 0.3 per cent of world inflows in 2000.
Wi t h i n t h e d e v e l o p e d w o r l d , t h e
Triad – the European Union (EU), the United
States and Japan – accounted for 71 per cent of world inflows and 82 per cent of outflows in 2000. Within the Triad, the EU has gained both as a recipient and source of FDI. Record inflows ($617 billion) were stimulated by f u r t h e r p r o g r e s s i n r e g i o n a l i n t e g r a t i o n , while the United States and other Western European countries remain its main partners outside the region. Due to the take-over of Mannesmann by VodafoneAirTouch – the largest cross-border merger deal so far – Germany became, for the first time, the l a rg e s t r e c i p i e n t o f F D I i n E u r o p e . T h e United Kingdom maintained its position as t h e t o p s o u r c e c o u n t r y w o r l d w i d e f o r a second year. The United States remained the world’s largest FDI recipient country as inflows reached $281 billion. Outflows with $139 billion decreased by 2 per cent. Japan saw its inflows in 2000 drop by 36 per cent from the previous year to $8 billion, partly d u e t o t h e p r o l o n g e d s l o w - d o w n o f t h e country’s economic growth, but also perhaps indicative of the fact that, in spite of its welcoming FDI policies, other factors deter investment inflows. In contrast, outflows from Japan rebounded to $33 billion, the highest level in ten years. Among o t h e r
developed countries, the most conspicuous
events were the unprecedented levels of FDI into and from Canada, reflecting several major M&A deals, in particular with partners in Europe and the United States.
per cent. The decline was mainly related to two countries: South Africa and Angola. In the former country, fewer privatization and M&A deals caused the slow-down, while in the latter, inflows in the petroleum sector declined. The Southern African Development Community maintained its position as the most important subregion for FDI inflows in Africa. Its share in total FDI inflows into Africa was 44 per cent, compared to 21 per c e n t i n t h e f i r s t h a l f o f t h e 1 9 9 0 s . T h e Community’s improved attractiveness to FDI m a y h a v e b e e n p r i n c i p a l l y d r i v e n b y country-specific factors, but at least some FDI inflows were also motivated by the economic integration of the region.
After tripling during the second half of the 1990s, FDI flows into Latin America
and the Caribbean also fell in 2000, by 22
per cent, to $86 billion. This was mainly a correction from 1999 – when FDI inflows into the region were greatly affected by three major cross-border acquisitions of Latin American firms – rather than a shift in the underlying trend. Privatization slowed down in 2000, but continues to be important as a factor driving inward FDI. In terms of sectors, FDI into South America was mainly i n s e r v i c e s a n d n a t u r a l r e s o u r c e s , w h i l e M e x i c o c o n t i n u e d t o r e c e i v e t h e l a rg e s t share of inflows in manufacturing as well as in banking.
I n d e v e l o p i n g A s i a , F D I i n f l o w s reached a record level of $143 billion in 2000. The greatest increase took place in East Asia; Hong Kong (China), in particular, experienced an unprecedented FDI boom, w i t h i n f l o w s a m o u n t i n g t o $ 6 4 b i l l i o n , making it the top FDI recipient in Asia as well as in developing countries. This upsurge in inflows has several explanations. First, it reflects a recovery from the economic turmoil of the recent past. Second, TNCs planning to invest in mainland China have been “parking” funds in Hong Kong (China), in anticipation of China’s expected entry into the WTO. Third, the increase reflects a major cross-border M&A in telecommunications, which alone accounted for nearly one-third of the territory’s total FDI inflows. Fourth, there is an element of increased “round-tripping” of capital flows into, and out of Hong Kong (China).
FDI flows to China, at $41 billion, remained fairly stable. In the course of its negotiations for membership in the WTO, China has amended some of its FDI policies. TNCs play an increasingly important role in the Chinese economy; for example, tax contributions by foreign affiliates accounted for 18 per cent ($27 billion) of the country’s total corporate tax revenues in 2000. Inflows to South-East Asia (ASEAN-10) remained below the pre-crisis level. The subregion’s share in total FDI flows to developing Asia continued to shrink, and stood in 2000 at 10 per cent, as compared with over 30 per cent in the mid-1990s. This was largely due to rising inflows into other countries in the r e g i o n a n d s i g n i f i c a n t d i v e s t m e n t s i n Indonesia since the onset of the financial crisis. South Asia witnessed a drop in FDI inflows by 1 per cent over the previous year. I n d i a , t h e l a r g e s t r e c i p i e n t i n t h e s u b c o n t i n e n t , r e c e i v e d $ 2 b i l l i o n . Notwithstanding these mixed trends, the l o n g e r - t e r m i n v e s t m e n t p r o s p e c t s f o r developing Asia remain bright. In addition to the quality of the underlying determinants for FDI, greater economic integration is likely to boost FDI in the region.
Outward FDI from developing Asia doubled in 2000, to $85 billion. Hong Kong (China) was the most important source ($63 billion); more than half of its outward FDI went to China. Outward FDI from China and India also picked up.
FDI inflows into Central and Eastern
Europe also rose, to an unprecedented $27
…but a mapping of the geography
of FDI patterns shows that
international production is
highly concentrated…
A mapping of FDI inflows indicates t h e e x t e n t t o w h i c h h o s t c o u n t r i e s a r e i n t e g r a t i n g i n t o t h e g l o b a l i z i n g w o r l d economy. It also indicates indirectly the d i s t r i b u t i o n o f b e n e f i t s f r o m F D I . T h e m a p p i n g o f o u t w a rd F D I s h o w s w h i c h countries control the global distribution of this investment. Understanding the pattern of FDI flows and stocks and its driving forces is important for the formulation and implementation of economic strategies and policies.
A comparison of the world maps of inward and outward FDI in 2000 and 1985 r e v e a l s t h a t F D I r e a c h e s m a n y m o r e countries in a substantial manner than in the past. More than 50 countries (24 of which are developing countries) have an inward stock of more than $10 billion, compared with only 17 countries 15 years ago (7 of them developing countries). The picture for o u t w a r d F D I i s s i m i l a r : t h e n u m b e r o f countries with stocks exceeding $10 billion r o s e f r o m 1 0 t o 3 3 ( n o w i n c l u d i n g 1 2 developing countries, compared to 8 in 1985) over the same period. In terms of flows, the number of countries receiving an annual average of more than $1 billion rose from 17 (6 of which were developing countries) in the mid-1980s to 51 (23 of which were d e v e l o p i n g c o u n t r i e s ) a t t h e e n d o f t h e 1990s. In the case of outflows, 33 countries (11 developing countries) invested more than $1 billion at the end of the 1990s, compared t o 1 3 c o u n t r i e s ( o n l y o n e d e v e l o p i n g country) in the mid-1980s.
Despite its reach, however, FDI is unevenly distributed. The world’s top 30 host countries account for 95 per cent of total world FDI inflows and 90 per cent of stocks. The top 30 home countries account for around 99 per cent of outward FDI flows and stocks, mainly industrialized economies. About 90 of the world’s largest 100 non-financial TNCs in terms of foreign assets are headquartered in the Triad. More than half of these companies are in the electrical and electronic equipment, motor vehicle, and
p e t r o l e u m e x p l o r a t i o n a n d d i s t r i b u t i o n industries. These TNCs play an important r o l e i n i n t e r n a t i o n a l p r o d u c t i o n : t h e y accounted (in 1999) for approximately 12 per cent, 16 per cent and 15 per cent of the f o r e i g n a s s e t s , s a l e s a n d e m p l o y m e n t , r e s p e c t i v e l y, o f t h e w o r l d ’s 6 0 , 0 0 0 p l u s TNCs. General Electric maintained in 1999 its position as the largest TNC in the world. For the first time, three companies from developing countries (Hutchison Whampoa, P e t r ó l e o s d e Ve n e z u e l a a n d C e m e x ) a r e among the world’s 100 largest TNCs. The t r a n s n a t i o n a l i z a t i o n o f c o m p a n i e s i s a phenomenon increasingly observed not only i n d e v e l o p e d c o u n t r i e s b u t a l s o i n t h e developing world. The top 50 TNCs from developing countries – the largest of which are comparable in size to the smallest of the top 100 worldwide – originate in some 13 newly industrializing economies of Asia a n d L a t i n A m e r i c a a s w e l l a s i n S o u t h Africa. They congregate in construction, f o o d a n d b e v e r a g e s , a n d d i v e r s i f i e d industries. The largest 25 TNCs from Central a n d E a s t e r n E u r o p e a r e s o m e w h a t m o r e e v e n l y d i s t r i b u t e d a m o n g n i n e h o m e countries. Transport, mining, petroleum and gas and chemicals and pharmaceuticals are the most frequently represented industries among these TNCs. The transnationality index for the three groups of TNCs show s o m e d i v e rg e n t p a t t e r n s . T h e d e g r e e o f transnationalization increased for both the top 50 TNCs and the top 25: from 37 per cent in 1998 to 39 per cent in 1999 in the case of the former; and from 26 per cent to 32 per cent in the case of the latter. The t r a n s n a t i o n a l i t y o f t h e t o p 1 0 0 T N C s remained fairly stable at a high level (53 per cent).
of proximity to customers. The same applies to some manufacturing industries, in which a c c e s s t o t h e d o m e s t i c m a r k e t i s t h e predominant reason for investing abroad. However, the more advanced the level of technology in an industry, the higher the l e v e l o f c o n c e n t r a t i o n t e n d s t o b e . F o r e x a m p l e , i f o n e t a k e s s i x i n d u s t r i e s representing different technological levels (semiconductors, biotechnology, automobiles, TV and radio receivers, food and beverages, a n d t e x t i l e s a n d c l o t h i n g ) , a n i n d u s t r i a l mapping shows FDI in biotechnology as h i g h l y c o n c e n t r a t e d , f o l l o w e d b y semiconductors and televisions and radio r e c e i v e r s . I n c o m p a r i s o n , t h e f o o d a n d beverages industry is more evenly spread among host countries. Foreign affiliates in h i g h - t e c h n o l o g y i n d u s t r i e s t e n d t o agglomerate in selected locations in the w o r l d . T h i s r e f l e c t s d i f f e r e n c e s i n t h e i n d u s t r i a l d i s t r i b u t i o n o f F D I i n t h e manufacturing sector between developed and d e v e l o p i n g c o u n t r i e s . I n t h e d e v e l o p e d countries, chemicals is the largest recipient industry, while in developing countries FDI is concentrated in low-technology industries.
At the functional level, geographical patterns of FDI reflect efficiency considerations of TNCs in the light of increasing competitive p r e s s u r e s , c o u p l e d w i t h t e c h n o l o g i c a l advances that enable real-time links across long distances and the liberalization of trade and FDI policies. This encourages a greater spread of all corporate functions. Even such critical corporate functions as design, R&D and financial management are today becoming increasingly internationalized to optimize cost, efficiency and flexibility. Take, for example, the location of regional headquarters. Singapore and Hong Kong ( C h i n a ) h a v e attracted a number of regional headquarters to serve the Asian region, with the first location hosting some 200 regional headquarters, and the second 855 in 2000. In some industries, TNCs have set up integrated international p r o d u c t i o n s y s t e m s w i t h a n i n t r a - f i r m international division of labour spanning regions (as in automobiles) or continents (as in semiconductors). Within such complex systems, the functions transferred to different locations vary greatly. Less industrialized locations are assigned simpler tasks like assembly and packaging, while more skill-a n d t e c h n o l o g y - i n t e n s i v e f u n c t i o n s skill-a r e a l l o c a t e d t o i n d u s t r i a l l y m o r e a d v a n c e d locations.
…with countries varying greatly
in terms of their success in
attracting FDI, as revealed in
the new Inward FDI Index.
The concentration of FDI reflects the concentration of economic activity more generally. Thus, exports, domestic investment and technology payments are also highly concentrated. Richer and more competitive economies naturally receive and send more international direct investment than other economies.
To g a u g e t h e u n d e r l y i n g attractiveness of a country for international investors, it is useful to take its relative economic size and strength into account. The Inward FDI Index captures the ability of countries to attract FDI after taking into account their size and competitiveness. The Index is the average of three ratios, showing each country’s share in world FDI relative t o i t s s h a r e s i n G D P, e m p l o y m e n t a n d exports. An index value of “one” would therefore mean that a country’s share in world FDI matches its economic position in terms of these three indicators.
The ranking of 112 countries in 1988-1990 and 137 in 1998-2000 shows a large dispersion of index values. For 1998-2000, the value of the Index ranges from 17.3 for t h e l e a d i n g e c o n o m y, B e l g i u m a n d Luxembourg, to -0.8 for Yemen. Moreover, the rankings have changed significantly over t i m e . S i n g a p o r e h a s s l i p p e d f r o m f i r s t position at the end of the 1980s to thirteenth position a decade later. The fall in its index value reflects a slower growth of FDI (by about a half) than in its GDP and exports which more than doubled between the two p e r i o d s . T h e p o s i t i o n o f S w e d e n h a s improved considerably (moving from the t w e n t y - n i n t h s p o t t o t h e f o u r t h ) , p a r t l y r e f l e c t i n g a d e l i b e r a t e c h a n g e i n p o l i c y d u r i n g t h e 1 9 9 0 s i n f a v o u r o f g r e a t e r openness towards inward FDI.
attracting FDI, includes advanced economies l i k e J a p a n , I t a l y a n d G r e e c e , n e w l y industrializing economies like the Republic of Korea, Taiwan Province of China and Turkey, oil rich economies like Saudi Arabia and a number of low income countries. FDI recipients with high values of the Index i n c l u d e t h e m a j o r i t y o f t h e d e v e l o p e d countries, Hong Kong (China), Singapore a n d s o m e C e n t r a l a n d E a s t e r n E u r o p e a n countries.
In both periods, the Index value for developed countries is about twice the world a v e r a g e , w h i l e t h o s e f o r d e v e l o p i n g countries and economies in transition are below the world average. The differences between the three groups of countries reflect mainly the influence of the employment v a r i a b l e : t h e d e v e l o p e d a n d d e v e l o p i n g country groups have FDI shares roughly in p r o p o r t i o n t o t h e i r G D P s h a r e s , b u t t h e former receive far larger shares of world FDI than their shares in world employment, while developing countries and economies i n t r a n s i t i o n r e c e i v e l e s s . Wi t h i n t h e developing world, the Inward FDI Index values for South America and Central Asia exceeded unity in 1998-2000. In the other regions (and for these two regions in the earlier period), the Index value was below one. South Asia, West Asia and North Africa show the lowest values; the reasons for this may have more to do with political factors than economic ones. Sub-Saharan Africa receives FDI in line with its GDP share, but v e r y l i t t l e i n r e l a t i o n t o i t s s h a r e i n employment; over time its FDI Index value has declined slightly. For the LDC group, the value of the FDI Index doubled between the two periods, mostly due to increases in the FDI to exports and FDI to GDP ratios. In fact, in the second period, the Index value for African LDCs exceeded one; it is now almost twice as high as that for sub-Saharan Africa as a whole. The index value for other LDCs has declined over the decade.
T h e I n d e x s u g g e s t s t h a t A f r i c a receives less FDI flows in comparison with the region’s relative economic size. The underlying economic reality is that sub-Saharan Africa has lost share in both world FDI inflows and other economic aggregates; African LDCs, however, have maintained their share of FDI but have fallen further behind in other economic aggregates.
Interpreting the Inward FDI Index calls for care and the use of evidence on o t h e r e c o n o m i c a n d p o l i c y v a r i a b l e s . Nonetheless, it can provide a starting point for benchmarking how countries succeed in attracting FDI. Many of the countries at the top of the ranking (with an index value far exceeding unity) are strong economies that are leveraging their economic strength through policies to attract more than their “ n o r m a l ” s h a r e o f F D I . T h e r e a r e a l s o , h o w e v e r, a f e w c o u n t r i e s w i t h w e a k e c o n o m i e s b u t s t r o n g n a t u r a l r e s o u r c e endowments that occupy places at the top. A number of countries at the bottom are weak economies in which the influence of o t h e r e c o n o m i c f a c t o r s a n d p o l i c i e s apparently pulls inward FDI below levels that could be expected on the basis of the elements of economic strength covered by the Index. There are others at the bottom, (such as Japan and the Republic of Korea), h o w e v e r, t h a t h a v e s t r o n g e c o n o m i c positions overall but have chosen to restrict FDI (at least until fairly recently).
The expansion of international
production is taking place in a
new international setting…
The rapidly changing international setting is changing the drivers of FDI. While the main traditional factors driving FDI location – large markets, the possession of natural resources and access to low-cost unskilled or semi-skilled labour – remain relevant, they are diminishing in importance, particularly for the most dynamic industries and functions. As trade barriers come down and regional links grow, the significance of m a n y n a t i o n a l m a r k e t s a l s o d i m i n i s h e s . Primary industries account for a shrinking s h a r e o f i n d u s t r i a l a c t i v i t y, a n d n a t u r a l r e s o u r c e s p e r s e p l a y a s m a l l e r r o l e i n attracting FDI for many countries. The role o f c h e a p “ r a w ” l a b o u r i s s i m i l a r : e v e n labour-intensive activities often need to be c o m b i n e d w i t h n e w t e c h n o l o g i e s a n d a d v a n c e d s k i l l s . T h e l o c a t i o n o f T N C activity instead increasingly reflects three d e v e l o p m e n t s : p o l i c y l i b e r a l i z a t i o n , technical progress and evolving corporate strategies.
Changes in the international policy
locational decisions. Trade and investment liberalization allows TNCs to specialize more and to search for competitive locations. T N C s h a v e g r e a t e r f r e e d o m t o c h o o s e locations and the functions they transfer. Between 1991 and 2000, a total of 1,185 r e g u l a t o r y c h a n g e s w e r e i n t r o d u c e d i n national FDI regimes, of which 1,121 (95 per cent) were in the direction of creating a more favourable environment for FDI. During 2000 alone, 69 countries made 150 regulatory changes, of which 147 (98 per c e n t ) w e r e m o r e f a v o u r a b l e t o f o r e i g n investors.
Te c h n i c a l p ro g re s s a f f e c t s t h e
g e o g r a p h y o f F D I i n m a n y w a y s . R a p i d i n n o v a t i o n p r o v i d e s t h e a d v a n t a g e s t h a t propel firms into international production. Thus, innovation-intensive industries tend to be increasingly transnational, and TNCs have to be more innovative to maintain their competitiveness. Innovation also leads to c h a n g e s i n t h e s t r u c t u r e o f t r a d e a n d production, with R&D-intensive activities g r o w i n g f a s t e r t h a n l e s s t e c h n o l o g y -i n t e n s -i v e a c t -i v -i t -i e s . T h e -i n c r e a s e d technology intensity of products reduces the i m p o r t a n c e o f p r i m a r y a n d s i m p l e l o w -technology activities in FDI, while raising t h a t o f s k i l l - i n t e n s i v e a c t i v i t i e s . N e w information and communication technologies intensify competition while allowing firms to manage widely dispersed international operations more efficiently. High-technology a c t i v i t i e s p r e v i o u s l y o u t o f r e a c h o f developing countries can now be placed there because labour-intensive processes within those activities can be economically separated and managed over long distances.
M a n y a c t i v i t i e s i n i n t e g r a t e d production systems are technology-intensive and dynamic; their location in developing countries can rapidly transform the FDI and competitive landscape there. Moreover, the pervasiveness of technical change means that
a l l T N C a c t i v i t i e s h a v e t o u s e n e w
technologies effectively. Location decisions h a v e t o b e b a s e d o n t h e a b i l i t y o f h o s t c o u n t r i e s t o p r o v i d e t h e c o m p l e m e n t a r y skills, infrastructure, suppliers and institutions t o o p e r a t e t e c h n o l o g i e s e ff i c i e n t l y a n d flexibly. Technical progress, thus, forces firms involved in international production to differentiate increasingly between the “ h a v e s ” a n d “ h a v e n o t s ” i n n e w F D I
-complementing factors when deciding where to undertake different activities.
M a n a g e r i a l a n d o rg a n i z a t i o n a l f a c t o r s s t r e n g t h e n t h e n e w l o c a t i o n a l
determinants of FDI. A greater focus on core competencies, with flatter hierarchies and stronger emphasis on networking, steers investments towards locations with advanced factors and institutions, and, where relevant, distinct industrial clusters. New organizational methods (aided by new technologies) allow a more efficient management of global operations, encouraging a greater relocation of functions. Intense competition forces firms to specialize in their core business, inducing T N C s t o f o rg e e x t e r n a l l i n k s a t v a r i o u s points along the value chain (from design and innovation to marketing and servicing) and allow other firms (including TNCs) to undertake different functions.
Hence, the changing geography of international production reflects the dynamic interaction of many economic, organizational and policy factors. While many of these f a c t o r s h a v e l o n g b e e n r e l e v a n t , t h e i r combination today represents new forces influencing TNC location decisions. To cope successfully with globalization and use FDI to their advantage, developing countries must understand these forces. They set the parameters within which policy makers have t o a c t , t o a t t r a c t F D I a n d t o e x t r a c t t h e greatest benefits in terms of technology, skills and market access, striking backward linkages and leveraging foreign assets to r e a c h c o m p e t i t i v e p o s i t i o n s i n g l o b a l markets.
…and leads to a concentration
at the sub-national
level as well…
to markets and factors of production, and t h e a v a i l a b i l i t y o f s p e c i a l i z e d s k i l l s , i n n o v a t o r y c a p a b i l i t i e s , s u p p l i e r s a n d institutions. Intensifying competition forces f i r m s t o s p e c i a l i z e m o r e i n t h e i r c o r e competencies and rely more heavily on links with external partners (suppliers, buyers or even competitors) than in the past. These networking possibilities often induce TNCs to set up operations in close proximity to (competent) clusters of related firms.
Industrial clusters are playing an
i n c r e a s i n g r o l e i n e c o n o m i c a c t i v i t y, particularly in technology intensive activity. “Clusters” are concentrations of firms in one o r a f e w i n d u s t r i e s , b e n e f i t i n g f r o m synergies created by a dense network of competitors, buyers and suppliers. Clusters comprise demanding buyers, specialized suppliers, sophisticated human resources, f i n a n c e a n d w e l l - d e v e l o p e d s u p p o r t i n s t i t u t i o n s . S u c h c o n c e n t r a t i o n s o f r e s o u r c e s a n d c a p a b i l i t i e s c a n a t t r a c t “efficiency-seeking” FDI (and more and more FDI is of this type). It also helps to a t t r a c t “ a s s e t - s e e k i n g ” F D I t o t h e m o r e advanced host countries. In their inexorable s e a r c h f o r n e w c o m p e t i t i v e a d v a n t a g e s , T N C s s e e k “ c r e a t e d a s s e t s ” s u c h a s technology and skilled labour across the globe. Clusters of innovative activity (as in Silicon Valley in California, Silicon Fen in C a m b r i d g e ( U n i t e d K i n g d o m ) , Wi r e l e s s Valley in Stockholm or Zhong Guancum, a suburb of Beijing) have a distinct advantage in attracting such (high value) FDI.
These shifts in location factors pose important policy challenges for developing countries. Many countries, in particular the poorer and least industrialized ones, risk b e c o m i n g e v e n m o r e m a rg i n a l t o t h e d y n a m i c s o f i n t e r n a t i o n a l p r o d u c t i o n b e c a u s e t h e y c a n n o t m e e t t h e n e w requirements for attracting high quality FDI. Simply opening an economy is no longer enough. There is a need to develop attractive configurations of locational advantages.
Different configurations of advantages attr a c t d i ff e r e n t c o r p o r a t e f u n c t i o n s a n d i n d u s t r i e s . I n s o m e h i g h - t e c h n o l o g y industries like electronics, it may be possible to attract final-stage assembly on the basis of cost-efficient semi-skilled labour and e ff i c i e n t e x p o r t - p r o c e s s i n g f a c i l i t i e s . I n
other activities, production facilities may require well-developed local supply chains, a pool of skilled labour, close interaction with other firms and knowledge-producing institutions in close proximity. Some back-office activities may require specialized s k i l l s ( e . g . i n a c c o u n t i n g ) . H i g h v a l u e functions like R&D or regional headquarters a r e p a r t i c u l a r l y d e m a n d i n g o f a d v a n c e d skills and institutions.
I n v e s t o r s – d o m e s t i c a n d f o r e i g n alike – seek to take advantage of dynamic clusters. In joining a cluster, they often add to its strength and dynamism. This, in turn, tends to attract new skills and capital, adding further to the dynamism of the location. W h e r e a g g l o m e r a t i o n e c o n o m i e s a r e significant, the rest of the country might be of little relevance to the locational decisions of firms. Hence, attracting FDI in these activities depends increasingly on the ability to provide efficient clusters. An international bank’s location choice is not so much a choice between the United Kingdom and Germany as between London and Frankfurt.
Just like competitive firms differentiate themselves from their rivals by developing clearly identifiable products with recognizable brand names, some countries, too, can, over time, identify and develop their distinct “investment products”, and market them to foreign investors. For example, Bangalore in India has become a “brand name” for the development of software, with its pool of highly skilled engineers and competitive software companies. Singapore and Hong Kong (China) enjoy a similar status in the a r e a o f f i n a n c i a l s e r v i c e s a n d r e g i o n a l headquarters in Asia.
…which calls for a new
generation of investment
promotion policies.
t o m a r k e t f o r c e s i n r e s o u r c e a l l o c a t i o n . Virtually all countries – to varying degrees – have undertaken steps in this direction. S o m e c o u n t r i e s , c a n g o a l o n g w a y i n attracting FDI with these steps, if the basic economic determinants for obtaining FDI are right. In the second generation of investment promotion policies, governments go a step further and actively seek to attract FDI by “marketing” their countries. This approach leads to the setting up of national investment promotion agencies. The World Association o f I n v e s t m e n t P r o m o t i o n A g e n c i e s , e s t a b l i s h e d i n 1 9 9 5 , n o w h a s o v e r 1 0 0 members. Again, of course, the success of proactive efforts depends, in the end, on the quality of the basic economic factors in a host country.
The third generation of investment p r o m o t i o n p o l i c i e s t a k e s t h e e n a b l i n g framework for FDI and a proactive approach towards attracting FDI as a starting point. It then proceeds to target foreign investors at the level of industries and firms to meet their specific locational needs at the activity and cluster level, in light of a country’s developmental priorities. Such a strategy, in turn, is greatly helped if a country can nurture specific clusters that build on the c o u n t r y ’s c o m p e t i t i v e a d v a n t a g e s , capitalizing on the natural inclination of firms to agglomerate and that eventually acquire a brand name. A critical element of such investment promotion is to improve – a n d m a r k e t – p a r t i c u l a r l o c a t i o n s t o potential investors in specific activities. Of c o u r s e , a c o u n t r y ’s g e n e r a l e c o n o m i c , political and regulatory features also matter, because they affect the efficiency of the clusters within it. But the key to success of such new investment promotion strategies is that they actually address one of the basic e c o n o m i c F D I d e t e r m i n a n t s w h i l e u n d e r s t a n d i n g t h e c h a n g i n g l o c a t i o n strategies of TNCs.
However, such a targeted approach, especially the development of locational “brand names”, is difficult and takes time. It requires fairly sophisticated institutional capacities. Third generation promotion is, n e v e r t h e l e s s , g r o w i n g i n p r a c t i c e , a s w i t n e s s e d b y t h e p r o l i f e r a t i o n o f s u b -national agencies (of which a minimum of 2 4 0 e x i s t t o d a y ) a n d e v e n m u n i c i p a l investment promotion agencies.
This gives rise to another challenge: t h e n e e d t o c o o r d i n a t e p o l i c i e s a c r o s s various administrative levels in a country. I f t h a t i s n o t d o n e , t h e r e i s a r i s k t h a t competition among regions within a country leads to “fiscal wars” and results in waste as far as the welfare of the country as a whole is concerned. It also raises the risk that promotion agencies, if they are unable to coordinate other policy-making bodies in the country, will be unable to deliver on their promises to investors.
PROMOTING BACKWARD
LINKAGES
B a c k w a r d l i n k a g e s f r o m
f o r e i g n a ff i l i a t e s t o d o m e s t i c
f i r m s c a n e n h a n c e t h e
b e n e f i ts f r o m F D I .
P a r t O n e o f W I R 0 1 m a p p e d t h e locational pattern of the extent to which c o u n t r i e s a t t r a c t F D I . A k e y f a c t o r determining the benefits host countries can derive from FDI are the linkages that foreign affiliates strike with domestically owned f i r m s . B a c k w a r d l i n k a g e s f r o m f o r e i g n affiliates to domestic firms are important c h a n n e l s t h r o u g h w h i c h i n t a n g i b l e a n d tangible assets can be passed on from the former to the latter. They can contribute to the upgrading of domestic enterprises and embed foreign affiliates more firmly in host economies. Given the role that backward linkages can play in these respects, WIR01 analyses how host country governments can best promote efficient backward linkages by f o r e i g n a ff i l i a t e s . T h e a p p r o a c h i s pragmatic. It draws on practical experience as to what firms have done to forge linkages, and the measures that governments have adopted to encourage linkages and their deepening. An underlying assumption is that, w h a t e v e r t h e c u r r e n t l e v e l o f b a c k w a r d linkages, linkages can be increased or deepened further, with a view towards strengthening the capabilities and competitiveness of domestic firms.
Linkages offer benefits to foreign affiliates and domestic suppliers, as well as to the economy in which they are forged as a w h o l e . F o r f o re i g n a f f i l i a t e s , l o c a l procurement can lower production costs in host economies with lower costs and allow greater specialization and flexibility, with b e t t e r a d a p t a t i o n o f t e c h n o l o g i e s a n d products to local conditions. The presence of technologically advanced suppliers can provide affiliates with access to external technological and skill resources, feeding into their own innovative efforts. The direct effect of linkages on domestic suppliers is g e n e r a l l y a r i s e i n t h e i r o u t p u t a n d employment. Linkages can also transmit
knowledge and skills between the linked f i r m s . A d e n s e n e t w o r k o f l i n k a g e s c a n promote production efficiency, productivity g r o w t h , t e c h n o l o g i c a l a n d m a n a g e r i a l capabilities and market diversification for t h e f i r m s i n v o l v e d . F i n a l l y, f o r a h o s t
economy as a whole, linkages can stimulate
economic activity and, where local inputs substitute for imported ones, benefit the balance of payments. The strengthening of suppliers can in turn lead to spillovers to the rest of the host economy and contribute to a vibrant enterprise sector.
Where, as in developed countries, both buyers and suppliers are technologically strong and capable, knowledge flows run in both d i r e c t i o n s w i t h a f o c u s m a i n l y o n n e w technologies, products and organizational m e t h o d s . W h e r e , a s i n m o s t d e v e l o p i n g countries, suppliers are relatively weak, the flows are likely to be more one-sided, from foreign affiliates (buyers) to domestic firms. They can also be expected to contain more basic technological and managerial knowledge, in that suppliers are likely to lag further behind international best practice frontiers; for this reason, they can be particularly important.
O f c o u r s e , n o t a l l l i n k a g e s a r e equally beneficial for host economies. For e x a m p l e , i n h i g h l y p r o t e c t e d r e g i m e s , foreign affiliates may strike considerable linkages without much incentive to invest in the upgrading of suppliers’ technological c a p a b i l i t i e s . I n s t e a d , s u c h l i n k a g e s m a y f o s t e r a s u p p l i e r b a s e t h a t i s u n a b l e t o survive international competition. Linkages developed in competitive environments and accompanied by efforts to enhance suppliers’ capabilities are likely to be technologically more beneficial and dynamic. The objective is not to promote linkages for their own sake, but to do so where they are beneficial to the host economy.
vis-à-vis its buyer. Such suppliers may be highly vulnerable to market fluctuations, and their linkages with foreign affiliates are unlikely to involve much exchange of information and knowledge. Foreign affiliates only invest resources in building local capabilities when they expect such an effort to yield a positive return.
TNCs have a self-interest
in forging links with
domestic suppliers,…
Organizational changes are making supply chain management more critical to t h e c o m p e t i t i v e n e s s o f f i r m s , i n c l u d i n g TNCs. On average, a manufacturing firm s p e n d s m o r e t h a n h a l f i t s r e v e n u e s o n purchased inputs. In some industries, such as electronics and automotive, the proportion is even higher. Some firms are contracting o u t t h e e n t i r e m a n u f a c t u r i n g p r o c e s s t o i n d e p e n d e n t “ c o n t r a c t m a n u f a c t u r e r s ” , keeping only such functions as R&D, design and marketing. In these cases, supply chain management obviously becomes even more important.
A foreign affiliate – like any other firm – has three options for obtaining inputs in a host country: import them; produce them locally in-house; or procure them from a l o c a l ( f o r e i g n - o r d o m e s t i c a l l y o w n e d ) s u p p l i e r. T h e e x t e n t t o w h i c h f o r e i g n a ff i l i a t e s f o r g e l i n k a g e s w i t h d o m e s t i c suppliers is determined by the balance of costs and benefits, as well as differences in firm-level perceptions and strategies. While the costs and benefits reflect a large number of industry-specific factors, the most important one concerns the local availability of qualified suppliers. Foreign affiliates producing primarily for the domestic market generally procure a larger share of inputs locally than export-oriented ones or those t h a t a r e p a r t o f i n t e g r a t e d i n t e r n a t i o n a l production systems. In the latter case, cost and quality considerations are particularly stringent, and affiliates tend to be guided by corporate global sourcing strategies. The lack of efficient domestic suppliers is often the key obstacle to the creation of local l i n k a g e s . I n m a n y d e m a n d i n g a c t i v i t i e s ,
TNCs therefore actively encourage foreign s u p p l i e r s t o e s t a b l i s h l o c a l f a c i l i t i e s o r prefer to produce in-house.
Many TNCs have supplier development programmes in host developing countries. Efforts can include finding suppliers and ensuring efficient supply through technology transfer, training, information sharing and the provision of finance. The objective is usually to expand the number of efficient suppliers, and/or to help existing suppliers improve their capabilities in one or several areas. However, supplier development efforts are typically not extended to all suppliers. Foreign affiliates tend to focus on a limited number of suppliers providing the strategically most important inputs. Where supplier development is undertaken, however, TNCs often offer considerable support to suppliers by transferring technology, training suppliers’ staff, providing business-related information and lending financial support. The intensity of knowledge and information exchange in buyer-supplier relationships tends to increase with the level of economic development of h o s t c o u n t r i e s , p a r t i c u l a r l y i n c o m p l e x a c t i v i t i e s , a n d w h e r e t e c h n o l o g i c a l a n d managerial gaps with suppliers are not too wide.
