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EMBARGO
The contents of this Report must not bequoted or summarized in the print,
broadcast or electronic media before
26 July 2011, 17:00 hours GMT
U n i t e d n a t i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t
WORLD
INVESTMENTREPORT
NoN-equity Modes of iNterNatioNal ProductioN aNd develoPMeNt
2011
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentii
UNITED NATIONS PUBLICATIONSales No. E.11.II.D.2
ISBN 978-92-1-112828-4Copyright United Nations, 2011
All rights reserved
Printed in Switzerland
NOTE
The Division on Investment and Enterprise o UNCTAD is a global centre o excellence, dealing with issues related
to investment and enterprise development in the United Nations System. It builds on three and a hal decades o
experience and international expertise in research and policy analysis, intergovernmental consensus-building, and
provides technical assistance to developing countries.
The terms country/economy as used in this Report also reer, as appropriate, to territories or areas; the designations
employed and the presentation o the material do not imply the expression o any opinion whatsoever on the part
o the Secretariat o the United Nations concerning the legal status o any country, territory, city or area or o its
authorities, or concerning the delimitation o its rontiers or boundaries. In addition, the designations o country groups
are intended solely or statistical or analytical convenience and do not necessarily express a judgment about the stage
o development reached by a particular country or area in the development process. The major country groupings used
in this Report ollow the classication o the United Nations Statistical Oce. These are:
Developed countries: the member countries o the OECD (other than Chile, Mexico, the Republic o Korea and Turkey),plus the new European Union member countries which are not OECD members (Bulgaria, Cyprus, Latvia, Lithuania,
Malta and Romania), plus Andorra, Bermuda, Liechtenstein, Monaco and San Marino.
Transition economies: South-East Europe and the Commonwealth o Independent States.
Developing economies: in general all economies not specied above. For statistical purposes, the data or China do not
include those or Hong Kong Special Administrative Region (Hong Kong SAR), Macao Special Administrative Region
(Macao SAR) and Taiwan Province o China.
Reerence to companies and their activities should not be construed as an endorsement by UNCTAD o those
companies or their activities.
The boundaries and names shown and designations used on the maps presented in this publication do not imply
ocial endorsement or acceptance by the United Nations.
The ollowing 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 or any o 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 nancial year.
Use o a dash () between dates representing years, e.g. 19941995, signies the ull period involved, including
the beginning and end years.
Reerence to dollars ($) means United States dollars, unless otherwise indicated.
Annual rates o growth or change, unless otherwise stated, reer to annual compound rates.
Details and percentages in tables do not necessarily add to totals because o rounding.
The material contained in this study may be reely quoted with appropriate acknowledgement.
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iii
PREFACE
Global oreign direct investment (FDI) has not yet bounced back to pre-crisis levels, though some
regions show better recovery than others. The reason is not nancing constraints, but perceived risks and
regulatory uncertainty in a ragile world economy.
The World Investment Report 2011 orecasts that, barring any economic shocks, FDI fows will
recover to pre-crisis levels over the next two years. The challenge or the development community is to
make this anticipated investment have greater impact on our eorts to achieve the Millennium Development
Goals.
In 2010 or the rst time developing economies absorbed close to hal o global FDI infows.
They also generated record levels o FDI outfows, much o it directed to other countries in the South. This
urther demonstrates the growing importance o developing economies to the world economy, and o
South-South cooperation and investment or sustainable development.Increasingly, transnational corporations are engaging with developing and transition economies
through a broadening array o production and investment models, such as contract manuacturing
and arming, service outsourcing, ranchising and licensing. These relatively new phenomena present
opportunities or developing and transition economies to deepen their integration into the rapidly evolving
global economy, to strengthen the potential o their home-grown productive capacity, and to improve their
international competitiveness.
Unlocking the ull potential o these new developments will depend on wise policymaking and
institution building by governments and international organizations. Entrepreneurs and businesses in
developing and transition economies need rameworks in which they can benet ully rom integrated
international production and trade. I commend this report, with its wealth o research and analysis, to
policymakers and businesses pursuing development success in a ast-changing world.
BAN Ki-moonSecretary-General o the United Nations
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentiv
ACKNOWLEDGEMENTS
The World Investment Report 2011(WIR11) was prepared by a team led by James Zhan. The team
members include Richard Bolwijn, Quentin Dupriez, Masataka Fujita, Thomas van Gien, Michael Hanni,
Kalman Kalotay, Joachim Karl, Ral Krger, Guoyong Liang, Anthony Miller, Haz Mirza, Nicole Moussa,
Shin Ohinata, Astrit Sulstarova, Elisabeth Tuerk, Jrg Weber and Kee Hwee Wee. Wolgang Alschner,
Amare Bekele, Federico Di Biasio, Hamed El Kady, Ariel Ivanier, Lizzie Medrano, Cai Mengqi, Abraham
Negash, Sergey Ripinski, Claudia Salgado, Christoph Spennemann, Katharina Wortmann and Youngjun
Yoo also contributed to the Report.
Peter Buckley served as principal consultant. WIR11 also beneted rom the advice o Ilan Alon, Mark
Casson, Lorraine Eden, Pierre Guislain, Justin Lin, Sarianna Lundan, Ted Moran, Rajneesh Narula, Pierre
Sauv and Timothy Sturgeon.
Research and statistical assistance was provided by Bradley Boicourt, Lizanne Martinez and Tadelle Tayeas well as interns Hasso Anwer, Hector Dip, Riham Ahmed Marii, Eleni Piteli, John Sasuya and Ninel Seniuk.
Production and dissemination oWIR11 was supported by Tserenpuntsag Batbold, Elisabeth Anodeau-
Mareschal, Sverine Excoer, Rosalina Goyena, Natalia Meramo-Bachayani, Chantal Rakotondrainibe and
Katia Vieu.
The manuscript was edited by Christopher Long and typeset by Laurence Duchemin and Teresita Ventura.
Sophie Combette designed the cover.
At various stages o preparation, in particular during the our seminars organized to discuss earlier drats o
the Report, the team beneted rom comments and inputs received rom Rol Adlung, Marie-Claude Allard,
Yukiko Arai, Rashmi Banga, Diana Barrowclough, Francis Bartels, Sven Behrendt, Jem Bendell, Nathalie
Bernasconi, Nils Bhinda, Francesco Ciabuschi, Simon Collier, Denise Dunlap-Hinkler, Kevin Gallagher,Patrick Genin, Simona Gentile-Ldecke, David Hallam, Georey Hamilton, Fabrice Hatem, Xiaoming He,
Toh Mun Heng, Paul Hohnen, Anna Joubin-Bret, Christopher Kip, Pascal Liu, Celso Manangan, Arvind
Mayaram, Ronaldo Mota, Jean-Franois Outreville, Peter Muchlinski, Ram Mudambi, Sam Muradzikwa,
Peter Nunnenkamp, Oah Obale, Joost Pauwelyn, Carlo Pietrobelli, Jaya Prakash Pradhan, Hassan
Qaqaya, Githa Roelans, Ulla Schwager, Emily Sims, Brian Smart, Jagjit Singh Srai, Brad Stillwell, Roger
Strange, Dennis Tachiki, Ana Teresa Tavares-Lehmann, Silke Trumm, Frederico Araujo Turolla, Peter Utting,
Kernaghan Webb, Jacques de Werra, Lulu Zhang and Zbigniew Zimny.
Numerous ocials o central banks, government agencies, international organizations and non-governmental
organizations also contributed to WIR11.
The nancial support o the Governments o Finland and Sweden is grateully acknowledged.
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vCONTENTS
TABLE OF CONTENTS
PagePREFACE ................................................................................................. iii
ACKNOWLEDGEMENTS ............................................................................ iv
ABBREVIATIONS .......................................................................................ix
KEY MESSAGES ........................................................................................x
OVERVIEW .............................................................................................. xii
CHAPTER I. GLOBAL INVESTMENT TRENDS .............................................. 1
A. GLOBAL TRENDS AND PROSPECTS: RECOVERY OVER THE HORIZON ...................2
1. Overall trends ..............................................................................................................................2a. Current trends ..........................................................................................................................................3b. FDI by sector and industry ......................................................................................................................8
c. FDI by modes o entry ...........................................................................................................................10
d. FDI by components ...............................................................................................................................11
e. FDI by special unds: private equity and sovereign wealth unds .........................................................13
2. Prospects ..................................................................................................................................16
B. FDI AS EXTERNAL SOURCES OF FINANCE TO DEVELOPING COUNTRIES .............21
C. FURTHER EXPANSION OF INTERNATIONAL PRODUCTION .................................24
1. Accelerating internationalization o rms ................................................................................24
2. State-owned TNCs ....................................................................................................................28a. The universe o State-owned TNCs ......................................................................................................28
b. Trends in State-owned TNCs FDI .........................................................................................................32c. Issues related to corporate governance ................................................................................................34
CHAPTER II. REGIONAL INVESTMENT TRENDS ........................................ 39
A. REGIONAL TRENDS .......................................................................................40
1. Arica ..........................................................................................................................................40a. Recent trends ........................................................................................................................................40
b. Intraregional FDI or development .........................................................................................................42
2. South, East and South-East Asia .............................................................................................45a. Recent trends ........................................................................................................................................45
b. Rising FDI rom developing Asia: emerging diversifed industrial patterns ...............................................47
3. West Asia ...................................................................................................................................52
a. Recent trends ........................................................................................................................................52b. Outward FDI strategies o West Asian TNCs .........................................................................................53
4. Latin America and the Caribbean .............................................................................................58a. Recent trends ........................................................................................................................................58
b. Developing country TNCs inroads into Latin America ..........................................................................60
5. South-East Europe and the Commonwealth o Independent States .....................................63a. Recent trends ........................................................................................................................................63
b EastSouth interregional FDI: trends and prospects .............................................................................65
6. Developed countries .................................................................................................................69a. Recent trends ........................................................................................................................................69
b. Bailing out o the banking industry and FDI ..........................................................................................71
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentvi
B. TRENDS IN STRUCTURALLY WEAK, VULNERABLE
AND SMALL ECONOMIES .................................................................... 74
1. Least developed countries .......................................................................................................74a. Recent trends ........................................................................................................................................74
b. Enhancing productive capacities through FDI .......................................................................................76
2. Landlocked developing countries ............................................................................................79a. Recent trends ........................................................................................................................................79
b. Leveraging TNC participation in inrastructure development .................................................................82
3. Small island developing States ................................................................................................85a. Recent trends ........................................................................................................................................85
b. Roles o TNCs in climate change adaptation ........................................................................................87
CHAPTER III. RECENT POLICY DEVELOPMENTS ....................................... 93
A. NATIONAL POLICY DEVELOPMENTS ................................................................94
1. Investment liberalization and promotion ..................................................................................952. Investment regulations and restrictions ...................................................................................96
3. Economic stimulus packages and State aid ............................................................................98
B. THE INTERNATIONAL INVESTMENT REGIME ..................................................100
1. Developments in 2010 ............................................................................................................100
2. IIA coverage o investment .....................................................................................................102
C. OTHER INVESTMENT-RELATED POLICY DEVELOPMENTS ................................103
1. Investment in agriculture ........................................................................................................103
2. G-20 Development Agenda ....................................................................................................104
3. Political risk insurance ............................................................................................................104
D. INTERACTION BETWEEN FDI POLICY AND INDUSTRIAL POLICY ......................105
1. Interaction at the national level ..............................................................................................105
2. Interaction at the international level .......................................................................................107
3. Challenges or policymakers ..................................................................................................109a. Picking the winner ............................................................................................................................109
b. Nurturing the selected industries .........................................................................................................109
c. Saeguarding policy space ..................................................................................................................110
d. Avoiding investment protectionism .....................................................................................................110
e. Improving international coordination ...................................................................................................110
E. CORPORATE SOCIAL RESPONSIBILITY ...........................................................111
1. Taking stock o existing CSR standards ................................................................................111a. Intergovernmental organization standards ..........................................................................................111
b. Multi-stakeholder initiative standards ..................................................................................................112
c. Industry association codes and individual company codes ................................................................1122. Challenges with existing standards: key issues ....................................................................113
a. Gaps, overlaps and inconsistencies ....................................................................................................113
b. Inclusiveness in standard-setting ........................................................................................................114
c. Relationship between voluntary CSR standards and national legislation ...........................................114
d. Reporting and transparency ................................................................................................................114
e. Compliance and market impact ..........................................................................................................114
. Concerns about possible trade and investment barriers ....................................................................115
3. Policy options ..........................................................................................................................117a. Supporting CSR standards development .............................................................................................117
b. Applying CSR to public procurement policy .......................................................................................117
c. Building capacity .................................................................................................................................117
d. Promoting CSR disclosure and responsible investment .....................................................................118
e. Moving rom sot law to hard law ........................................................................................................118
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viiCONTENTS
. Strengthening compliance promotion mechanisms among
intergovernmental organization standards ..........................................................................................118
g. Applying CSR to investment and trade promotion and enterprise development ................................119
h. Introducing CSR into the international investment regime ..................................................................119
CHAPTER IV. NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND
DEVELOPMENT ................................................................................ 123
A. THE GROWING COMPLEXITY OF GLOBAL VALUE CHAINS
AND TNC GOVERNANCE ................................................................... 124
1. TNC value chains and governance choices ...........................................................................124
2. Dening eatures o NEMs ......................................................................................................127
B. THE SCALE AND SCOPE OF CROSS-BORDER NEMs .........................................130
1. The overall size and growth o cross-border NEMs ...............................................................132
2. Trends and indicators by type o NEM ....................................................................................133
a. Contract manuacturing and services outsourcing ...............................................................................133b. Franchising .............................................................................................................................................138
c. Licensing ................................................................................................................................................139
d. Other modalities .....................................................................................................................................140
C. DRIVERS AND DETERMINANTS OF NEMs ......................................................142
1. Driving orces behind the growing importance o NEMs ......................................................142
2. Factors that make countries attractive NEM locations .........................................................144
D. DEVELOPMENT IMPLICATIONS OF NEMs .......................................................147
1. Employment and working conditions .....................................................................................147
2. Local value added ...................................................................................................................153
3. Export generation ....................................................................................................................155
4. Technology and skills acquisition by NEMs ...........................................................................1575. Social and environmental impacts .........................................................................................160
6. Long-term industrial capacity-building ...................................................................................161
E. POLICIES RELATED TO NON-EQUITY MODES OF INTERNATIONAL
PRODUCTION ............................................................................................................165
1. Embedding NEM policies in development strategies ...........................................................165
2. Domestic productive capacity-building .................................................................................166a. Entrepreneurship policy .......................................................................................................................167
b. Education .............................................................................................................................................167
c. Enhancing technological capacities ....................................................................................................167
d. Access to fnance ................................................................................................................................168
3. Facilitation and promotion o NEMs .......................................................................................169
a. Setting up an enabling legal ramework ..............................................................................................169b. The role o investment promotion agencies ........................................................................................169
c. Home-country policies ........................................................................................................................170
d. International policies ............................................................................................................................170
4. Addressing potential negative eects o NEMs ....................................................................171a. Strengthening the bargaining power o domestic frms ......................................................................171
b. Addressing competition concerns ........................................................................................................172
c. Labour issues and environmental protection ......................................................................................173
REFERENCES ....................................................................................... 177
ANNEX TABLES .................................................................................... 185
SELECTED UNCTAD PUBLICATIONS ON TNCS AND FDI ........................... 226
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentviii
Boxes
I.1. Why are data on global FDI infows and outfows dierent? ....................................................6I.2. FDI fows and the use o unds or investment ........................................................................12I.3. Forecasting global and regional fows o FDI .........................................................................17I.4 Eects o the natural disaster on Japanese TNCs and outward FDI ......................................19I.5. FDI and capital controls ...........................................................................................................23I.6. Recent trends in internationalization o the largest nancial TNCs in the world ..................26I.7. What is a State-owned enterprise: the case o France ..........................................................29II.1. The Arab Spring and prospects or FDI in North Arica .........................................................43II.2. Chinas rising investment in Central Asia ................................................................................66II.3. Russian TNCs expand into Arica ............................................................................................67II.4. Overcoming the disadvantages o being landlocked: experience o Uzbekistan in attracting
FDI in manuacturing ................................................................................................................81II.5. Natural resource-seeking FDI in Papua New Guinea: old and new investors ........................88II.6. TNCs and climate change adaptation in the tourism industry in SIDS .................................89
III.1. Examples o investment liberalization measures in 20102011 .............................................96III.2. Examples o investment promotion measures in 20102011 .................................................97III.3. Examples o new regulatory measures aecting established oreign investors
in 20102011 .............................................................................................................................98III.4. Examples o entry restrictions or oreign investors in 20102011 ........................................99III.5. EU FDI Policymaking ..............................................................................................................101III.6. WTO TRIMS Agreement .........................................................................................................108III.7. The 10 principles o the UN Global Compact .......................................................................112III.8. Impact investing: achieving competitive nancial returns while maximizing
social and environmental impact ...........................................................................................119IV.1. The evolution o retail ranchising in transition economies ..................................................127IV.2. Methodological note ..............................................................................................................131IV.3. The use o management contracts in the hotel industry ......................................................141IV.4 Employment impact in developing countries o NEMs in garment and
ootwear production ...............................................................................................................149IV.5. Labour conditions in Foxconns Chinese operations concerns and corporate
responses ...............................................................................................................................151IV.6. Cyclical employment in contract manuacturing in Guadalajara .........................................152IV.7. Value capture can be limited: iPhone production in China ...................................................156IV.8. Managing the environmental impact o contract arming .....................................................162IV.9. From contract manuacturing to building brands the Chinese white goods sector .........163IV.10. NEMs as catalysts or capacity-building and development .................................................164IV.11. Educational reorms in Viet Nam promote entrepreneurship ................................................167IV.12. Providing access to nance or SMEs engaging in ranchising activities ............................169IV.13. Pre-contractual requirements in ranchising ..........................................................................172
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ixABBREVIATIONS
ABBREVIATIONS
ASEAN Association o South-East Asian Nations
BIT bilateral investment treaty
BOO build-own-operate
BOT build-operate-transer
CIS Commonwealth o Independent States
COMESA Common Market or Eastern and Southern Arica
CSR corporate social responsibility
EAC East Arican Community
EMS electronics manuacturing services
FDI oreign direct investment
GCC Gul Cooperation Council
GFCF gross xed capital ormationGHG green house gas
IIA international investment agreement
IP intellectual property
IPA investment promotion agency
IPO initial public oering
ISDS investorstate dispute settlement
IT-BPO inormation technology and business process outsourcing
LDC least developed country
LLDC landlocked developing country
LNG liqueed natural gas
M&As mergers and acquisitionsMFN most avoured nation
MSI multi-stakeholder initiative
NEM non-equity mode
NIE newly industrializing economies
ODA ocial development assistance
OECD Organisation or Economic Co-operation and Development
PPM process and production method
PPP public-private partnership
QIA Qatar Investment Authority
R&D research and development
ROCE return on capital employed
RTAs regional trade agreementsSADC Southern Arican Development Community
SEZ special economic zone
SIDS small island developing States
SME small and medium-sized enterprise
SOE State-owned enterprise
SWF sovereign wealth und
TBT technical barriers to trade
TNC transnational corporation
TRIMs trade-related investment measures
TRIPs trade-related aspects o intellectual property rights
WIPS World Investment Prospects Survey
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentx
KEY MESSAGES
FDI TRENDS AND PROSPECTS
Global oreign direct investment (FDI) ows rose moderately to $1.24 trillion in 2010, but were still 15 per
cent below their pre-crisis average. This is in contrast to global industrial output and trade, which were back
to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to
$1.41.6 trillion, and approach its 2007 peak in 2013. This positive scenario holds, barring any unexpected
global economic shocks that may arise rom a number o risk actors still in play.
For the frst time, developing and transition economies together attracted more than hal o global FDI ows.
Outward FDI rom those economies also reached record highs, with most o their investment directed
towards other countries in the South. In contrast, FDI infows to developed countries continued to decline.
Some o the poorest regions continued to see declines in FDI ows. Flows to Arica, least developedcountries, landlocked developing countries and small island developing States all ell, as did fows to South
Asia. At the same time, major emerging regions, such as East and South-East Asia and Latin America
experienced strong growth in FDI infows.
International production is expanding, with oreign sales, employment and assets o transnational
corporations (TNCs) all increasing. TNCs production worldwide generated value-added o approximately
$16 trillion in 2010, about a quarter o global GDP. Foreign aliates o TNCs accounted or more than 10
per cent o global GDP and one-third o world exports.
State-owned TNCs are an important emerging source o FDI. There are at least 650 State-owned TNCs,
with 8,500 oreign aliates across the globe. While they represent less than 1 per cent o TNCs, their
outward investment accounted or 11 per cent o global FDI in 2010. The ownership and governance o
State-owned TNCs have raised concerns in some host countries regarding, among others, the level playing
eld and national security, with regulatory implications or the international expansion o these companies.
INVESTMENT POLICY TRENDS
Investment liberalization and promotion remained the dominant element o recent investment policies.
Nevertheless, the risk o investment protectionism has increased as restrictive investment measures and
administrative procedures have accumulated over the past years.
The regime o international investment agreements (IIAs) is at the crossroads . With close to 6,100 treaties,
many ongoing negotiations and multiple dispute-settlement mechanisms, it has come close to a point
where it is too big and complex to handle or governments and investors alike, yet remains inadequate to
cover all possible bilateral investment relationships (which would require a urther 14,100 bilateral treaties).
The policy discourse about the uture orientation o the IIA regime and its development impact is intensiying.
FDI policies interact increasingly with industrial policies, nationally and internationally. The challenge is
to manage this interaction so that the two policies work together or development. Striking a balance
between building stronger domestic productive capacity on the one hand and avoiding investment and
trade protectionism on the other is key, as is enhancing international coordination and cooperation.
The investment policy landscape is inuenced more and more by a myriad o voluntary corporate social
responsibility (CSR) standards. Governments can maximize development benets deriving rom these
standards through appropriate policies, such as harmonizing corporate reporting regulations, providing
capacity-building programmes, and integrating CSR standards into international investment regimes.
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xiKEY MESSAGES
NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT
In todays world, policies aimed at improving the integration o developing economies into global value chains
must look beyond FDI and trade. Policymakers need to consider non-equity modes (NEMs) o international
production, such as contract manuacturing, services outsourcing, contract arming, ranchising, licensing,
management contracts, and other types o contractual relationship through which TNCs coordinate the
activities o host country rms, without owning a stake in those rms.
Cross-border NEM activity worldwide is signifcant and particularly important in developing countries. It
is estimated to have generated over $2 trillion o sales in 2009. Contract manuacturing and services
outsourcing accounted or $1.11.3 trillion, ranchising $330350 billion, licensing $340360 billion, and
management contracts around $100 billion. In most cases, NEMs are growing more rapidly than the
industries in which they operate.
NEMs can yield signifcant development benefts. They employ an estimated 1416 million workers in
developing countries. Their value added represents up to 15 per cent o GDP in some economies. Theirexports account or 7080 per cent o global exports in several industries. Overall, NEMs can support long-
term industrial development by building productive capacity, including through technology dissemination
and domestic enterprise development, and by helping developing countries gain access to global value
chains.
NEMs also pose risks or developing countries. Employment in contract manuacturing can be highly cyclical
and easily displaced. The value added contribution o NEMs can appear low i assessed in terms o the
value captured out o the total global value chain. Concerns exist that TNCs may use NEMs to circumvent
social and environmental standards. And to ensure success in long-term industrial development, developing
countries need to mitigate the risk o remaining locked into low-value-added activities and becoming overly
dependent on TNC-owned technologies and TNC-governed global value chains.
Policy matters. Maximizing development benets rom NEMs requires action in our areas. First, NEM
policies need to be embedded in overall national development strategies, aligned with trade, investment
and technology policies and addressing dependency risks. Second, governments need to support eorts
to build domestic productive capacity to ensure the availability o attractive business partners that can
qualiy as actors in global value chains. Third, promotion and acilitation o NEMs requires a strong enabling
legal and institutional ramework, as well as the involvement o investment promotion agencies in attracting
TNC partners. Finally, policies need to address the negative consequences and risks posed by NEMs by
strengthening the bargaining power o local NEM partners, saeguarding competition, protecting labour
rights and the environment.
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxii
OVERVIEW
FDI TRENDS AND PROSPECTS
FDI recovery to gain momentum in 2011
Global oreign direct investment (FDI) infows rose modestly by 5 per cent, to reach $1.24 trillion in 2010.
While global industrial output and world trade are already back to their pre-crisis levels, FDI fows in 2010
remained some 15 per cent below their pre-crisis average, and nearly 37 per cent below their 2007 peak.
UNCTAD predicts FDI fows will continue their recovery to reach $1.41.6 trillion, or the pre-crisis level,
in 2011. They are expected to rise urther to $1.7 trillion in 2012 and reach $1.9 trillion in 2013, the peak
achieved in 2007. The record cash holdings o TNCs, ongoing corporate and industrial restructuring, rising
stock market valuations and gradual exits by States rom nancial and non-nancial rms shareholdings,built up as supporting measures during the crisis, are creating new investment opportunities or companies
across the globe.
However, the post-crisis business environment is still beset by uncertainties. Risk actors such as the
unpredictability o global economic governance, a possible widespread sovereign debt crisis and scal and
nancial sector imbalances in some developed countries, as well as rising infation and signs o overheating
in major emerging market economies, may yet derail the FDI recovery.
Emerging economies are the new FDI powerhouses
Developing economies increased urther in importance in 2010, both as recipients o FDI and as outward
investors. As international production and, recently, international consumption shit to developing and
transition economies, TNCs are increasingly investing in both eciency- and market-seeking projects inthose countries. For the rst time, they absorbed more than hal o global FDI infows in 2010. Hal o the
top-20 host economies or FDI in 2010 were developing or transition economies.
FDI outfows rom developing and transition economies also increased strongly, by 21 per cent. They now
account or 29 per cent o global FDI outfows. In 2010, six developing and transition economies were
among the top-20 investors. The dynamism o emerging-market TNCs contrasts with the subdued pace
o investment rom developed-country TNCs, especially those rom Europe. Their outward investment was
still only about hal o their 2007 peak.
Services FDI subdued, cross-border M&As rebound
Sectoral patterns.
The moderate recovery o FDI infows in 2010 masks major sectoral dierences. FDI inservices, which accounted or the bulk o the decline in FDI fows due to the crisis, continued on its downward
path in 2010. All the main service industries (business services, nance, transport and communications and
utilities) ell, although at dierent speeds. FDI fows in the nancial industry experienced one o the sharpest
declines. The share o manuacturing rose to almost hal o all FDI projects. Within manuacturing, however,
investments ell in business-cycle-sensitive industries such as metal and electronics. The chemical industry
(including pharmaceuticals) remained resilient through the crisis, while industries such as ood, beverages
and tobacco, textiles and garments, and automobiles, recovered in 2010. FDI in extractive industries (which
did not suer during the crisis) declined in 2010.
Modes o entry.The value o cross-border M&A deals increased by 36 per cent in 2010, but was still only
around one third o the previous peak in 2007. The value o cross-border M&As into developing economies
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xiiiOVERVIEW
doubled. Greeneld investments declined in 2010, but registered a signicant rise in both value and number
during the rst ve months o 2011.
Components o FDI. Improved economic perormance in many parts o the world and increased prots o
oreign aliates lited reinvested earnings to nearly double their 2009 level. The other two FDI components
equity investment fows and intra-company loans ell in 2010.
Special unds. Private equity-sponsored FDI started to recover in 2010 and was directed increasingly
towards developing and transition economies. However, it was still more than 70 per cent below the peak
year o 2007. FDI by sovereign wealth unds (SWFs) dropped to $10 billion in 2010, down rom $26.5 billion
in 2009. A more benign global economic environment may lead to increased FDI rom these special unds
in 2011.
International production picks up
Indicators o international production, including oreign sales, employment and assets o TNCs, showed
gains in 2010 as economic conditions improved. UNCTAD estimates that sales and value added o oreignaliates in the world reached $33 trillion and $7 trillion, respectively. They also exported more than $6
trillion, about one-third o global exports. TNCs worldwide, in their operations both at home and abroad,
generated value added o approximately $16 trillion in 2010 about a quarter o total world GDP.
State-owned TNCs in the spotlight
State-owned TNCs are causing concerns in a number o host countries regarding national security,
the level playing eld or competing rms, and governance and transparency. From the perspective o
home countries, there are concerns regarding the openness to investment rom their State-owned TNCs.
Discussions are underway in some international orums with a view to addressing these issues.
Today there are at least 650 State-owned TNCs, constituting an important emerging source o FDI. Theirmore than 8,500 oreign aliates are spread across the globe, bringing them in contact with a large number
o host economies. While relatively small in number (less than 1 per cent o all TNCs), their FDI is substantial,
reaching roughly 11 per cent o global FDI fows in 2010. Refecting this, State-owned TNCs made up 19
o the worlds 100 largest TNCs.
State-owned TNCs constitute a varied group. Developing and transition economies are home to more than
hal o these rms (56 per cent), though developed countries continue to maintain a signicant number o
State-owned TNCs. In contrast to the general view o State-owned TNCs as largely concentrated in the
primary sector, they are diversied and have a strong presence in the services sector.
Uneven perormance across regions
The rise o FDI to developing countries masks signicant regional dierences. Some o the poorest regionscontinued to see declines in FDI fows. Flows to Arica, least developed countries (LDCs), landlocked
developing countries (LLDCs) and small island developing States (SIDS) continued to all, as did those
to South Asia. At the same time, major emerging regions, such as East and South-East Asia and Latin
America, experienced strong growth in FDI infows.
FDI fows toArica ell by 9 per cent in 2010. At $55 billon, the share o Arica in total global FDI infows
was 4.4 per cent in 2010, down rom 5.1 per cent in 2009. FDI to the primary sector, especially in the oil
industry, continued to dominate FDI fows to the continent. It accounted or the rise o Ghana as a major
host country, as well as or the declines o infows to Angola and Nigeria. Although the continuing pursuit o
natural resources, in particular by Asian TNCs, is likely to sustain FDI fows to sub-Saharan Arica, political
uncertainty in North Arica is likely to make 2011 another challenging year or the continent as a whole.
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Although there is some evidence that intraregional FDI is beginning to emerge in non-natural resource
related industries, intraregional FDI fows in Arica are still limited in terms o volume and industry diversity.
Harmonization o Aricas regional trade agreements and inclusion o FDI regimes could help Arica achieve
more o its intraregional FDI potential.
Infows to East Asia, South-East Asia and South Asia as a whole rose by 24 per cent in 2010, reaching
$300 billion. However, the three subregions experienced very dierent trends: infows to ASEAN more than
doubled; those to East Asia saw a 17 per cent rise; FDI to South Asia declined by one-ourth.
Infows to China, the largest recipient o FDI in the developing world, climbed by 11 per cent, to $106 billion.
With continuously rising wages and production costs, however, oshoring o labour-intensive manuacturing
to the country has slowed down, and FDI infows continue to shit towards high-tech industries and services.
In contrast, some ASEAN member States, such as Indonesia and Viet Nam, have gained ground as low-
cost production locations, especially or low-end manuacturing.
The decline o FDI to South Asia refects a 31 per cent slide in infows to India and a 14 per cent drop in
Pakistan. In India, the setback in attracting FDI was partly due to macroeconomic concerns. At the sametime, infows to Bangladesh, an increasingly important low-cost production location in South Asia, jumped
by 30 per cent to $913 million.
FDI outfows rom South, East and South-East Asia grew by 20 per cent to about $232 billion in 2010. In
recent years, rising FDI outfows rom developing Asia demonstrate new and diversied industrial patterns.
In extractive industries, new investors have emerged, including conglomerates such as CITIC (China) and
Reliance Group (India), and sovereign wealth unds, such as China Investment Corporation and Temasek
Holdings (Singapore). Metal companies in the region have been particularly active in ensuring access to
overseas mineral assets, such as iron ore and copper. In manuacturing, Asian companies have been
actively taking over large companies in the developed world, but ace increasing political obstacles. FDI
outfows in the services sector have declined, but M&As in such industries as telecommunications have
been increasing.
FDI fows to West Asia in 2010 continued to be aected by the global economic crisis, alling by 12 per cent,
but they are expected to bottom out in 2011. However, concerns about political instability in the region are
likely to dampen the recovery.
FDI outfows rom West Asia dropped by 51 per cent in 2010. Outward investment rom West Asia is mainly
driven by government-controlled entities, which have been redirecting some o their national oil surpluses to
support their home economies. The economic diversication policies o these countries has been pursued
through a dual strategy: investing in other Arab countries to bolster their small domestic economies; and
also investing in developed countries to seek strategic assets or the development and diversication o
the industrial capabilities back at home. Increasingly this policy has been pursued with a view to creating
productive capabilities that are missing at home, such as motor vehicles, alternative energies, electronics
and aerospace. This approach diers rom that o other countries, which have generally sought to develop
a certain level o capacity at home, beore engaging in outward direct investment.
FDI fows to Latin America and the Caribbean increased by 13 per cent in 2010. The strongest increase
was registered in South America, where the growth rate was 56 per cent, with Brazil particularly buoyant.
FDI outfows rom Latin America and the Caribbean increased by 67 per cent in 2010, mostly due to large
cross-border M&A purchases by Brazilian and Mexican TNCs.
Latin America and the Caribbean also witnessed a surge o investments by developing Asian TNCs
particularly in resource-seeking projects. In 2010, acquisitions by Asian TNCs jumped to $20 billion,
accounting or more than 60 per cent o total FDI to the region. This has raised concerns in some countries
in the region about the trade patterns, with South America exporting mostly commodities and importing
manuactured goods.
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xvOVERVIEW
FDI fows to transition economies declined slightly in 2010. Flows to the Commonwealth o Independent
States (CIS) rose marginally by 0.4 per cent. Foreign investors continue to be attracted to the ast-growing
local consumer market, especially in the Russian Federation where fows rose by 13 per cent to $41 billion.
In contrast, FDI fows to South-East Europe dropped sharply or the third consecutive year, due partly tosluggish investment rom EU countries.
SouthEast interregional FDI is growing rapidly. TNCs based in transition economies and in developing
economies have increasingly ventured into each others markets. For example, the share o developing host
countries in greeneld investment projects by TNCs rom transition economies rose to 60 per cent in 2010
(up rom only 28 per cent in 2004), while developing-country outward FDI in transition economies increased
more than ve times over the past decade. Kazakhstan and the Russian Federation are the most important
targets o developing-country investors, whereas China and Turkey are the most popular destinations
or FDI rom transition economies. Such SouthEast interregional FDI has beneted rom outward FDI
support rom governments through, among others, regional cooperation (e.g. the Shanghai Cooperation
Organization) and bilateral partnerships.
FDI ows to the poorest regions continue to all
In contrast to the FDI boom in developing countries as a whole, FDI infows to the 48 LDCs declined overall
by a urther 0.6 per cent in 2010 a matter o grave concern. The distribution o FDI fows among LDCs
also remains highly uneven, with over 80 per cent o LDC FDI fows going to resource-rich economies in
Arica. However, this picture is distorted by the highly capital-intensive nature o resource projects. Some
40 per cent o investments, by number, were in the orm o greeneld projects in the manuacturing sector
and 16 per cent in services.
On the occasion o the 2011 Fourth United Nations Conerence on the Least Developed Countries, UNCTAD
proposed a plan o action or investment in LDCs. The emphasis is on an integrated policy approach to
investment, technical capacity-building and enterprise development, with ve areas o action: public-privateinrastructure development; aid or productive capacity; building on LDC investment opportunities; local
business development and access to nance; and regulatory and institutional reorm.
Landlocked developing countries (LLDCs)saw their FDI infows all by 12 per cent to $23 billion in 2010.
These countries are traditionally marginal FDI destinations, and they accounted or only 4 per cent o total
FDI fows to the developing world. With intensied SouthSouth economic cooperation and increasing
capital fows rom emerging markets, prospects or FDI fows to the group may improve.
FDI infows tosmall island developing States (SIDS) as a whole declined slightly by 1 per cent in 2010, to
$4.2 billion. As these countries are particularly vulnerable to the eects o climate change, SIDS are looking
to attract investment rom TNCs that can make a contribution to climate change adaptation, by mobilizing
nancial and technological resources, implementing adaptation initiatives, and enhancing local adaptive
capacities.
FDI to developed countries remains well below pre-crisis levels
In 2010, FDI infows in developed countries declined marginally. The pattern o FDI infows was uneven
among subregions. Europe suered a sharp all. Declining FDI fows were also registered in Japan. A
gloomier economic outlook, austerity measures and possible sovereign debt crisis, as well as regulatory
concerns, were among the actors hampering the recovery o FDI fows. Infows to the United States,
however, showed a strong turnaround, with an increase o more than 40 per cent.
In developed countries, the restructuring o the banking industry, driven by regulatory authorities, has
resulted in a series o signicant divestments o oreign assets. At the same time, it has also generated new
FDI as assets changed hands among major players. The global eorts towards the reorm o the nancial
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system and the exit strategy o governments are likely to have a large bearing on FDI fows in the nancial
industry in coming years.
The downward trend in outward FDI rom developed countries reversed, with a 10 per cent increase over
2009. However, this took it to only hal the level o its 2007 peak. The reversal was largely due to higher
M&A values, acilitated by stronger balance sheets o TNCs and historic low rates o debt nancing.
INVESTMENT POLICY TRENDS
National policies: mixed messages
More than two-thirds o reported investment policy measures in 2010 were in the area o FDI liberalization
and promotion. This was the case or Asia in particular, where a relatively high number o measures eased
entry and establishment conditions or oreign investment. Most promotion and acilitation measures were
adopted by governments in Arica and Asia. These measures included the streamlining o admissionprocedures and the opening o new, or the expansion o existing, special economic zones.
On the other hand, almost one-third o all new measures in 2010 ell into the category o investment-
related regulation and restrictions, continuing its upward trend since 2003. The recent restrictive measures
were mainly in a ew industries, in particular natural resource-based industries and nancial services. The
accumulation o restrictive measures over the past years and their continued upward trend, as well as
stricter review procedures or FDI entry, has increased the risk o investment protectionism.
Although numerous countries continue to implement emergency measures or hold considerable assets
ollowing bail-out operations, the unwinding o support schemes and liabilities resulting rom emergency
measures has started. The process advances relatively slowly. As o April 2011, governments are estimated
to hold legacy assets and liabilities in nancial and non-nancial rms valued at over $2 trillion. By ar thelargest share relates to several hundred rms in the nancial sector. All this indicates a potential wave o
privatizations in the years to come.
The international investment regime: too much and too little
With a total o 178 new IIAs in 2010 more than three new treaties per week the IIA universe reached
6,092 agreements at the end o the year. This trend o treaty expansion is expected to continue in 2011,
the rst ve months o which saw 48 new IIAs, with more than 100 IIAs currently under negotiation. How
the FDI-related competence shit rom EU member States to the European level will aect the overall IIA
regime is still unclear (EU member States currently have more than 1,300 BITs with non-EU countries). At
least 25 new treaty-based investorState dispute settlement cases were initiated in 2010 and 47 decisions
rendered, bringing the total o known cases to 390, and those closed to 197. The overwhelming majority othese cases were initiated by investors rom developed countries, with developing countries most oten on
the receiving end. The 2010 awards urther tilted the overall balance in avour o the State, with 78 cases
won against 59 lost.
As countries continue concluding IIAs, sometimes with novel provisions aimed at rebalancing the rights and
obligations between States and rms, and ensuring coherence between IIAs and other public policies, the
policy discourse about the uture orientation o the IIA regime and how to make IIAs better contribute to
sustainable development is intensiying. Nationally, this maniests itsel in a growing dialogue among a broad
set o investment stakeholders, including civil society, business and parliamentarians. Internationally, inter-
governmental debates in UNCTADs 2010 World Investment Forum, UNCTADs Investment Commission
and the joint OECD-UNCTAD investment meetings serve as examples.
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xviiOVERVIEW
With thousands o treaties, many ongoing negotiations and multiple dispute-settlement mechanisms,
todays IIA regime has come close to a point where it is too big and complex to handle or governments
and investors alike. Yet it oers protection to only two-thirds o global FDI stock and covers only one-th o
possible bilateral investment relationships. To provide ull coverage a urther 14,100 bilateral treaties wouldbe required. This raises questions not only about the eorts needed to complete the global IIA network, but
also about the impact o the IIA regime and its eectiveness or promoting and protecting investment, and
about how to ensure that IIAs deliver on their development potential.
Intensiying interaction between FDI policies and industrial policies
FDI policies increasingly interact with industrial policies, nationally and internationally. At thenational level,
this interace maniests itsel in specic national investment guidelines; the targeting o types o investment
or specic categories o oreign investors or industrial development purposes; investment incentives related
to certain industries, activities or regions; and investment acilitation in line with industrial development
strategies. Countries also use selective FDI restrictions or industrial policy purposes connected to the
protection o inant industries, national champions, strategic enterprises or ailing domestic industries intimes o crisis.
At theinternational level,industrial policies are supported by FDI promotion through IIAs, in particular whenthe respective IIA has sector-specic elements. At the same time, IIA provisions can limit regulatory space
or industrial policies. To avoid undue policy constraints, a number o fexibility mechanism have been
developed in IIAs, such as exclusions and reservations or certain industries, general exceptions or national
security exceptions. According to UNCTAD case studies o reservations in IIAs, countries are more inclined
to preserve policy space or the services sector, compared to the primary and manuacturing sectors.
Within the services sector, most reservations exist in transportation, nance and communication.
The overall challenge is to manage the interaction between FDI policies and industrial policies, so as to
make the two policies work or development. There is a need to strike a balance between building strongerdomestic productive capacity on the one hand and preventing investment and trade protectionism on the
other. Better international coordination can contribute to avoiding beggar thy neighbour policies and
creating synergies or global cooperation.
CSR standards increasingly inuence investment policies
Over the past years, corporate social responsibility (CSR) standards have emerged as a unique dimension
o sot law. These CSR standards typically ocus on the operations o TNCs and, as such, are increasingly
signicant or international investment as eorts to rebalance the rights and obligations o the State and
the investor intensiy. TNCs in turn, through their oreign investments and global value chains, can infuence
the social and environmental practices o business worldwide. The current landscape o CSR standards is
multilayered, multiaceted, and interconnected. The standards o the United Nations, the ILO and the OECDserve to dene and provide guidance on undamental CSR. In addition there are dozens o international
multi-stakeholder initiatives (MSIs), hundreds o industry association initiatives and thousands o individual
company codes providing standards or the social and environmental practices o rms at home and abroad.
CSR standards pose a number o systemic challenges. A undamental challenge aecting most CSR
standards is ensuring that companies actually comply with their content. Moreover, there are gaps, overlaps
and inconsistencies between standards in terms o global reach, subjects covered, industry ocus and
uptake among companies. Voluntary CSR standards can complement government regulatory eorts, but
they can also undermine, substitute or distract rom these. Finally, corporate reporting on perormance
relative to CSR standards continues to lack standardization and comparability.
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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxviii
Governments can play an important role in creating a coherent policy and institutional ramework to address
the challenges and opportunities presented by the universe o CSR standards. Policy options or promoting
CSR standards include supporting the development o new CSR standards; applying CSR standards to
government procurement; building capacity in developing countries to adopt CSR standards; promotingthe uptake o CSR reporting and responsible investment; adopting CSR standards as part o regulatory
initiatives; strengthening the compliance promotion mechanisms o existing international standards; and
actoring CSR standards into IIAs. The various approaches already underway increasingly mix regulatory
and voluntary instruments to promote responsible business practices.
While CSR standards generally aim to promote sustainable development goals, in the context o international
production care needs to be taken to avoid them becoming barriers to trade and investment. The objective
o promoting investment can be rhymed with CSR standards. Discussions on responsible investment are
ongoing in the international community; or example, in 2010, G-20 leaders encouraged countries and
companies to uphold the Principles or Responsible Agricultural Investment (PRAI) that were developed by
UNCTAD, the World Bank, IFAD and FAO, requesting these organizations to develop options or promoting
responsible investment in agriculture.
NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT
International production, today, is no longer exclusively about FDI on the one hand and trade on the other.
Non-equity modes (NEMs) o international production are o growing importance, generating over $2
trillion in sales in 2010, much o it in developing countries. NEMs include contract manuacturing, services
outsourcing, contract arming, ranchising, licensing, management contracts and other types o contractual
relationships through which TNCs coordinate activities in their global value chains (GVCs) and infuence the
management o host-country rms without owning an equity stake in those rms.
From a development perspective, both NEM partnerships and oreign aliates (i.e. FDI) can enable hostcountries to integrate into GVCs. A key advantage o NEMs is that they are fexible arrangements with
local rms, with a built-in motive or TNCs to invest in the viability o their partners through dissemination o
knowledge, technology and skills. This oers host economies considerable potential or long-term industrial
capacity building through a number o key channels o development impact such as employment, value
added, export generation and technology acquisition. On the other hand, by establishing a local aliate
through FDI, a TNC signals its long-term commitment to a host economy. Attracting FDI is also the better
option or economies with limited existing productive capacity.
NEMs may be more appropriate than FDI in sensitive situations. In agriculture, or example, contract arming
is more likely to address responsible investment issues respect or local rights, livelihoods o armers and
sustainable use o resources than large-scale land acquisition.
For developing country policymakers, the rise o NEMs not only creates new opportunities or productive
capacity building and integration into GVCs, there are also new challenges, as each NEM mode comes with
its own set o development impacts and policy implications.
The TNC make or buy decision and NEMs as the middle-ground option
Foremost among the core competencies o a TNC is its ability to coordinate activities within a global value
chain. TNCs can decide to conduct such activities in-house (internalization) or they can entrust them to
other rms (externalization) a choice analogous to a make or buy decision. Internalization, where it has a
cross-border dimension, results in FDI, whereby the international fows o goods, services, inormation and
other assets are intra-rm and under ull control o the TNC. Externalization results in either arms-length
trade, where the TNC exercises no control over other rms or, as an intermediate middle-ground option,
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xixOVERVIEW
in non-equity inter-rm arrangements in which contractual agreements and relative bargaining power
condition the operations and behaviour o host-country rms. Such conditioning can have a material
impact on the conduct o the business, requiring the host-country rm to, or example, invest in equipment,
change processes, adopt new procedures, improve working conditions, or use specied suppliers.
The ultimate ownership and control conguration o a GVC is the outcome o a set o strategic choices
by the TNC. In a typical value chain, a TNC oversees a sequence o activities rom procurement o inputs,
through manuacturing operations to distribution, sales and atersales services. In addition, rms undertake
activities such as IT unctions or R&D which support all parts o the value chain.
In a ully integrated company, activities in all these segments o the value chain are carried out in-house
(internalized), resulting in FDI i the activity takes place overseas. However, in all segments o the value chain
TNCs can opt to externalize activities through various NEM types. For example, instead o establishing a
manuacturing aliate (FDI) in a host country, a TNC can outsource production to a contract manuacturer
or permit a local rm to produce under licence.
The TNCs ultimate choice between FDI and NEMs (or trade) in any segment o the value chain is based onits strategy, the relative costs and benets, the associated risks, and the easibility o available options. In
some parts o the value chain NEMs can be substitutes or FDI, in others the two may be complementary.
NEMs are worth more than $2 trillion, mostly in developing countries
Cross-border NEM activity worldwide is estimated to have generated over $2 trillion o sales in 2010. O
this amount, contract manuacturing and services outsourcing accounted or $1.11.3 trillion, ranchising
or $330350 billion, licensing or $340360 billion, and management contracts or around $100 billion.
These estimates are incomplete, including only the most important industries in which each NEM type is
prevalent. The total also excludes other non-equity modes such as contract arming and concessions,
which are signicant in developing countries. For example, contract arming activities by TNCs are spread
worldwide, covering over 110 developing and transition economies, spanning a wide range o agricultural
commodities and accounting or a high share o output.
There are large variations in relative size. In the automotive industry, contract manuacturing accounts
or 30 per cent o global exports o automotive components and a quarter o employment. In contrast,
in electronics, contract manuacturing represents a signicant share o trade and some three-quarters o
employment. In labour-intensive industries such as garments, ootwear and toys, contract manuacturing
is even more important.
Putting dierent modes o international production in perspective, cross-border activity related to selected
NEMs o $2 trillion compares with exports o oreign aliates o TNCs o some $6 trillion in 2010. However,
NEMs are particularly important in developing countries. In many industries, developing countries account
or almost all NEM-related employment and exports, compared with their share in global FDI stocks o 30per cent and in world trade o less than 40 per cent.
NEMs are also growing rapidly. In most cases, the growth o NEMs outpaces that o the industries in which
they operate. This growth is driven by a number o key advantages o NEMs or TNCs: (1) the relatively low
upront capital expenditures required and the limited working capital needed or operation; (2) reduced risk
exposure; (3) fexibility in adapting to changes in the business cycle and in demand; and (4) as a basis or
externalizing non-core activities that can oten be carried out at lower cost by other operators.
NEMs generate signifcant ormal employment in developing countries
UNCTAD estimates that worldwide some 1821 million workers are directly employed in rms operating
under NEM arrangements, most o whom are in contract manuacturing, services outsourcing and ranchising
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activities. Around 80 per cent o NEM-generated employment is in developing and transition economies.
Employment in contract manuacturing and, to a lesser extent, services outsourcing, is predominantly
based in developing countries. The same applies in other NEMs, although global gures are not available;
in Mozambique, or instance, contract arming has led to some 400,000 smallholders participating in globalvalue chains.
Working conditions in NEMs based on low-cost labour are oten a concern, and vary considerably
depending on the mode and the legal, social and economic structures o the countries in which NEM
rms are operating. The actors that infuence working conditions in non-equity modes are the role o
governments in dening, communicating and enorcing labour standards and the sourcing practices o
TNCs. The social responsibility o TNCs has extended beyond their own legal boundaries and has pushed
many to increase their infuence over the activities o value chain partners. It is increasingly common or
TNCs, in order to manage risks and protect their brand and image, to infuence their NEM partners through
codes o conduct, to promote international labour standards and good management practices.
An additional concern relates to the relative ootlooseness o NEMs. The seasonality o industries,
fuctuating demand patterns o TNCs, and the ease with which they can shit NEM production to other
locations can have a strong impact on working conditions in NEM rms and on stability o employment.
NEMs oten make an important contribution to GDP
The impact o NEMs on local value added can be signicant. It depends on how NEM arrangements t into
TNC-governed GVCs and, thereore, on how much value is retained in the host economy. It also depends
on the potential or linkages with other rms and on their underlying capabilities.
In eciency seeking NEMs, such as contract manuacturing or services outsourcing, it is possible or value
capture in the host economy to be relatively small compared to the overall value creation in a GVC, when
the scope or local sourcing is limited and goods are imported, processed and subsequently exported, as is
oten the case in the electronics industry, or example. Although value captured as a share o nal-productsales price may be limited, it can nevertheless represent a signicant contribution to the local economy,
adding up to 1015 per cent o GDP in some countries.
Local sourcing and the overall impact on host-country value added increases i the emergence o contract
manuacturing leads to a concentration o production and export activities (e.g. in clusters or industrial
parks). The greater the number o plants and the more numerous the linkages with TNCs, the greater will
be the spillover eects and local value added. In addition, clustering can reduce the risk o TNCs shiting
production to other locations by increasing switching costs.
NEMs can generate export gains
NEMs are inextricably linked with international trade, shaping global patterns o trade in many industries.In toys, ootwear, garments, and electronics, contract manuacturing represents more than 50 per cent o
global trade. NEMs can thus be an important route-to-market or countries aiming at export-led growth,
and an important initial point o access to TNC governed global value chains, beore gradually building
independent exporting capabilities. Export gains can be partially oset by higher imports, reducing net
export gains, where local value added is limited, especially in early stages o NEM development.
NEMs are an important avenue or technology and skills building
NEMs are in essence a transer o intellectual property to a host-country rm under the protection o a
contract. Licensing involves a TNC granting an NEM partner access to intellectual property, usually with
contractual conditions attached, but oten with some training or skills transer. International ranchising
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policymakers: rst, how to integrate NEM policies into the overall context o national development strategies;
second, how to support the building o domestic productive capacity to ensure the availability o attractive
business partners that can qualiy as actors in global value chains; third, how to promote and acilitate
NEMs; and ourth, how to address negative eects o NEMs.
NEM policies appropriately embedded in industrial development strategies will:
ensure that eorts to attract NEMs through building domestic productive capacity and through
acilitation and promotion initiatives are directed at the right industries, value chains and specic
activities or segments within value chains;
support industrial upgrading in line with a countrys development stage, ensuring that rms move to
higher value-added stages in the value chain, helping local NEM partners reduce their technology
dependency, develop their own brands, or become NEM originators in their own right.
An important element o industrial development strategies that incorporate NEMs are measures to prevent
and mitigate impacts deriving rom the ootlooseness o some NEM types, balancing diversication and
specialization. Diversication ensures that domestic companies are engaged in multiple NEM activities,
both within and across dierent value chains, and are connected to a broad range o NEM partners.
Specialization in particular value chains improves the competitive edge o local NEM partners within those
chains and can acilitate, in the longer term, upgrading to segments with greater value capture. In general,
measures should aim at maintaining and increasing the attractiveness o the host country or TNCs and
improve the stickiness o NEMs by building up local mass, clusters o suppliers, and the local technology
base. Continuous learning and skills upgrading o domestic entrepreneurs and employees are also important
to ensure domestic rms can move to higher value-added activities should oreign companies move low
end production processes to cheaper locations.
Improving the capacity o locals to engage in NEMs has several policy aspects. Pro-active entrepreneurship
policies can strengthen the competitiveness o domestic NEM partners and range rom ostering start-ups
to promoting business networks. Embedding entrepreneurship knowledge into ormal education systems,
combined with vocational training and the development o specialized NEM-related skills is also important.
A mix o national technology policies can improve local absorptive capacity and create technology clusters
and partnerships. Access to nance or domestic NEM partners can be improved through policies reducing
borrowing costs and the risks associated with lending to SMEs, or by oering alternatives to traditional
bank credits. Facilitation eorts can also include initiatives to support respect or core labour standards and
CSR.
Promoting and acilitating NEM arrangements depends, rst, on clear and stable rules governing the
contractual relationships between NEM partners, including transparency and coherence. This is important,
as NEM arrangements are oten governed by multiple laws and regulations. Conducive NEM-specic
laws (e.g. ranchising laws, rules on contract arming) and appropriate intellectual property (IP) protection
(particularly relevant or IP-intensive NEMs such as licensing, ranchising and oten contract manuacturing)
can also help. While the current involvement o investment promotion agencies in NEM-specic promotion
is still limited, they could expand their remit beyond FDI to promote awareness o NEM opportunities,
engage in matchmaking services, and provide incentives to start-ups.
To address any negative impacts o NEMs, it is important to strengthen the bargaining power o local NEM
partners vis--vis TNCs to ensure that contracts are based on a air sharing o risks and benets. The
development o industry-specic NEM model contracts or negotiation guidelines can contribute to achieving
this objective. I TNCs engaged in NEMs acquire dominant positions, they may be able to abuse their
market power to the detriment o their competitors (domestic and oreign) and their own trading partners.
Thereore, policies to promote NEMs need to go hand in hand with policies to saeguard competition. Other
public interest criteria may require attention as well. Protection o indigenous capacities and traditional
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xxiiiOVERVIEW
activities, that may be crowded out by a rapid increase in market shares o successul NEMs, is essential.
In the case o contract arming or instance, policies such as these would result in model contracts or
guidelines supporting smallholders in negotiations with TNCs; training on sustainable arming methods;
provision o appropriate technologies and government-led extension services to improve capacities o
contract armers; and inrastructure development or improving business opportunities or contract armers
in remote areas. I contract arming was given more pride o place in government policies, direct investment
in large-scale land acquisitions by TNCs would be less o an issue.
Finally, home-country initiatives and the international community can also play a positive role. Home-country
policies that specically promote overseas NEMs include the expansion o national export insurance
schemes and political risk insurance to also cover some types o NEMs. Internationally, while there is
no comprehensive legal and policy ramework or ostering NEMs and their development contribution,
supportive international policies range rom relevant WTO agreements and, to a limited extent, IIAs, to sot
law initiatives contributing to harmonizing the rules governing the relationship between private NEM parties
or guiding them in the crating o NEM contracts.
* * *
Foreign direct investment is a key component o the worlds growth engine. However, the post-crisis recovery
in FDI has been slow to take o and is unevenly spread, with especially the poorest countries still in FDI
recession. Many uncertainties still haunt investors in the global economy. National and international policy
developments are sending mixed messages to the investment community. And investment policymaking is
becoming more complex, with international production evolving and with blurring boundaries between FDI,
non-equity modes and trade. The growth o NEMs poses new challenges but also creates new opportunities
or the urther integration o developing economies into the global economy. The World Investment Report
2011 aims to help developing-country policymakers and the international development community navigate
those challenges and capitalize on the opportunities or their development gains.
Geneva, June 2011 Supachai PanitchpakdiSecretary-General o the UNCTAD
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Global oreign direct investment (FDI) ows rose moderately to $1.24 trillion in 2010, but were still15 per cent below their pre-crisis average. This is in contrast to global industrial output and trade,which were back to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.41.6 trillion, approaching its 2007 peak in 2013. This positivescenario holds, barring any unexpected global economic shocks that may arise rom a number orisk actors still in play.
For the frst time, developing and transition economies together attracted more than hal o globalFDI ows. Outward FDI rom those economies also reached record highs, with most o theirinvestment directed towards other countries in the South. Furthermore, interregional FDI betweendeveloping countries and transition economies has been growing rapidly. In contrast, FDI inowsto developed countries continued to decline.
Some o the poorest regions continued to see declines in FDI ows. Flows to Arica, least developedcountries, landlocked developing countries and small island developing States all ell, as did owsto South Asia. At the same time, major emerging regions, such as East and South-East Asia andLatin America, experienced strong growth in FDI inows.
International production is expanding, with oreign sales, employment and assets o transnationalcorporations (TNCs) all increasing. TNCs production worldwide generated value added oapproximately $16 trillion in 2010 about a quarter o global GDP. Foreign afliates o TNCsaccounted or more than one-tenth o global GDP an