6 Global Developments FDI

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6.1 GLOBAL DEVELOPMENTS

MIDDLE EAST AND NORTH AFRICA

Foreign Direct Investment Performance

The MENA region is not well connected with global investment and production chains. This isevident from the limited role played in the regions economies by foreign direct investment andby trade in parts and components. Integration with global private capital flow markets has also been relatively stagnant in sharp contrast to comparable country groups. Net FDI inflows toMENA (measured as a share of PPP GDP) were consistently less than half a percentage point ofGDP for most of the period.In the early 1980s this put MENA roughly on par with comparable groups. But in the next 15years, the average of the other comparators had risen to between 1.0 to 2.5 percent while MENAcontinued to trail at around 0.5 percent. The MENA region, excluding the Gulf countries,received net inflows of foreign direct investment (FDI) of about $2.2 billion in 2000slightly

more than 1 percent of the $158 billion to all developing countries, and one-sixth of their share(7 percent) in the GDP of all developing countries. The group of five Eastern European countries(Czech Republic, Hungary, Poland, Turkey and Russia) together received some $19 billion, ninetimes more than MENA. The three East Asian countries (Malaysia, Philippines, and Thailand)received more than $8 billion in inflows, four times more than MENA. And the group of fourLatin American countries (Bolivia, Chile, Mexico, and Brazil) received about $50 billion, morethan 22 times the inflows to the MENA region. These comparisons provide some indication ofthe huge potential for expanding inflows of FDI to the MENA region. A large part of theseinflows came from (neighboring) high-income Europe. Egypt accounted for about half theMENA total ($1.2 billion), and Tunisia and Jordan about a quarter each ($750 million and $560million respectively). The rest received very small amounts or even had significant outflows

(Yemen).

Potential for foreign direct investment

The potential for higher inflows by country can be determined by conditioning FDI inflows onnon-oil trade performance (measured by non-oil export to PPP GDP ratios), natural resources,and population. FDI inflows are known to be closely related to trade flows, so the predictedlevels of FDI should be associated with trade. Natural resource endowments often also lead tohigher levels of foreign investment, albeit of a different type of flows. And size may matter, withlarger countries expected to receive higher investment inflows (market-seeking investments), but because this is already accounted for by measuring FDI inflows relative to GDP, the residual

population variable may or may not be significant. The results for 42 countries are pretty muchin accord with expectations: trade and natural resources raise FDI flows, but size turns out to be anegative influence.Firstly, only Jordan, Lebanon and Tunisia (small resource-poor countries) do as well or slightlyless than expected. Morocco is a surprise in how little it receives in FDI inflows (at least for19982000); Egypt receives more, possibly given its larger size, but still well below expectedlevels. Second, among the countries with large natural resource endowments, Saudi Arabia is theonly country that receives relatively high FDI led by its oil sector. All the larger oil-producing


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countries (Algeria, Iran, Syria, and Yemen) receive very low FDI relative to expected levels.Third, for the MENA countries as a whole, FDI inflows are only about half what they should bereceiving. In comparison, Chile receives three times as much FDI as expected and the CzechRepublic twice as much.

Others such as China, Brazil and Argentina receive FDI inflows four to five times their expectedlevels. The FDI gap for MENA also shows investment climate barriers in these countries, sincethe gap in potential already takes into account their very low non-oil trade. If their non-oil tradewere higher and if the investment climate were better, the region should expect FDI inflows atleast four to five times the current levelor some 3 percent of GDP on average, compared withthe current 0.5 percent of GDP.

Summary

1. FDI inflows greatly improved in many countries of the region, however, risk of reversalin current crisis.

2. Need to continue work on FDI restrictiveness and general investment climate instruments(investment laws, privatization/PPP legislation, IIAs).

3. BCDS tool and identification of competitive sectors should be considered when issuingInvestment laws and negotiating International Investment Agreements.

4. Framework including state of the art investment regulation and IIAs need to becommunicated as part of the investment promotion strategy.

5. Investor perception is the key, especiallyduring the crisis.MENA countries also have great potential for attracting more investment from abroad andencouraging more private investment at home, both crucial in trade and development. If exportsother than oil were higher, and in a better investment climate, domestic private investment in

traded goods and services would be much higher. And the FDI inflows that the region couldexpect would be four to five times what they are todaysome 3 percent of GDP, up from anaverage of 0.6 percent. On the other hand, the region remains subject to a geopolitical contextfeaturing high levels of tension and conflict which can discourage foreign investment and eventrade. Nevertheless, if only half the regions trade and private investment potential were realizedover the next ten years, that would be enough to raise its per capita GDP growth from about 1percent to about 4 percent a yearhalf from more private investment and half from the greaterproductivity that openness would encourage.


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CHINA

FDI in China has increased considerably in the last decade reaching $185 billion in 2010.China

is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due

the Global Financial Crisis (global macroeconomic factors) but rebounded in 2010.

Definitely, governments policy towards FDI plays an important role in attracting FDI. In 1950s

and 1960s, due to the well known political reasons, China was isolated from western countries,

logically, China shut up the door to western investors. Since 1978, China has adopted reform and

opening up policy. To develop Chinas economy, Chinese government encourages FDI. In 1979

China promulgated Sino-China Equity Joint Venture Law. In 1986, China promulgated Foreign

Capital Venture Law. In order to attract foreign investment, China gave foreign investors a

variety of favourable treatments, such as tax reduction, cheaper land etc. In addition, nearly all

local governments set up investment promotion agencies. To compete for foreign investment,

many local governments even gave more favourable treatment to foreign investors some of

which were illegal. Furthermore, After China joined the WTO in 2001; China reduced or

abolished some performance requirements and other restrictions on FDI.

Investment climate in China

1. Globalization

First of all, globalization is an irresistible trend in 21st century; no one can change the trend of it.

No country can isolate itself from the world. Every nation can only adapt to the tendency.

Globalization will involve all economies and integrate them into a single global economy.

Transnational companies in developed countries will continue to invest abroad. What is more,

developing countries will become more and more important sources of FDI.

2. China: AHuge Market with Great Potential

Secondly, China has a huge market with great potential. China has a population which is more

than 1.3 Billion, and the middle class has grown quickly after 30 years of development of

Chinese economy. China will remain a magnet for FDI, especially for market-seeking FDI.

3. Affluent Human Resources

Furthermore, China has ample human resources. Every year, more than 6 million students

graduate from universities and colleges. In rural area, there exists a huge pool of potential labour.

Such human resources reserve can meet all demands of FDI.

4. The Investment Environment will continue to improve

In addition, the investment environment will continue to be improved. In foreseeable future,

Chinese government will hold the policy of utilization of FDI. Although China will control


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BRAZIL

FDI began to gain importance in Brazil in the late 19th century, especially through Britishinvestments in services directly related to exports activities such as railroad and seatransportation, financial services and commercialization. Foreign investments in urban infra-

structure services (transportation, energy, and so on) gained strength in the first decades of the20th century, driven by growing urbanization and industrialization. Later on, provision of a greatdeal of public services was taken over by the State, through a unilateral decision of governmentsor negotiations with the foreign investors.

The share of foreign capital was particularly high in the industrial sectors that were more capitaland technology-intensive (transportation equipment, electrical and mechanical equipment,plastics, rubber and pharmaceuticals). In 1975 the transnationals accounted for 42% of the salesof the 500 leading Brazilian companies and operated with higher levels of productivity and moremodern technologies than the average nationally-owned companies. As of the second half of the70s, under the State policy of fostering the creation of joint ventures with private and state-

owned Brazilian companies, FDI participated in large investment projects in intermediate-goodssectors (notably chemical and petrochemical) as well as capital goods.

The reduction of the economys anti-export bias in the late 60s through an exchange policy thatwas more favorable to exports and the implementation of an aggressive scheme of tax and creditincentives for exporters, led the transnational companies to deeper involvement with foreigntrade via exports. These companies contributed heavily to the process of diversification ofBrazils exports and above all to the dynamism registered in the 70s in exports of manufacturedgoods. They also became relevant users of the incentives and subsidies to exports: in 1978 theyaccounted for 37% of exported manufactured products and absorbed 42% of the tax incentives.

The 90s, especially from the middle of the decade on, marks Brazils return to a relevantdestination of FDI among developing countries. Between 1990 and 1995, Brazil received aboutUS$ 2 billion a year in FDI, which corresponded to 0.9% of the world flows of FDI and to 2.7%of the flows directed towards developing countries. In 1996 the FDI meant for Brazil multipliedby five in relation to the annual average for the first half of the decade. In 1998 the FDI flowstotaled US$ 28.9 billion, that is, 4.2% of the world flows of FDI and 15.4% of the flows sent todeveloping countries. These shares fell from that point on, but the flow in the direction of Brazilwent on growing until 2000, when the total reached US$ 32.8 billion. From then onwards, theinflow of FDI bound for Brazil fell. Even so, in 2001 the flows heading for Brazil (US$ 21 billion) amounted to 3% of the world total and 11% of the FDI received by the Developingcountries.

Various factors contributed to the FDI boom in the 90s. In the first place, in the middle of thedecade, macro-economic stabilization caused a strong growth in domestic demand, whichattracted new transnational companies as well as new investments from already establishedTNCs.


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Secondly, the unilateral trade liberalization brought about in the beginning of the period ledcompanies to increase investments in order to face an environment that was less protected andmore competitive. It should be remembered that Brazilian trade liberalization was limited,especially in the industrial sectors preferred by FDI, which maintained high import levels.

A third factor was that for some industrial sectors the consolidation of Mercosur as an amplifieddomestic market lent incentive to new investments. Although Mercosur as a source ofdynamization of FDI flows can only be considered as a protagonist in the case of the auto sector,the consolidation of the regional bloc played an important secondary role in this process inseveral other sectors and even generated some impact on the FDI outflows from Brazil to itsneighbor countries.

In the fourth place, the regulatory updating carried out by the government - privatizations,concessions, suppression of public monopolies, among others affected principally the sectorsof public services by opening them to private investments, including foreign investments. In thelate 90s, privatizations accounted for about 31% of the FDI flows directed towards Brazil.

The fifth factor is that some sectoral regimes for promoting industrial investments such as theauto regime and the new version of the Information-Technology Law worked to attractimportant flows of direct investments in the manufacturing industry.

The recent flows of FDI involve both newcomers who entered the domestic market via privatizations and through other modalities, and transnational companies already installed inBrazil. Although there are no systematic data on this, there are sure indications that mergers andtakeovers, without immediate addition of capacity, represented a significant portion of the newinvestments, if only because of the weight of the privatization processes of state-ownedcompanies as a factor to attract foreign investments in the 90s.

In 2003 the flows of FDI to Brazil suffered a sharp reduction, falling to just US$ 10.1 billion, afigure 45% lower than that posted in 2002. As the preliminary data from UNCTAD point to theworld flows of FDI having remained stable in 2003 when compared with 2002, Brazilsparticipation in these flows fell to 1.6%, the lowest since 1995. In terms of the sectoral makeupof the investments, the expansion of the oil sector explains the growth in the share of the miningindustry in the total for the year: from 3.4% in 2002 to 11.5% in 2003. The United Statesrecovered its position as leading foreign investor, outdoing The Netherlands, which led the fieldin 2002.

So, at the beginning of the early 21st century the stock of FDI in Brazil presents some markeddifferences in relation to the amount accumulated up to the mid-90s. The most significant changeconcerns diversification both with regard to sectors of destination and countries of origin of FDIinflows.


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6.2 CURRENT SCENARIO

Developing and transition economies, for the first time, absorbed more than half of global FDI

flows. Global inflows of foreign direct investment (FDI) rose marginally by 1%, from $1,114

billion in 2009 to almost $1,122 billion in 2010, based on UNCTAD estimates.

Stagnant global flows in 2010 were accompanied by diverging trends in the components of FDI.

While the increased profits of foreign affiliates, especially in developing countries, boosted

reinvested earnings, the uncertainties surrounding global currency markets and European

sovereign debt, resulted in negative intra-company loans and lower equity investments.

Cross-border mergers and acquisitions (M&As) increased by 37% in 2010, while international

greenfield projects, fell both in number and in value. Nevertheless, the total project value of

greenfield investments has been much higher than that of cross-border M&As since the crisis,

which was the opposite case before the crisis.

Global FDI inflows remained stagnant in 2010 at an estimated $1,122 billion, compared to

$1,114 billion in the previous year. However, they showed an uneven pattern among regions,

components and modes of FDI. While FDI inflows to developed countries contracted further in

2010, those to developing and transition economies recovered, surpassing the 50% mark of

global FDI flows. The improvement of economic conditions in2010 drove up reinvested

earnings, while equity capital and intra-company loans remained relatively subdued. Cross-

border M&A volume rebounded in 2010, whereas greenfield investments continued to decline.

FDI in the United States surged by more than 40% over 2009 levels, an increase worth $56

billion, the single biggest increase in FDI among the major economic regions. This rise is largely

due to a significant recovery in reinvested earnings of foreign affiliates.

Europe stood out as the sub region where flows fell most sharply, explained largely by two

groups of countries. First, the Netherlands and Luxembourg saw significant declines. Negative

FDI flows in the former country were caused by more volatile flows related to transactions of

financial affiliates. Second, uncertainties about sovereign debts caused drops in FDI, with the

largest impacts seen in Ireland and Italy (Greece and Spain are less significant FDI recipients).

FDI in the regions major economies (France and Germany) fell only slightly.

Inflows to Africa, which peaked in 2008 driven by the resource boom, appear to continue the

downward trend of the previous year. For the region as a whole, UNCTAD estimates show that

FDI inflows fell by 14% to$50 billion in 2010, although there are significant regional variations.

While the downward trends of inflows to North Africa appear to have stabilized, in sub-Saharan

Africa, inflows to South Africa declined to barely a quarter of the 2009 level, contributing to the

large fall of FDI inflows in the sub region. Cross-border M&A mainly in extractive industries,

registered an increase of 49%, while the number and value of greenfield projects normally the

main mode of FDI in Africa suffered a decline of about 10% in 2010. The rise of FDI


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from developing Asia and Latin America to Africa was not yet enough to compensate for the

decline of FDI from developed countries which still account for the lions share of inward FDI

flows to many African countries.

FDI flows to South, East and South-East Asia have picked up markedly, outperforming other

developing regions. After a 17% decline in 2009,inflows to the region rose by about 18% in2010, reaching $275 billion, due to booming inflows in Singapore, Hong Kong (China), China,

Indonesia, Malaysia and Vietnam, in that order. FDI flows (in the non-financial

sector) to China, for example, reached more than $100 billion. Breaking this general upward

trend, South Asia experienced a 14% drop in FDI, mainly due to declines in flows to India.

FDI flows to West Asia, at $57 billion, continued to be affected by the global economic crisis,

despite the steady economic recovery registered by the economies of the region. Sizeable

increases in government spending by oil-rich countries helped push their economies forward, but

conditions in the private sector remained subdued. The picture varies by country, with inflows to

the United Arab Emirates rebounding modestly from the relatively low values of 2009, to littlechange in performance for Lebanon, to a drop in Saudi Arabia due in part to foreign investors

pulling out of or freezing large refinery projects.

A surge in cross-border M&As is the main factor explaining the significant increase in FDI flows

to Latin America and the Caribbean, which attained the level of $141 billion. Compared with

negative values in 2009, M&As reached $32 billion in 2010, nearly reaching the high values

registered in the region during the 1990s.The targets of these deals were mainly in the oil and

gas, metal mining and food and beverages industries. Strong economic growth, spurred by

robust domestic and external demand, good macroeconomic fundamentals and higher

commodity prices, explain the quick recovery of FDI flows to the region. Nearly all thebig recipient countries saw inward flows increase, with Brazil remaining the largest destination

for the fourth consecutive year.


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6 Global Developments FDI

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