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WTO Symposium on cross-border supply of servicesGeneva, 28-29 April 2005

FDI in Services

Anne Miroux

Head, Investment Issues Analysis Branch

UNCTAD, Division on Investment, Technology and Enterprise DevelopmentPhone: +4122 9071167; Fax: +4122 9170498

E-mail: anne. miroux@unctad.org

This presentation is based on UNCTAD, World Investment Report 2004: The Shift Towards Services (Geneva: UNCTAD, 2004), UN Sales Publication No. E.04.II.D.33, also at www.unctad.org

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Background - FDI trends

The shift towards services

Offshoring

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FDI is recoveringGlobal inflows of FDI, 1990-2004, by region, $ billions

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).

0

200

400

600

800

1000

1200

1400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Developed countries Developing economies Central and Eastern Europe World

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… led by the developing countriesInflows of FDI to developing countries, 1995-2004, by region, $ billions

Source: UNCTAD, World Investment Report 2004: The Shift Towards Services. (see www.unctad.org/wir) and UNCTAD Press /PR/2005/002

0

50

100

150

200

250

300

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Developing countries

Asia and the Pacific

Latin America and the Caribbean

China

Africa

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The recovery in 2004 was driven by:

• Stronger global economic growth • Improved corporate profitability• Higher stock valuations• Higher levels of cross-border M&As• Continuing liberalization and improvement of

investment environment

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Indicators of FDI and international production

$ billions, current prices

Item 1982 1990 2000 2001 2002 2003

FDI inflows 59 209 1 388 818 679 560

FDI outflows 28 243 1 189 722 596 612

Sales of foreign affiliates 2 541 5 479 15 087 16 472 17 685 17 580

Total assets of foreign affiliates 1 959 8 759 23 460 24 517 26 543 30 362

Exports of foreign affiliates 670 1 169 2 594 2 509 2 613 3 077

Employment by foreign aff's (thousands) 17 987 23 858 51 013 50 254 53 094 54 170

Memorandum

Exports of goods and non-factor services 2246 4 260 7819 7 559 7 917 9 228

Source: UNCTAD, World Investment Report 2004: The Shift Towards Services (see www.unctad.org/wir).

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The importance of commercial presence/mode 3 in the delivery of services

Mode 3 sales of services are clearly larger than cross border sales (mode 1) of services.

In 2001, for instance, the sales of services by affiliates of US multinationals in foreign markets amounted to $432 billion while US exports of services amounted to $276 billion 1 (a 1.6 to 1 ratio).

1/ US Bureau of Economic Analysis

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The shift towards services

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Sectoral distribution of FDI inward stock 1990 2002

9%

42%49%

6%

34%60%

41%

10%

49%

6%

32%62%

7%

46%47% 55%

7%

38%

Source: UNCTAD, World Investment Report 2004: The Shift Towards Services (see www.unctad.org/wir).

World

Developed Countries

Developing Countries

Primary Manufacturing Services

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Estimated world inward FDI stock, by sector and industry, 1990 and 2002(Millions of dollars)

1990 2002

Sector/industryDeveloped countries

Developing economies World

Developed countries

Developing economies

Central and Eastern Europe World

Primary 159 432 23 068 182 500 297 165 144 800 6 936 448 901

Manufacturing 650 974 155 941 806 915 1 601 944 750 221 90 398 2 442 563

Services 784 758 163 348 948 106 3 130 002 1 098 544 134 824 4 363 371 of which:

Electricity, gas and water 7 021 3 051 10 072 89 921 45 463 8 467 143 851Construction 17 452 5 157 22 609 35 577 33 632 6 227 75 436Trade 209 168 24 159 233 327 617 058 148 293 28 373 793 724Hotels and restaurants 22 188 3 193 25 382 53 031 19 825 2 478 75 334Transport, storage and communications 16 677 12 313 28 990 338 152 105 716 32 214 476 082Finance 289 508 92 945 382 453 963 542 246 299 39 133 1 248 975

Business activities 117 459 8 298 125 756 703 053 434 109 a 13 514 1 150 676 a

Source: UNCTAD, World Investment Report 2004 , Annex Table A.I.18

Note: Data should be interpreted with caution. The world total was extrapolated on the basis of data covering 48 countries in 1990 and 61 countries in 2002, or latest year available. They account for over four-fifths of world inward FDI stock in 1990 and 2002. The world total in 1990 includes the countries of Central and Eastern Europe, although data by sector and industry are not available for that region.

a A large share of investment in this industry is in Hong Kong (China), which accounted for 58% of developing economies and 22% of the world total. Hong Kong (China) data include investment holding companies.

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What services attract the most FDI?

• Traditional Industries:– Financial services (40% in 1990, 29% in 2002)

– Trading (25% in 1990, 18% in 2002)

• Emerging Industries:

– Telecommunications (3% in 1990, 11% in 2002)– Electricity (1% in 1990, 3% in 2002)– Business services (13% in 1990, 26% in 2002)

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Additional features of the shift of FDI towards services

• Shift towards services in all country groups

• Shift is fastest in developed countries

• Wide variations among individual economies

– Inward stock:

• More than 80%: Denmark, Hong Kong (China), Switzerland

• 30% or less: Bangladesh, Sweden, Venezuela

– Outward stock:

• More than 70%: Austria, Colombia, Denmark

• Less than 40%: Australia, Croatia, Sweden

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Drivers

• «Tradability revolution » – advances in ICT

• Trade and investment liberalization

• High demand for certain skills (growth of IT industries)

• Responses to increased competition

• Cost reduction and quality improvements through:

– consolidation

– focus on core activities

– shift to lower-cost locations

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Potential benefits for developing countries

• Financial resources• Improvement of services provided• Transfer of “soft” technology (knowledge,

information, expertise, organizational skills)• Employment generation• Transfer of “hard” technology (infrastructure)• Enhancement of systemic and export

competitiveness

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Potential costs and risks for countries: the importance of policies

• Potential abuse of monopolistic/oligopolistic market power, especially in basic services

• Systemic risk in banking and other financial services

• Contingent risks in socially or culturally sensitive areas

Need for appropriate policies at the national and international levels:

•Regulation of monopolistic/oligopolistic markets

•Supervision of banking/finance

•Protection of socially or culturally sensitive areas

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Offshoring of services

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Offshoring vs. outsourcing

LocationInternalized production

Externalized production("outsourcing")

DomesticProduction kept in-

house at home

Production outsourced to third-party service provider at home

Foreign

("offshoring")

Production by foreign affiliate

"Captive offshoring"

Production outsourced to third-party service provider abroad

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The big picture

• The services tradability revolution

• Allows for an international division of labour in the production of services

• Open policy environment plus competitive pressures

• Total offshoring market: $32 bn (2001) – but potential is high

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U.S. firms lead the offshoring trend…

• 55-65% of export-oriented service FDI projects are undertaken by U.S. firms

…but other companies are following:• 40% of top European firms have offshored services

• 23% of Japanese IT companies have offshored services, especially to China

• Indian companies among the top in the offshoring of IT services

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Top destinations for export-oriented FDI projects in services, 2002-2003(Number)

Offshoring is not a North-South issue•Ireland & Canada among top recipients of offshored services•But it offers opportunities for developing countries - India’s services exports: $0.5 bn to $12 bn in past decade

Call centres

Shared service centres IT services Regional HQs

India (60) India (43) India (118) US (80)

Canada (56) Ireland (19) U.K. (73) U.K. (64)

U. K. (43) Singapore (8) China (60) China (38)

China (30) Hungary (7) Singapore (35) Hong Kong, China (37)

Ireland (29) U.K. (7) Germany (34) Singapore (36)

Developed country share:

54% 35% 46% 60%

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A win-win-win proposition …Companies

• Concentration on core competencies• Increase competitiveness

Recipient countries• Export earnings• New jobs and skills upgrading• Technology transfers• Potential for linkages

Countries of origin

• Lower costs of services for consumers

• Export opportunities

• Structural change: move to higher-value activities

In brief: all the opportunities (and costs) associated with the emerging international division of labour in the services sector

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…if policy challenges are met • Recipients countries

- Telecommunications, skilled labour, quality of suppliers

- Regulatory framework (including privacy protection)

- Investment promotion (including after care) where FDI becomes important

- Prudential regulation

- Integration into development strategies – leverage export oriented activities for growth and development (e.g. linkages)

• Countries of origin

- Protectionism is not the answer

- Instead: adjustment policies (especially to take care of employment impact). Not easy (see DCs)

• International community

- Maintain open and enabling framework for offshored services

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In sum:

• Offshoring is an important phenomenon, driven by the tradability revolution

• It is still in its infancy, although the tipping point may be approaching rapidly

• It is the cutting edge of the international division of labour

• It can be of benefit to all groups of countries if policy challenges are met

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Thank you very much!