*EPF207 09/17/2002
Text: Transnational Corporations Spur Export Growth, UN Agency Says
(UNCTAD also notes sharp decline in foreign investment in 2001) (3360)

Transnational corporations (TNCs) are playing a major role in the expansion of developing country exports, according to the United Nations Conference on Trade and Development (UNCTAD).

In its World Investment Report 2002 released September 17, UNCTAD also noted that foreign direct investment (FDI) declined by more than half in 2001, the largest decline in 30 years.

Developing countries and economies in transition accounted for most of the gains in world export market shares between 1985 and 2000, the report said.

The report noted that countries that have experienced the biggest export market share gains have shifted from low-technology to medium- and high-technology manufactures. Exports also increasingly include services, natural resources and agricultural products, the report said.

Falling trade barriers spurred by globalization, liberalization and new technologies has intensified export competition, forcing corporations to become more efficient and to internationalize their operations, the report said.

The report noted that countries are taking a more targeted approach to attracting export-oriented FDI. UNCTAD emphasizes that countries should integrate FDI promotion efforts with overall development strategies and that countries should not all target the same product market, it said.

World FDI fell 51 percent in 2001 to $735,000 million, the first decline in a decade, according to the report. Most of the decline -- 59 percent -- occurred in developed countries while only 14 percent was in developing countries, it said. The decline reflects a decrease in cross-border mergers and acquisitions, which are expected to remain low again in 2002, it said.

The United States remained the largest FDI recipient and the largest foreign investor. Canada and Mexico, the country's North American Free Trade Agreement trading partners, are seeing an increase in U.S. investment, the report noted.

The report said the long-term outlook for foreign direct investment is "promising" as transnational corporations expand their role in the global economy. It said foreign affiliates now account for 11 percent of world gross domestic product (GDP) compared to 7 percent in 1990.

(Note: In the following text "billion" equals 1,000 million; "trillion" equals 1,000,000 million.)

Following is the text of the first of two UNCTAD news releases:

(begin text)

17 September 2002

HIGH EXPORT GROWTH IN DEVELOPING COUNTRIES LINKED TO TNCs, SAYS NEW UNCTAD REPORT

Transnational corporations (TNCs) are playing a pervasive role in the exports of developing countries, UNCTAD finds in the World Investment Report 2002, released today. In a number of countries they account for a substantial share of all exports, and this is especially true of "winner countries" -- those boasting the largest gains in market share over the past decades. Their export growth is directly or indirectly linked to the expansion of TNCs���� international production systems. But although more and more countries are targeting export-oriented FDI [foreign direct investment], high shares in exports are not enough, as the Report points out: exports must also be upgraded and involve local value added if this investment is to yield longer-term development gains.

While the list of the world's top exporting countries is dominated by developed countries, developing countries and economies in transition accounted for the principal gains in world export market shares between 1985 and 2000 (figure). Moreover, in countries that have boasted substantial increases in exports of non-resource-based manufactures, TNCs have played a major role, primarily through their foreign affiliates but also by way of non-equity links. The UNCTAD report includes six case studies -���� China, Costa Rica, Hungary, Ireland, Mexico and the Republic of Korea -���� for which it examines this phenomenon down to the firm level (table 1). In Costa Rica, Hungary and Mexico, for example, the top three TNC exporters account for 29 percent, 26 percent and 13 percent, respectively, of total exports. In Mexico's case, the affiliates of the five transnational auto manufacturers brought in $27 billion of the country's exports in 2000.

In most of the countries with the largest gains in export market shares, the role of TNCs in those exports has increased over time. In China, the share of foreign affiliates in exports rose from 17 percent in 1991 to 50 percent in 2001. In the Republic of Korea, strong export growth was achieved without a strong presence of foreign affiliates, although non-equity relationships with foreign TNCs played a key role. At the same time, the export repertoire of the winner countries has generally shifted, from primary to manufacturing products and from low- to medium- and high-technology manufactures. The role of TNCs is particularly important for those products that have seen the fastest growth in world trade between 1985 and 2000. They are mostly to be found in non-resource-based manufactures, particularly in the electronics, automotive and apparel industries.

TNCs' role in exports varies greatly between countries, however, from 4 percent in Japan to 80 percent in Hungary. That role also goes beyond the most dynamic manufacturing products to encompass increasingly internationally traded services as well as natural resources and agriculture. In Kenya, for example, rapid growth in the exports of flowers has made the country the leading flower supplier of the European Union, with foreign affiliates producing most of these exports.

A key factor behind the shifts in export competitiveness is changing corporate strategies. These are leading to a specialization within the international production systems of TNCs, with different activities being performed in locations that offer the best conditions in terms of costs, resources, logistics and market access. As a result, trade in parts and components is assuming greater significance. In response to a search for more cost-efficient production systems, these changes are also generating new exports from developing countries and economies in transition.

Several concurrent trends are responsible for the transformation of international production systems, the Report finds. On the one hand, barriers to international transactions are falling, spurred by globalization, liberalization and technological innovation, including speedier transportation (see e-brief of 20 August and www.unctad.org/en/subsites/dite/bit). This intensifies competitive pressures, forcing corporations to become more efficient and to internationalize their operations. In the process, many TNCs are focusing more on their core activities and contracting out other functions to independent firms, if not opting out of production altogether. These changes are resulting in new forms of international production systems and networks, ranging from linkages through FDI to non-equity linkages, posing both opportunities and challenges for developing countries.

Targeting export-oriented FDI

Countries are scaling up their efforts to attract and benefit from export-oriented FDI. The intense competition for such investment is leading countries to adopt a more targeted approach to FDI promotion, particularly in the framework of their own development objectives. The basis for successful targeting is a good understanding of a location����s relative strengths and weaknesses and of the corporate strategies driving location decisions. As a rule-of-thumb, the Report suggests that countries wishing to target export-oriented FDI should consider an approach involving an analysis of existing trade and industry patterns; consultations with existing investors; an analysis of what competing locations are exporting and what they have attracted in terms of export-oriented FDI; and an identification of other factors that may attract export-oriented FDI (such as membership in free trade areas, preferential trade schemes, clusters of economic activity and industrial parks). UNCTAD emphasizes that any effort to promote export-oriented FDI needs to be well integrated into a country����s overall development strategy.

The Report addresses a number of policies that can be considered by governments to facilitate export-oriented FDI in developing countries. One key issue is to secure better access to developed country markets for goods and services produced in the developing world. A rise in protectionism could effectively jeopardize the prospects for poor countries to exploit their comparative advantages fully. The growing use of anti-dumping, increased tariffs on certain products, tariff peaks and targeted subsidies in developed countries is of concern in this context. Beyond promotional activities, key instruments for host country policies include the provision of improved infrastructure and trade and investment facilitation. Most of the winner countries identified in the World Investment Report also used export processing zones (EPZs) in their efforts to attract export-oriented FDI. The Report notes that, in order to comply with WTO [World Trade Organization] rules, many developing countries will have to eliminate the use of export subsidies as of 1 January 2003, with implications for many EPZs. Although these zones are likely to continue to play an important role in the overall strategy for promoting export-oriented FDI, countries using them need to prepare for these WTO restrictions.

But as the Report stresses, enhanced export competitiveness should be seen as a means to an end: development. Longer-term development gains from export-oriented FDI cannot be taken for granted. The costs and benefits of various approaches must be carefully considered at all policy levels. UNCTAD warns, for example, that if too many countries seek to corner the same product market, a supply glut may result and prices collapse. Similarly, intense competition for export-oriented FDI may translate into a race to the bottom in social and environmental standards and a race to the top in incentives -���� not least in the context of EPZs.

Sustained competitiveness requires continuous upgrading towards higher value-added activities. On their own, and in the absence of an adequate policy environment, TNCs may not undertake such upgrading. Specific promotional measures therefore need to be complemented by broader efforts to strengthen a location����s endowments of skills and technological capabilities and to promote linkages between exporting foreign affiliates and domestic suppliers. Keeping these broader issues in mind is important to ensure that export-oriented FDI results in development benefits for the host country. "At the top of the agenda should be the development of domestic capabilities, as this helps not only to attract quality FDI but also to upgrade existing activities", says Rubens Ricupero, Secretary-General of UNCTAD.

(end text)

Following is the text of the second UNCTAD release:

(begin text)

17 September 2002

UNCTAD BENCHMARKS FDO PERFORMANCE AND POTENTIAL

Belgium/Luxembourg, Hong Kong, China and Angola are the best-performing host economies for foreign direct investment (FDI), while the U.S., Sweden and Singapore have the highest potential, according to the World Investment Report 2002 released today by the United Nations Conference on Trade and Development (UNCTAD).

These findings come from UNCTAD����s new FDI benchmarking tools, which measure performance by standardizing a country����s inflows to the size of its economy, and measure potential by using a set of economic and policy factors of importance to foreign investors. Taken together, the two indices show how countries are performing relative to their potential. Thus, the United States ranks in the lower half of the performance index, because it receives relatively little FDI given its GDP [gross domestic product]. But as a strong economy with strong fundamentals, it heads the potential index, for the same reason.

"The decline of FDI flows by more than half in 2001 is the largest in 30 years", says Rubens Ricupero, Secretary-General of UNCTAD. "This makes it all the more important for countries to measure how they are doing today in terms of attracting FDI and what their potential is for the future", adds Karl P. Sauvant, lead author of the World Investment Report.

World FDI inflows plunged last year by 51 percent, to $735 billion, marking the first decline in a decade. But the picture is mixed, with the downturn concentrated mainly in developed countries (down 59 percent), as opposed to a 14 percent drop in developing countries. At the same time, developing countries and Central and Eastern Europe (CEE) economies are garnering a rising share of FDI overall.

Against the background of these strong regional and national differences, this year����s World Investment Report introduces two new indices -- the Inward FDI Performance Index and the Inward FDI Potential Index. They have been calculated for two periods spanning the past decade: 1988-1990, and 1998-2000 (see table 1 and sidebar on methodology).

The more straightforward of the two is the Inward FDI Performance Index, which is the ratio of a country����s share in global FDI flows to its share in global GDP. Here, a value of one means that the shares of global FDI flows and global GDP are equal. Countries with a value higher than one attract more FDI than could be expected on the basis of their relative GDP size; this category includes several advanced industrial economies whose FDI performance reflects high incomes and technological strengths (e.g. the United Kingdom) or a location (combined with other favourable factors) within large regional markets like the EU (Ireland). In other countries, high scores reflect the end of political or economic crises, transition to a market economy or massive privatizations. Countries with low values that receive less FDI than would be expected from their size also vary greatly, due to a range of factors including instability, poor policy design and implementation or competitive weaknesses. Some are very large economies that attract large amounts of FDI, albeit low in relation to GDP (the United States), while others -- like Japan -- have traditionally been closed to FDI. Many are simply poor or unable to compete effectively.

Thus, according to this measure, during 1998-2000 the developed world as a whole was more or less balanced in terms of the FDI it received, although the EU reported the highest score (1.7) and Japan the lowest (0.1). The CEE countries as a group ranked at almost the same level throughout the decade, with a score close to one. The developing world has also generally maintained its score over time, but its FDI inflows reflect its relative size. Africa����s score fell (from 0.8 during 1988-1990 to 0.5 during 1998-2000), suggesting a loss in its relative attractiveness even given its low share of global GDP. Latin America and the Caribbean, by contrast, improved its ranking significantly (from 0.9 to 1.4), reflecting the strong performance of countries in South America. Asia as a whole slid from 1.1 to 0.9, based largely on the weakened performance in West Asia and East and South-East Asia, although there is a marked difference between the two subregions: West Asia had a very low score in both periods, while East and South-East Asia retained values well above one. South Asia increased its score, but from a very low base (0.1-0.2).

By country rankings, the greatest gains in FDI performance over the past decade were those by Angola, Panama, Nicaragua and Armenia, with Oman, Greece, Botswana and Sierra Leone registering the largest declines.

The Inward FDI Potential Index is more complex. Based on slow-changing structural factors, including social, political, institutional and economic variables, its values are fairly stable over time and correspond by and large to levels of economic development. The top 20 economies in 1998-2000 by this measure were developed countries or high-income developing countries, while the bottom 20 ranks were all held by developing countries. Most developed countries tend to sustain similar ranks over time, while some developing countries and economies in transition make large upward or downward leaps. The largest jumps in this index were by Guyana, El Salvador and Lebanon, and the largest falls by Georgia, Tajikistan and Moldova.

Global trends last year: a return to normalcy?

Last year����s striking descent in FDI flows largely reflects a fall in cross-border mergers and acquisitions (M&As), which were the driving force. M&As are expected to remain low this year as well -���� between January and July, with a value of only $222 billion, they dipped 40 percent over the same period in 2001 -���� which would contribute to a further decline overall.

The downturn was strongly influenced by the worldwide recession, especially in the world����s three largest economies (the United States, European Union and Japan) and a sharp slide in the stock market activities of industrial countries. For this reason it was felt primarily in the developed world, where both inflows and outflows are likely to maintain their present low levels. The U.S. held onto its position as the largest FDI recipient, but inflows were halved, to $124 billion. And although it has again become the world����s number 1 investor, outflows were also down -���� by 30 percent, to $114 billion. Canada and Mexico, the country����s two NAFTA partners, are seeing an increasing share of those dollars.

Inflows and outflows to the European Union have skidded as well, by about 60 percent, again primarily because of the drop in M&As. The United Kingdom and Germany registered the greatest declines in inflows, while France became the region����s largest outward investor.

In the developing world, too, inflows slumped last year, by 14 percent, from $238 billion to $205 billion, largely because of developments in Argentina, Brazil and Hong Kong, China. China was one of several developing countries to boast an increase -- primarily due to heightened investor interest following the country����s accession to the WTO. In relative terms, however, developing countries and CEE should benefit from other post-recession fall-out -- namely, the likelihood that the recession may, as the World Investment Report suggests, lead investors increasingly to relocate to, or expand in, lower-cost locations. In fact, the number of developing and CEE countries registering increased inflows (77 and 13, respectively) is larger than those experiencing decreases (69 and six, respectively), while in developed countries inflows fell in 22 out of 25 countries.

Long-term prospects promising

Underlying economic factors suggest that the outlook for FDI over the longer term is "promising", says the Report. A number of surveys of TNCs confirm this, despite the events of 11 September. In fact, despite the decline, TNCs are expanding their role in the global economy. Last year, the estimated 850,000 foreign affiliates of the world����s 65,000 TNCs accounted for about 54 million employees, compared to 24 million in 1990; their sales of almost $19 trillion were more than twice as high as world exports in 2001, compared to 1990 when both were roughly equal; and the stock of outward FDI skyrocketed from $1.7 trillion to $6.6 trillion over the same period. Foreign affiliates now account for 11 percent of world GDP ����- as opposed to 7 percent in 1990 -���� and one third of world exports.

The picture is dominated by the world����s largest TNCs, where the rapid ascendancy in 2000 of three firms -���� Vodafone (UK) to number 1, Vivendi (France) to number 4 and Telefónica (Spain) to number 9 ����- reflected the unprecedented wave of cross-border M&As and the peak of a decade-long stock market rally (see table 3 for the top 25 of those firms). Despite these developments, the composition of the 10 largest TNCs remained fairly stable. The top-100 list reflects the continuing expansion of TNCs from developing countries, which now account for five of the 100, although their percentage of total outflows has slumped over the past decade.

Firms from the European Union garnered more than half of all foreign assets of the top 100, which were up more than 20 percent from 1999, to $2.5 trillion; US and Japanese companies put in a declining performance. And while 45 of the 100 registered double-digit rises in their foreign assets as a result of M&As, an "unprecedented" number of them ����- 20 in all ����- suffered declines, says the World Investment Report 2002. These companies were in a wide range of industries, with the exception of "new economy" sectors, such as telecommunications. Electrical and electronic equipment, motor vehicles and pharmaceutical firms represented more than half of all those with reduced foreign assets and operations, usually a result of spin-offs, the sale of manufacturing operations abroad to contract manufacturers or in response to dimmer economic prospects.

Total foreign sales of the top 100 firms climbed 14 percent in 2000, thus boosting their importance relative to total sales. Foreign employment also did an about-face, up 17 percent over 1999 to an unprecedented 7 million of 14 million total employees. And while the same industries dominated the list as in previous years -���� electronics and electrical equipment, motor vehicles and parts, petroleum exploration and distribution, and food and beverages -���� the transnationality of the top 100 rose. This UNCTAD index captures the foreign dimension of TNC activities by averaging three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. Between 1991 and 2000, the average transnationality index value of the top 100 grew from 51 percent in 1991 to almost 56 percent in 2000, with some interruptions.

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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