MARCH 1996 · VOLUME 17 · NUMBER 3

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E C O N O M I C S

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FOREIGN DIRECT INVESTMENT by multinational corporations and trade within and between firms are now the dominant elements of the world economy, with multinationals increasingly influencing the size and nature of cross-border transactions, says a United Nations Conference on Trade and Development (UNCTAD) report.

The world's multinationals -- 40,000 parent firms and approximately five times as many foreign affiliates -- account for two thirds of the world trade in goods and services, one third in intra-firm transactions and one third in inter-firm transactions, according to UNCTAD's World Investment Report 1995.

This means that only one third of world trade in goods and services is according to free-market, free-trade theories of arms-length transactions.

In releasing the report at a news conference in mid-December 1995, UNCTAD's Secretary-General Rubens Ricupero said that foreign direct investment (FDI) has now superseded trade as the most important mechanism for international economic integration.

The report uses this fact to argue for making "investments" part of the trade negotiation and rule-making process, through a Multilateral Investment Agreement (MIA).

At his news conference, Ricupero slightly distanced himself from the MIA proposal of the World Investment Report, preferring the term "multilateral framework," but he did not elaborate on the distinction. Observers generally understand that a framework would allow individual governments more leeway to set rules to suit their own conditions, while a multilateral agreement would give multinationals the right to invest in any country for production of goods and services and would discipline governments against interfering with these rights.

The report also advocates developing countries liberalize not only inward FDI, but also outward FDI flows, and says it would be in the interests of all countries to have a multilateral agreement to provide stable, predictable and transparent international investment relations.

Given the growing importance of FDI and international production for linking national economies and improving economic performance, and given the transnational nature of the investment, "it is unavoidable that a framework will be sought that provides for stability, predictability and transparency at the multilateral level," the report says.

A global investment agreement is presaged by elements of the World Trade Organization (WTO) agenda, regional efforts (within the framework of the European Union, the North American Free Trade Agreement, South America's Mercosur and the Asia Pacific Economic Cooperation) and the negotiations among rich countries (through the Organization for Economic Cooperation and Development, OECD) for a binding Multilateral Agreement on Investment which, once concluded, would be open to non-OECD members, the report asserts.

Without predicting whether these efforts would lead in the foreseeable future to a comprehensive multilateral framework, the UNCTAD report asserts that such a framework when established would likely be as important as the international trade framework created by establishing the General Agreement on Tariffs and Trade (GATT) 50 years ago.

The European Union, the leading exponent of a WTO investment agreement, promptly welcomed the World Investment Report, and called for a WTO working group to make progress on the idea.

Investment by the numbers

DURING 1991 TO 1993, the world FDI stock grew twice as fast as world trade, which itself grew one-and-a-half times faster than world output, according to the World Investment Report.

The world outward FDI stock at the end of 1994 is estimated to be $2.4 trillion, with the industrialized countries as a whole accounting for about three quarters of this total.

Total FDI outflows to all countries in 1994 was approximately $224 billion, the World Investment Report estimates, compared to $208 billion in 1993.

The Report projects FDI outflows in 1995 at $230 billion, with 15 percent originating in developing countries.

The United States was both the largest source of outward investment ($46 billion in 1994, down from $69 billion in 1993) and the largest recipient of inward flows ($49 billion in 1994, up from $41 billion in 1993). The World Investment Report estimates the total stock of FDI in the United States in 1994 to be more than $500 billion. Outward foreign investment of U.S. multinationals is $610 billion, approximately one-quarter of the world FDI stock.

The World Investment Report states that 34,353 multinationals, with 93,311 affiliates, are based in the industrialized countries, with 3,788 multinationals with 101,139 affiliates based in developing countries. But the Report's definition of affiliates covers any kind of relationship between parent and "affiliate" and makes comparisons difficult.

The World Investment Report also details the number of incentives that industrialized and developing countries offer to attract FDI to their countries, or particular regions within the country, and says that "unbridled competition among governments in this area can lead to abuses, as the world experienced in the inter-war years through successive rounds of currency devaluations in a beggar-thy-neighbor attempt to boost exports, and the more recent export-credit competition."

Some incentives could lead to waste of governmental financial resources and economic distortions, the World Investment Report says. The report calls for the establishment of an international eminent persons group on incentives.

FDI flows concentrated in a few Southern countries

Developing countries are now increasingly attracting FDI, continuing a trend that began in 1990, with the 1994 FDI flows to the developing countries reaching $84 billion, or 37 percent of the world foreign direct investment inward flows.

But the FDI flows continue to be concentrated in a few countries in the South, with China's $34 billion inflows in 1994 being the second largest and accounting for 40 percent of all flows into the developing world. (The Chinese figures may be over-valued by about a quarter because of some double-counting and other statistical errors, however.) Despite its top ranking, China is more selective in the foreign investments it solicits or accepts than other Third World nations.

The Asia-Pacific region, which now accounts for some 70 percent of developing country FDI stock, got $61 billion in 1994. China and Southeast Asia were at the forefront, with the Pacific Island economies and South Asian countries lagging behind, according to the Report.

Inward flows into Latin America and the Caribbean are fragile and depend very much on privatization programs, which do not create new production, though some may involve expansion with additional FDI.

Flows into Latin America increased only marginally in 1994, to some $40 billion, largely shaped by privatization programs open to foreign investors. Argentina, the largest recipient in 1993 with $6 billion inflows, saw a sharp decline to $1.2 billion in 1994. Peru with $2.7 billion, mostly privatization FDI, and Chile with $1.8 billion saw a sharp rise.

FDI flows into Brazil increased from $891 billion in 1993 to $1.5 billion in 1994. The UNCTAD report suggests and argues for further privatization in Brazil, which it estimates would bring in substantially more FDI.

The increase in Brazil in 1994 was an outcome of the successful real plan, a more liberal attitude to all kinds of foreign inflows and improvements in the macro-economy. But in the aftermath of the Mexican crisis, Brazilian authorities became more cautious and some Brazilian analysts suggest that Brazil will not blindly follow the neo-liberalism of Mexico and Argentina.

Africa, the World Investment Report stresses, remains marginalized. Despite the considerable efforts of African governments to undertake far-reaching domestic policy reforms and improve their domestic frameworks for investment, and the higher returns for investors in Africa, the FDI boom in other regions has largely bypassed that continent. Sub-Saharan Africa received only $1.8 billion of FDI in 1994, while North Africa got $1.3 billion. Most FDI in Africa also continues to be concentrated in a small number of countries endowed with natural resources and especially in oil.

As for Eastern Europe and the former Soviet Union, FDI flows reached $6.3 billion in 1993 and $6.5 billion in 1994, increasing the total FDI stock in the region to an estimated $22 billion. Inflows, the World Investment Report says, have slowed down due to lingering economic recession in some West European countries and the slower transition to a market economy. The gap between investors' commitments and implementation in the region also remains high. The flows are also unevenly distributed.

The report suggest that while the dominant actors on the multinational scene are the industrialized countries, developing countries are also undertaking outward FDI, accounting for $33 billion of outflows in 1994. The World Investment Report notes that developing country firms, because of the need to remain internationally competitive, are becoming significant foreign investors and says that prospects of large increases in FDI by multinationals headquartered in the South are bright.

The Top 25 Multinationals Ranked by Foreign Assets
			Assets		Sales		Employment
Company	Home country	Industry	Foreign	Total	Foreign	Total	Foreign	Total
Royal Dutch Shell	Netherlands/U.K.	Petroleum refining	69.4	100.8	45.5	95.2	85,000	117,000
Exxon	United States	Petroleum refining	47.4	84.1	87.7	111.2	57,000	91,000
IBM	United States	Computers	44.1	81.1	37.0	64.1	130,655	256,207
General Motors	United States	Motor vehicles and parts	36.9	167.4	28.6	133.6	270,000	756,000
General Electric	United States	Electronics	31.6	251.5	11.2	60.5	59,000	222,000
Toyota	Japan	Motor vehicles and parts	-	97.6	41.1	94.6	23,824	110,534
Ford	United States	Motor vehicles and parts	30.9	198.9	36.0	108.5	180,904	332,700
Hitachi	Japan	Electronics	-	86.7	16.5	71.8	-	330,637
Sony	Japan	Electronics	-	41.5	26.3	36.3	70,000	130,000
Mitsubishi	Japan	Trading	-	85.2	65.3	168.4	-	157,900
Nestlé	Switzerland	Food	24.8	30.6	38.4	39.2	203,100	209,800
Mobil	United States	Petroleum refining	23.1	40.7	42.5	63.5	28,600	61,900
Nissan Motor	Japan	Motor vehicles and parts	-	68.3	24.2	56.5	34,464	143,916
Matsushita Electric	Japan	Electronics	22.5	77.2	31.7	64.3	98,639	254,059
Elf Aquitaine	France	Petroleum refining	22.4	45.5	14.9	35.5	44,603	94,253
Asea Brown Boveri	Switzerland	Electrical equipment	21.5	24.9	24.7	28.3	-	206,490
Philips Electronics	Netherlands	Electronics	-	23.8	26.6	30.3	200,000	244,400
British Petroleum	U.K.	Petroleum	19.0	28.1	39.2	52.4	62,600	84,500
Hanson	U.K.	Building materials	19.0	37.9	7.6	15.4	53,000	71,000
Siemens	Germany	Electronics	-	58.4	13.8	50.0	153,000	403,800
Unilever	Netherlands/U.K.	Food	18.0	24.7	16.1	40.0	187,000	294,000
Mitsui	Japan	Trading	-	72.5	49.8	172.9	-	11,528
Alcatel Alsthom	France	Electronics	-	44.2	5.0	26.5	115,500	196,500
Du Pont	United States	Chemicals	16.4	37.1	16.8	37.1	36,400	114,000
B.A.T. Industries	U.K.	Tobacco	15.7	50.5	25.3	33.2	175,500	190,308

SOURCE: WORLD INVESTMENT REPORT 1995, UNCONFERENCE ON TRADE AND DEVELOPMENT; BASED ON 1993 DATA; BLANKS INDICATE DATA NOT AVAILABLE