Thursday, June 27, 2013

World Investment Report focuses on global value chains

UNCTAD has just ( on June 26, 2013) published its annual World Investment Report, this year on the subject Global Value Chains: Investment and Trade for Development.

Below I cite text selectively from the Key Messages section at the beginning of the report, interspersed with my own commentary from the point of view of Growing Capacity, Inc. (in bold). I won't attempt to summarize the wealth of data on sectoral flows, major deals, and the analysis of greenfield and M&A FDI.

As usual, the report starts with a review of recent FDI trends and a forecast of FDI for the next few years. Despite UNCTAD's own serious reservations about using crude figures like total FDI flows and stocks, the report continues to base its main trend analysis on these. This makes sense only because compiling a full set of alternative indicators would take too long to be current. So readers should bear in mind that FDI flows and stocks are examined because they are the most readily available data, not because they are the most valid indicators of foreign investor activity.

Global foreign direct investment (FDI) flows fell by 18% in 2012 to USD1.35 trillion, well below the USD2 trillion peak before the global economic crisis. UNCTAD expects the recovery to take longer than expected because of global economic fragility and policy uncertainty. It expects the 2013 FDI figure to be not much higher than the 2012 total, rising to only USD1.8 trillion in 2015, and it warns that these figures are uncertain because "significant risks to this growth scenario remain".

For the first time ever, developing economies absorbed more FDI flows than developed countries in 2012, accounting for 52% of the global total. This is because the biggest fall in FDI inflows occurred in developed countries, which now account for only 42% of global flows. Developing economies also generated almost one third of global FDI ouflows, continuing a steady upward trend.

FDI outflows from developed countries dropped to a level close to the trough of 2009 as the uncertain economic outlook led multinational enterprises (MNCs -- UNCTAD calls them "transnational corporations", TNCs) to maintain their wait-and-see approach towards new investment or to divest foreign assets, rather than undertake international expansion. In 2012, 22 of the 38 developed countries experienced a decline in outward FDI, leading to a 23% overall decline. One element that has stubbornly held up during the crisis is investment through offshore financial centers and special purpose entities -- bad news for tax collectors.

These figures once again illustrate the basic standpoint of Growing Capacity, Inc.: trillions of dollars are sitting idle in corporate bank accounts, where they are being eroded by negative real interest rates as inflation gradually takes hold, while the developing world, in particular the least-developed countries, stand in sore need of (often quite modest amounts of) investment capital to provide basic physical and soft infrastructure to enable them to meet the basic needs of their inhabitants. What is needed is a real international effort aimed at improving the investment climate in host countries and connecting their needs with profitable opportunities for responsible investment by MNCs.

An encouraging sign is the 7% global rate of return on FDI (8% in developing countries, 13% in transition economies and only 5% in developed ones). Nearly one-third of global FDI income was retained in host economies and two-thirds repatriated. The share of retained earnings is highest, at 40%, in developing countries.

This is positive news, but we need to know much more about the effect of FDI on host (and home) economies. How many new jobs were created by FDI in 2012? What was the impact of FDI on GDP growth? How many new businesses of various sizes were created as a knock-on effect of FDI? What other measurable spillovers occurred? What negative effects of FDI, such as the "crowding out" of domestic businesses, were detected?

FDI flows to developing regions fell slightly in 2012, but there were what UNCTAD calls "some bright spots", including Africa, where FDI inflows rose 5% to USD50 billion. FDI flows to developing Asia fell 7% to a still high USD407 billion. FDI inflows to Latin America and the Caribbean decreased 2% to USD244 billion, with flows to Central America and the Caribbean slumping while those to South America were 12% higher. The increases in Africa and South America were largely, though not wholly, driven by investments in natural resource exploitation.

Least-developed countries (LDCs) received record high FDI inflows. Given the need of these countries for massive investment in basic facilities, it would be good to have more information on the development impact of FDI as well as the quantitative envelope data. I hope a more detailed picture will emerge from UNCTAD's annual report on LDCs, which is published later in the year.

The fall in FDI inflows to developed countries by 32% to USD561 billion may seem less important in development terms, but it does indicate a loss in efficiency gains at a time when productivity in developed countries is not rising fast enough to help governments to tackle structural problems such as population ageing.

The 2013 World Investment Report voices concerns that the recent trend for countries to reinforce the regulatory environment for foreign investment may be disguised protectionism. It notes that over 1,300 of today's 2,857 bilateral investment treaties (BITs) will be effectively expiring by the end of 2013, "opening a window of opportunity to address inconsistencies and overlaps in the multi-faceted and multi-layered" international investment agreement (IIA) regime and to strengthen its development dimension.

This does not go far enough. As Growing Capacity continues to reiterate, the world needs to move beyond the spaghetti-bowl of BITs and, increasingly, regional investment agreements, to construct a global investment framework that incorporates widely-agreed elements of the thousands of agreements now in force and facilitates a massive expansion of international investment for development.

UNCTAD proposes five broad paths for reforming international investment arbitration: promoting alternative dispute resolution, modifying the existing dispute resolution system through individual agreements, limiting investors' access to the dispute resolution system, introducing an appeals facility and creating a standing international investment court.

This year's special focus is on global value chains, in which intermediate goods and services are traded in fragmented and internationally-dispersed production processes. Such chains are typically co-ordinated by MNCs, with cross-border trade of inputs and outputs taking place within their networks of affiliates, contractual partners and arms-length suppliers, which account for about 80% of global trade.

The resulting value-added trade is estimated to contribute nearly 30% to countries' GDP on average in developing countries and 18% in developed countries and there is a positive correlation between participation in global value chains and growth rates of GDP per capita. They also have a direct impact on value added, jobs and income. They provide an important avenue for developing countries to build productive capacity.

The risks of such chains are high. The contribution to GDP may be limited if countries capture only a small share of value added in the chain, and spillovers are not automatic. Environmental and social impacts can be negative. Vulnerability to external shocks may be greater. Production may move out as well as in.

UNCTAD correctly emphasizes the need for countries to make a strategic choice to promote or not promote participation in global value chains as part of their development strategies, and encourages an active policy stance. A structured approach is required that includes embedding global value chaiuns in industrial development policies, encouraging their growth by creating a conducive environment for trade and investment, and building productive capacities in local firms and skills in the local workforce. These efforts, says, UNCTAD, "should take place within a strong environmental, social and governance framework, with strengthened regulation and enforcement and capacity-building support to local firms for compliance".

UNCTAD proposes three specific initiatives to do this: developing synergistic trade and investment policies and institutions; creating regional industrial development compacts; establishing sustainable export processing zones.

Special economic zones such as export processing zones can be useful as incubators of new enterprises and areas where more liberal economic policies can be piloted, they should be viewed as temporary stepping-stones to more widespread economic liberalization and development. The experience of such zones worldwide is mixed, with a few of them becoming successful and others turning into centers of illegal activity. They need to be firmly administered and governments should plan to expand them nationwide as soon as possible. Policy-makers often point to the success of China's Special Economic Zones, which were set up in the early 1980s, and cite these as models for emulation. But they need also to see how China's leaders then opened several coastal zones to foreign investment later in the 1980s and achieved even greater success by opening up the whole country in the 1990s.

You can download the complete 2013 World Investment Report here.


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