Foreign Direct Investments in the World Economy

International capital flows increased to unprecedented magnitudes by the late 1990s, FDI outflows reached a peak of USD 649 billion in 1998, while inflows amounted to USD 644 billion (Table 1). This expansion in capital flows occurred despite a number of unfavourable factors such as the recession in Asia, the shaky financial markets in Russia and the Latin American countries, the decrease in world trade, the decline in certain raw material prices, retardation in privatisation activities and a slowing down in world economic growth. FDI out-flows increased by 39 percent in 1998 relative to the previous year, while the growth in FDI inflows reached 37 percent. These growth rates were the highest recorded since 1987. The world' s foreign direct investment stock exceeded USD 4 trillion in 1998 (Table 1).

The most dynamic increase of all was in the value of mergers and acquisi-tions, which amounted to over USD 400 billion in 1998, a rate of expansion of 70 percent relative to the year before. The proeess also continued into 1999, as the total value of mergers and acquisitions had already exceeded the 1998 level in the first half of the year, reaching USD 574 billion.

Table 1. Indicators of foreign direct investment flows and international produc-tion, 1986-1998.

Value at current prices (billion dollars)

Annual growth rate (percent)

1996 1997 1998 1986-1991- 1996 1997 1998 1990 1995

FDI inflows 359 464 644 24.3 19.6 9.1 29.2 38.8 FDI outflows 380 475 649 27.3 15.9 5.9 25.0 36.6 FDI inward stock 3,086 3,437 4,088 17.9 9.6 10.6 11.4 18.9 FDI outward stock 3,145 3,423 4,117 10.5 10.7 8.9 8.8 20.3 International mergers

and acquisitions 163 236 411 30.2 15.5 45.2 44.8 74.2 Indicators of foreign affiliates

- sales revenues 9,372 9,728 11,427 10.7 11.7 3.8 3.8 17.5 - assets 11,246 12,211 14,620 13.8 8.8 8.6 8.6 19.7 - exports 1,841 2,035 2,338 13.1 -5.8 10.5 10.5 14.9 - employment

(in thousand) 30,941 31,630 35,074 5.6 4.9 2.2 2.2 10.9 Source: UNCTAD (1999, p. 9).

International production — the aggregate production of parent companies and their foreign affiliates — has become significant factor in the world economy in the course of the 1990s. The significance of transnational corporations had been increasing rapidly, so that by 1998 there were 60,000 parent companies operat-ing half a million foreign affiliates ali over the world.

Although the transnational corporations include small, medium-sized and large companies, they are highly concentrated, the 100 largest accounting for 15 percent of the total assets of the 60,000 companies in 1997, and 22 percent of the sales. Over 90 of the 100 largest companies have originated from the United States, the European Union or Japan.

International production has expanded at almost as rapid a rate as foreign direct investment over recent years. The production output, value of assets and labour force of the foreign affiliates of transnational corporations having increased spectacularly in 1998 (Table 1).

2.2.1.1. Trends in International Production

Trends in international production and their significance are summarised in the World Investment Repo rt under the following major points (UNCTAD 1999):

1 Transnational corporations contribute one-fourth to the world' s total produc- tion, out of which one-third originates from the capital recipient countries as the combined production of foreign affiliates. The foreign and domestic sales of affiliates reached USD 11 trillion in 1998, while world trade in goods and services amounted to only USD 7 trillion in the same year. In the supply of external markets with goods and services, international production and for-eign direct investments have surpassed traditional world trade in their signi-ficance.

Technology flows are important phenomena accompanying international pro-duction. The overall value of expenditure on patents, know-how payments, and licensing has steadily grown since the mid-1980s, and the process has accelerated particularly in recent years. The accent within the sectoral struc-ture of foreign direct investments is moving towards technology-intensive branches.

The high expenses of innovation and R&D activities compel firms to make use of ownership advantages internationally. There is a general tendency for innovation and development activities to be typically concentrated at corpo-rate headquarters. Parent companies spend much more on research and devel-opment than their foreign subsidiaries.

International production and international trade are tightly interrelated. On the one hand, international trade is reinforced by intra-company trade among the segments of transnational corporations, while on the other hand, world trade impediments are among the pflmary factors that drive the expansion of international production.

Global FDI stock (1997) outward stock: USD 3,423 billion

inward stock: USD 3,437 billion

Global FDI tlows (1997) outfiows: USD 475 billion

inflows: USD 464 billion

al Figures in parentheses are calculated as shares in global FDI stoc

International production generates additional employment, which can he of utmost importance, particularly in host countries suffering from acute unem-ployment.

The financial resources needed for international production — i.e. for the es-tablishment, acquisition or expansion of foreign affiliates — may he procured internally by the transnational corporation itself. The capital may originate from the parent company, or it may take the form of internal debt or rein-vested earnings of the foreign affiliate. Alternatively, the source of financing can be external capital mobilised by the transnational corporation in the host country or on the international capital market.

2.2.1.2. Geographical Distribution of Global Foreign Direct Investment Stock

Global foreign direct investments are characterised by extremely pronounced geographical concentration, the 10 principal resident countries accounting for

United States

FDI stock°

outward: 861 bn $ (25,1%) inward: 682 bn $ (19,8%)

369

102 285 36

European Union

FDI stock' outward: 1,511 bn $ ^{(44,1 %)}

inward: 1,230 bn $ ^{(35,8 %)}

13

Japan

FDI stock' outward: 272 bn $ (7,9 %)

inward: 27 bn $ (0,8%) 53

Figure 2. Significance of the Investment Triad in the world's foreign direct investment flows and stock in 1997 (UNCTAD 1999, pp. 22, 479, 483, 489, 495).

four-fifths of the world's FDI outflows. Foreign direct investment flows and stock are in fact centralised on the developed countries, with the United States, the European Union and Japan constituting an investment Triad which handles the majority of. global FDI flows (Figure 2).

The dominant position of the developed countries can be ascribed to the ex-traordinary rate of growth in mergers and acquisitions (Table 1). As a result of the liberalisation of global trade, intensifying competition has induced the emer-gence of global industries. The principal means of market consolidation has been the merging of existing assets.

The extent of foreign direct investment flows and stock among the developed countries is explained by the nature of mergers and acquisitions:

The largest transactions rarely involve real capital infusion, since they can be resolved with the simple exchange of shares.

Acquisitions typically entail the attaining of a share in the owner- ship of an existing company, which is not necessarily followed by capacity growth.

The developed countries that account for the majority of the foreign direct investment flows almost without exception shed more capital than they absorb.

The difference ends up in the developing countries, for which foreign direct in-vestment inflows make up the most important source of development funds. In fact, the developing countries have been engaged in a constant race for the re-mainder of global FDI. The host countries are continuously changing their set of investment preferences, while the market perspectives of each region also change from year to year.

The figures in Table 2 provide information on the origin and distribution of foreign direct investment inflows. Developing regions are primarily recipients of Table 2. Regional distribution of the world's foreign direct investment flows between 1995 and 1998 (in percent).

FDI inflows FDI outflows 1995 1996 1997-1998 1995 1996 1997 1998 Developed countries 63.4 58.8 58.9 71.5 85.4 84.2 85.6 91.6 Developing countries 32.3 37.7 37.1 25.8 14.5 15.5 13.7 8.1 out of which: Africa 1.3 1.6 1.6 1.2 0.1 0.0 0.3 0.1 Latin America 10.0 12.9 14.7 11.1 2.1 1.9 3.3 2.4 Asia 20.4 22.1 18.9 12.0 12.3 13.0 9.6 5.3 Other 0.6 1.1 1.9 1.5 0.0 0.6 0.5 0.3 Central and Eastern Europe 4.3 3.5 4.0 2.7 0.1 0.3 0.7 0.3 World total 100 100 100 100 100 100 100 100 Source: UNCTAD (1999, p. 20).

capital, while the magnitude of their capital outflows is negligible. Developing countries attracted over one-third of ali global capital up to 1997, but their share dropped dramatically in 1998 Similarly, Central and Eastem Europe received a notable proportion of global capital flows, but this had diminished considerably by 1998.

The reason for the structural realignment is the above-mentioned dynamic growth in mergers and acquisitions in the developed countries. The decline of the developing countries in this respect is therefore primarily a proportional matter. The absolute value of capital flowing into the developing countries decreased only minimally between 1997 and 1998, from USD 190 billion to USD 183 billion (UNCTAD 1999).