CHAPTER 4

TRENDS AND PATTERNS OF FDI INFLOWS

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4.0 INTRODUCTION

One of the most striking developments during the last two decades is the spectacular

growth of FDI in the global economic landscape. The liberalization of trade, capital

markets, breaking of business barriers, technological advancements, and the growing

internationalization of goods, services, or ideas over the past two decades makes the

world economies the globalised one. Consequently, with large domestic market, low

labour costs, cheap and skilled labour, high returns to investment, developing

countries now have a significant impact on the global economy, particularly in the

economics of the industrialized states.

The unprecedented growth of global FDI around the world has made FDI an

important and vital component of development strategy in both developed and

developing nations and policies are designed in order to stimulate inward flows.

Infact, FDI provides a win-win situation to the host and the home countries. Both

countries are directly interested in inviting FDI, because they benefit a lot from such

type of investment. The home countries want to take the advantage of the vast

markets opened by industrial growth. On the other hand the host countries want to

acquire technological and managerial skills and supplement domestic savings and

foreign exchange. Moreover, the paucity of all types of resources viz. financial,

capital, entrepreneurship, technological know-how, skills and practices, access to

markets abroad in their economic development, developing nations accepted FDI as a

sole visible panacea for all their scarcities. Further, the integration of global financial

markets paves ways to this explosive growth of FDI around the globe.

This chapter covers the trends and patterns of FDI inflows at World, developed and

developing countries particularly Asian countries during pre and post 1990s up to 2008.

4.1 TRENDS AND PATTERNS OF FDI: PRE- 1990S EXPERIENCE

While international business, as a discipline is relatively new, as a business practice, it

is not. However, the pattern of International business keeps on changing. Mira

Wilkins has called attention to its antecedents far back in history, from the period of

the earliest known civilization in 2500 B.C., Sumerian merchants found that in their

foreign commerce they needed men stationed abroad to receive, to store, and to sell

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their goods. Later, the Roman trader made contacts at distant points. International

business in the form of trade existed between Egypt and the Phoenician City of

Bybols, as revealed by the recent excavations in Greece.

Hundreds of years have passed since British and Dutch firms began contracting

production to local business in Asia and elsewhere. British firms dominated real

investment across borders. For example, in 1600, The East India Company, a

newly formed trading firm, had established branches overseas, and not dissolved

until almost three centuries later. In 1847, it emerged as one of the world’s first

international corporations and an example of the direct investment, resource–

seeking phase. At about the same time, a number of Dutch companies, which had

organized in 1590 to open shipping routes to the East, joined together to form the

Dutch East India Company and also opened branch offices in Asia. American

colonial traders began operating in a similar fashion in the 1700s. The first

successful American venture into foreign production was the factory built in

Scotland by Singer Sewing Machine in 1868. By 1880, Singer emerged as the

world's first modern MNCs and was one of the largest firms in the world. It

established several overseas manufacturing plants. Other firms soon followed, and

by 1914 at least 37 American companies had production facilities in two or more

overseas locations.

By 1864 the value of world foreign long-term investment rose from under $4 billion

to $44 billion in 1913. Among the all creditor countries, UK was the most important,

accounting for about three-quarters of all international capital movements up to 1900.

Thereafter, its share of new investment fell as the US and Continental Europe became

important lenders. At this time, France and Germany the two other important

investors held foreign assets worth $9 and $5.8 billion respectively. United State

owned credits valued at $3.5 billion.

After First World War the process of industrial distribution speeded up, War reshaped the

pattern of international capital transfer and heralded an era through which ultimately had

a crucial effect on the whole climate of international capital movement. Technological

improvement in transport and communication and the need of European countries and

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Japan for US capital to finance reconstruction following the damage inflicted by the war

gave rise to a reversal of the trend towards growth in FDI.

The World in 1970s, witnessed rapid growth of a number of very large industrial groups

with extensive international ramifications. While most of the largest MNCs had been in

existence for a good number of years, they grew rapidly in this period, both in size and in

international scope of their operations. In this period, the total value of world FDI inflows

increased from $12,586 to $43,440 million. The share of developed countries increased

from total FDI inflow of $9,812 to $32,826 million, while the share of DCs rose

moderately from total FDI inflow of $2,774 to $10,584 million.

The 1980s saw a major developments in international economies as firms from

many nations expanded their international operations. Since second half of 1980s

by growing integration of markets and financial institutions, firms began a new

wave of FDI. In this period by the strong recovery of the world economy, from the

recession of the early 1980s, and the ensuing high growth rates in both developed

and DCs world-wide FDI flows grew faster than world-wide domestic investment

and domestic output. In the second half of the 1980s the number of developed

countries, which became significant outward investors increased and Japan

emerged as one of the most important outward investors. The growth of number of

cross-border M&As, driven by technological and competitive forces, also

promoted the surge in FDI.

Total world-wide FDI inflows rose from $61 billion in 1982-1986 to $200 billion in

1989. In this period FDI inflows to DCs grew by an annual rate of 22% and reached to

about $29 billion in 1989 from $19 billion during first half of 1980s. Developed

countries share of FDI inflow grew by an annual rate of 24% and rose from $43

billion in 1982-86 to a value of $172 billion in 1989 (Table 4.1). Five major creditor

countries were among the largest recipient countries and received 57% of the world

inflows during 1980s, while outflows from these countries grew by 38% annually and

reached to $202 billion in 1989. During the 1980-1989 UK, Japan and USA were the

largest creditor countries.

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Table 4.1 FDI inflows and outflows, 1982-1994

(In US $ Billions)

Year Developed countries Developing countries All countries

1982-1986 43 53 19 4 61 57

1989 172 202 29 15 200 218

1990 176 226 35 17 211 243

1991 115 188 41 11 158 199

1992 111 171 55 19 170 191

1993 129 193 73 29 208 222

1994 135 189 84 33 226 222

Source: World Investment Report 1995: Transnational Corporations and Competitiveness

Among the all DCs, FDI became increasingly important for East, South and South-East

Asia in the latter half of 1980s as the newly industrializing economies emerged as important

investors, seeking new low-cost production locations in neighboring countries in order to

maintain their competitiveness in export markets. This region experienced the highest

growth of inflow with 37% per annum or in other word recipient of over half of all FDI

flows to DCs during the 1985-1989. This sustained increase can partly attributed to the

continuous attractiveness of the newly industrializing economies, to the growth of

investment opportunities in several ASEAN member countries and to the emergence of

China as an important host country in the region.

4.2 POST-1990S EXPERIECNE

The year 1990s led the world into a new era, by bringing fundamental changes. It is

the decade of globalization, liberalization and acceptance of privatization with

participation of foreign investors particularly in DCs.

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Global FDI flows, which had increased in the second half of 1980s, due to countries

welcoming stance on FDI continued to rise systematically in 1990s. FDI grew by 22%

in the first half of 1990s and 40% in the second half, faster than other economic

aggregates like world production, capital formation and trade. World economic

growth and the response of MNCs to technological development, international

competition and liberalization propelled global FDI flows to unprecedented levels

from $225 million in 1990-1995 to a record of $1.5 trillion in 2000. Inward FDI flows

as a percentage of GFCF increased from 4.1% in 1990-95 to 22% in 2000. And GDP

increased from 8.9% in 1990 to 20% in 2000.

Industrial countries accounted for much of upsurge in FDI flows. Their share in the world

FDI rose from a low of $145 billion in 1990-1995 to $1 trillion in 2000. Inward FDI

flows to developed countries as percentage of GFCF increased from 3.6% in 1990-95 to

25% in 2000 and as percentage of GDP from 8.1% in 1990 to 17.1% in 2000.

Within the developed world, the share of Triad (the European Union, Japan and the

United States) in total world FDI inflow and stocks fluctuated at around 60-70%. The

share of EU in FDI inflows into Triad was 40.3% in 1990 as compared to 46% in

2000. The United States remained the world’s largest FDI recipient country as inflows

reached $300 billion in 2000 as compared to $40 billion in the first half on 1990s.

Inflows to Japan grew moderately, total FDI inflows increased from $1 billion in

1990-95 to $8.3 billion in 2000.

During 1990s, the number of DCs receiving sizeable amount of inflows increased

significantly and FDI became the single largest source of foreign capital for many

DCs. Their share in world FDI inflows rose from 17.5% in 1990 to 21.7% in 2000.

Developing countries share in FDI inflow grew from $74 billion in 1990-1995 to

the highest amount of $237 billion in 2000. Inward FDI flows as percentage of

GFCF rose from 5.7% in 1990-95 to 13.4% in 2000 and as percentage of GDP

from 13% to 30.9% of the same period. The boom in investment flows to DCs was

a reflection of sustained economic growth and continuing liberalization and

privatization in these countries, as well as the increasing integration of the DCs

into the investment plans of MNCs.

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The growth of FDI flows to DCs unevenly distributed among regions and groups.

Most FDI inflows concentrated in 10 to 15 host countries overwhelmingly in Latin

America and Asia. FDI flows into Latin America and the Caribbean was $22 billion

in the first half of 1990s and tripled in second half and reached to $95 billion in 2000.

In developing Asia, FDI inflows rose from $ 47 billion in 1990-1995 and to a record

level of $133 billion in 2000 (Table 4.2). Investment flows to these countries was due

to strengthening the position of certain DCs in the region, emergence of regional

corporations and efforts of almost all those countries to open up their economies to

FDI and liberalizing their policies.

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Table 4.2 FDI Inflows in Selected Asian Developing Countries

During 1990-2008 (Million Dollars)

Host Region/ Economy 1990-1995 1996 1997 1998 1999 2000

World 225321 386140 478082 694457 1 088263 1 491 934

Developed economies 145019 219908 267947 484239 837761 1 227476

European Union 84165 110376 127919 262216 487898 808519

United States 40 829 84 455 103 398 174 434 283 376 300 912

Japan 1 144 228 3 224 3 193 12 741 8 32

Developing economies 74 288 152685 191022 187 611 225 140 237 894

Latin America and the Caribbean 22 259 52 856 74 299 82 203 109 311 95 405

Asia and the Pacific 47 710 93 994 105 978 96 386 103 008 133 795

Asia 47 321 93 331 105 828 96 109 102 779 133 707

West Asia 2 096 2 898 5 645 6 705 324 688

Iran, Islamic Republic of -17 26 53 24 35 39

South, East and South-East Asia 44 564 87 843 96 338 86 252 99 990 131 123

China 19 360 40 180 44 237 43 751 40 319 40 772

Hong Kong, China 4 859 10 460 11 368 14 770 24 596 61 938

India 703 2 525 3 619 2 633 2 168 2 319

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Host Region/ Economy 2001 2002 2003 2004 2005 2006 2007 2008

World 735 146 716 128 632 599 742 143 945 795 1 461 074 1 978 838 1 697 353

Developed economies 503 144 547 778 442 157 418 855 590 311 972 762 1 358 628 962 259

European Union 322 954 420 433 338 678 204 245 486 409 590 305 842 311 503 453

United States 124 435 71 331 56 834 135 826 101 025 237 136 271 176 316 112

Japan 6 202 9 239 6 324 7 816 2 775 -6 506 22 549 24 426

Developing economies 204 801 155 528 166 337 283 030 314 316 433 764 529 344 620 733

Latin America and the Caribbean 85 373 50 492 46 908 94 290 541 93 303 127 491 144 377

Asia and the Pacific 102 264 92 042 101 424 170 722 209 127 283 402 332 682 388 709

Asia 102 066 92 009 101 278 169 999 208 744 282 127 331 425 387 828

West Asia 4 133 5 691 6 522 20 839 41 554 67 633 77 609 90 255

Iran, Islamic Republic of 33 548 482 282 360 1626 1658 1492

South, East and South-East Asia 94 365 86 318 94 755 149 160 167 190 214 495 253 816 297 573

China 46 846 52 743 53 505 60 630 72 406 72 715 83 521 108 982

Hong Kong, China 22 834 9 682 13 624 34 032 33 618 45 054 54 365 63 003

India 3 403 3 449 4 269 5 771 6 676 20 336 25 127 41 554

Source: Compiled from the various issues of WIR, UNCTAD

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Some newly industrializing economies, for example, Hong Kong (China), Singapore and

Taiwan province of China emerged as important hosts and home economies of FDI.

At regional level, South, East and South-East Asia received the highest amount of FDI from

$44 billion in 1990-1995 to its highest level of $131 billion in 2000. The greatest increase

took place in Hong Kong (China) in particular, experienced an unprecedented FDI boom,

with inflows amounting $4 billion in the first half of 1990s to $62 billion in 2000 and

making it the top FDI recipient in Asia as well as among DCs. FDI flows to China rose

from $19 billion in first half of 1990s and at $41 billion remained fairly stable during

second half (1995 to 2000) and became the largest host country for FDI among the DCs

and the second largest host country in the world. The world's leading manufactures of

computer, electronics, telecommunication equipment pharmaceuticals, petrochemicals and

power generating equipment extended their production networks to this country.

The inflow of FDI to South Asia increased moderately. India, the largest recipient in

the subcontinent received $703 million during 1990 to 1995. After India's economic

reforms FDI inflows started growing in this country and raised to $3 billion in 1997

the highest level after reforms. By 2000 India received $2 billion FDI which was

1.8% of FDI inflows into DCs and India occupied 12th rank.

In West Asia FDI inflows rose slowly, with some fluctuations, by 0.3% during 1990s.

Its share from total FDI Inflows during 1990-95 increased from $2 billion to $6

billion in 1998 but decreased to $688 million in 2000. Islamic Republic of Iran had

negative FDI (outflows) of $-17 million in 1990-1995. But after introducing of

economic reforms with particular consideration on foreign investment in 1997-98,

Iran received FDI worth at $39 million in 2000.

By entering to the third millennium global FDI flows declined sharply for three years

from 2001 to 2003. In 2001 FDI slowdown by 41% to $735 billion and fell by another

fifth in 2002 to $716 billion, just half the peak in 2000. In 2003 inflows fell again by

18% to $632 billion. This reversal after years of steady growth reflects few factors:

the slowing of economic activity in major industrial economies, sluggish growth in

the euro area, and a sharp decrease in their stock market activity. Developed countries

borne the brunt of declining FDI and DCs also suffered.

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Developed countries affected significantly and FDI inflows fell by about half, from $1

trillion in 2000 to $503, $547 and $442 billion in 2001, 2002 and 2003 respectively.

Inflows to DCs decreased by much less from $237 billion in 2000 to $204 and $155

billion in 2001 and 2002. To the extent that the events of 11 September 2001

exacerbated this slowdown, they also contributed to the further decline in FDI.1

In 2003, FDI inflows to DCs rose by 9% to $166 billion. Inflows varied by regions

and top ten recipients accounted for almost three-fourths of total flows to DCs. FDI

inflows accounted for 72% of all resource flows to DCs and their share in global FDI

inflows rose from 8% to 31%.

On account of a strong increase in FDI flows to DCs, 2004 saw a slight rebound in global

FDI by 27% after three years of sluggish growth at $742 billion. Inflows to DCs rose by

40% to $283 billion. As a result, their share in world FDI inflows reached 36% the

highest since 1997. The developed countries share in FDI flows after a significant fall

during 2001-2003 reached to just 30% of their peak level in 2000 to $418 billion.

Many factors help to explain why the growth of FDI was particularly pronounced

in DCs in 2004. Intense competitive pressures in many industries are leading firms

to explore new ways of improving their competitiveness. Some of these ways are

by expanding operations in the fast-growing markets of emerging economies to

boost sales, and by rationalizing production activities with a view to reaping 1 - The effects of the 11 September 2001 on FDI flows are difficult to gauge. Company surveys suggest that they were limited. In October/November 2001, a survey by UNCTAD, the Agence Française pour les Investissements Internationaux and Andersen Consulting revisited a number of the firms they had surveyed before 11 September (UNCTAD, 2001). The finding was that few expected to change their investment plans in the light of the attacks. Similarly, a survey by the Japan External Trade Organization (JETRO) found in October 2001 that nearly half the Japanese firms surveyed did not expect to change their FDI plans. These findings are consistent with a survey by A.T. Kearney in September/October 2001: two-thirds of corporate executives of the world's 1,000 largest firms said that they intended to invest abroad at more or less the levels already planned, 16 per cent said that their FDI in 2001 would increase, and 20 per cent that it would decline. A survey of 643 firms by the Multilateral Investment Guarantee Agency (MIGA) in October 2001 found that there was no effect on the expansion plans of 64 per cent of respondents (MIGA, 2002). Virtually none of the respondents intended to cancel their FDI projects. On the other hand, the higher level of uncertainty created by the September 11 events, including higher perceived political risk (associated with war and terrorism), may have induced some companies to adopt a "wait-and-see" attitude. Firms may have placed planned investments on hold until they had a clearer picture of economic developments and the longer-term impact of the events on the US. This was reflected in the JETRO survey, according to which more than half the respondents were unable to make an assessment. Some companies are reported to have cancelled planned investments after the September 11 events. (World Investment Report 2002, P.5)

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economies of scale and lowering production costs. Higher prices for many

commodities have further stimulated FDI to countries that are rich in natural

resources such as oil and minerals.

By 2005 global FDI flows grew substantially by 29% to $945 billion, largely

reflecting a significant increase in cross-border M&As both in value and in number of

deals. While inward FDI inflows as percentage of GFCF since 2001 had been

decreased due to slow down of FDI flows, by 2005 rose again to 10.4% and FDI stock

as percentage of GDP reached to 22.7%.

FDI inflows in developed countries amounted to $590 billion an increase of 37% over

2004. The five largest host economies (UK, US, France, Netherlands and Canada)

accounted for 75% of total inflows to developed countries. FDI inflows as percentage

of GFCF to these countries increased to 9.3% and FDI Stock as a percentage of GDP

rose to 21.4%.

In DCs, FDI inflows rose by another 22% to the highest ever recorded of $314 billion,

despite record inflows into DCs, the gap in FDI inflows between developed and DCs

reached to over $200 billion. FDI inflows as percentage of GFCF rose to 12.8% and

FDI stock as percentage of GDP to 27%.

At the regional level, FDI inflows in Latin America and the Caribbean with some

fluctuations rose from $85 billion in 2001 to $94 billion in 2004 and again reduced to

$75 billion in 2005.

FDI inflows to Asia with some fluctuations reduced to $102 and $92 billion in 2001

and 2002 respectively. By 2003, it again recovered and in 2005 FDI inflows reached

to $208 billion. Inflows to the countries in South, East and South-East Asia decreased

to $94 billion in 2001 but in 2005 rose to $167 billion. FDI inflows to China increased

from $46 billion in 2001 to $72 billion in 2005.

In South Asia FDI inflows increased to $9 billion in 2005. The highest FDI flows

among the countries in South Asia took place in India where FDI inflows rose from

$3 billion in 2001 to its highest level of $6 in 2005.

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In West Asia, FDI inflows had some fluctuations. Inflows increased to $4 billion in

2001 and $5 billion in 2002 but again rose to its highest level of $41 billion in 2005.

Islamic Republic of Iran out of total flows to this region received $33 million in 2001

and in 2005 total FDI inflows reached to $360 million.

Due to emergence of some new trends, FDI inflows soared to reach $1,461 billion a

growth of 38% in 2006 and 30% in 2007 to reach a high record of $1979 billion

(Figure 4.1). The rise in global FDI flows was partly driven by increasing corporate

profits worldwide and resulting higher stock prices that raised the value of cross-

border M&As. M&As continued to account for a high share of FDI flows, but

greenfield investment also increased, especially in developing and transition

economies. Reinvested earnings became an important component of inward FDI, they

accounted almost for 50% of total inflows in DCs alone.

Figure 4.1 FDI inflows, global and by groups of economies, 1980–2008

(Billions of Dollars)

Source: World Investment Report 2009.

In 2008 global FDI flows severely affected worldwide by the economic and financial

crisis and FDI inflows reduced to $1,697 billion a decline of 14%. FDI flows as

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percentage of GFCF also reduced to 12.3% from a high rate of 16% in 2007 but FDI

stock as percentage of GDP rose to 24.5%.

The crisis changed the FDI landscape and investments to developing and transition

economies surged. Their shares in global FDI inflows grew by 37% and 7%

respectively the combine share was 43%, close to the record share in 2004 (Figure

4.2). This was partly due to a concurrent large decline in FDI flows to developed

countries by 29%.

Figure 4.2 Shares of the three major groups of Economies in global FDI inflows 1990–2008

(Percent)

Source: World Investment Report 2009.

The decline in FDI inflows to developed countries was mostly due to cross-border

M&A sales that fell by 39% in value after a five-year boom ended in 2007. FDI

inflows amounted to $ 972 billion in 2006 and $962 billion in 2008 down from the

previous year 2007 a pick of $1358 billion. As a result FDI flows as percentage of

GFCF and FDI stock as percentage of GDP reduced to 11.4% and 24.7% respectively

as compare to previous year.

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These declines occurred in all major host countries except the United States which

maintained its position as the largest host and home country in 2008 with inflow of

$316 billion. The United Kingdom lost its position as the largest source and recipient

country of FDI among European countries. The fall in inward FDI was more

pronounced in the manufacturing and services sectors. FDI policy environments in

developed countries in 2008 were influenced by the continuing public debate about

the cross-border investments and by concerns of new investment protectionism in

developed countries in reaction to the financial and economic crisis. Some developed

countries adopted or amended rules concerning the review of foreign investment on

national security grounds, while others adopted measures aimed at further

liberalization of their investment regimes. Japan faced negative FDI worth at $ - 6

billion but in the next two years it recovered at FDI inflow reached to $22 and $24

billion in 2007 and 2008 respectively.

Developing countries weathered the global financial crisis better than developed

countries, as their financial systems were less closely interlinked with the hard-hit

banking systems of the United States and Europe. Their economic growth remained

robust, supported by rising commodity prices. FDI inflows continued to grow but at a

much slower pace than in previous years, posting a 17% to $621 billion in 2008 as

compare to $433 in 2006 and $529 in 2007. FDI inflow as percentage of GFCF in

2008 slightly reduced to 12.8% from 13% in 2006 and 2007.

By region, FDI inflows increased considerably to Asia from $283 and $332 billion in

2006 and 2007 to $388 billion in 2008. South, East and South-East Asia continued to

register strong growth in FDI inflows in 2008 by 17% to reach a new high of $297

billion. Inflows into the major economies in the region varied significantly. They

surged in China with inflows of $108 billion and $63 billion in Hong Kong (China).

South Asia also received a highest amount of FDI inflows of $50 billion and India

ranked among the most attractive location with FDI inflows of $41 billion in 2008 as

compare to $20 and $25 billion in 2006 and 2007 respectively.

FDI inflows to West Asia continued to rise; they totalled $90 billion representing a

16% increase because of more liberal FDI related policies in a number of countries.

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Examples include reductions in the rate of tax level on foreign companies,

Privatization of State-owned enterprises, liberalization of the exchange rate regime,

improved access to financing by investors and investment facilitation. FDI inflows to

Iran rose from $ 1626 million in 2006 to $1658 million in 2007 but slightly decreased

to $1492 million in 2008.

4.3 POLICY DEVELOPMENT OF FDI

During the last years several countries lowered existing obstacles to foreign

investment, thereby continuing the trend of more openness towards FDI. Measures in

this regard included raising FDI ceilings or the level of the general review threshold.

At the same time, various countries took new steps to regulate FDI. The trend of

scrutinizing foreign investments for national security reasons continued in several

countries. Some countries in Latin America took further steps to nationalize strategic

industries, particularly extractive industries.

In 2008, National Laws and Regulations related to FDI indicate that 110 new FDI

related measures were introduced by a total of 55 countries (table 4.3). Of these, 85

measures were more favourable to FDI. Compared to the previous year, the

percentage of less favourable measures for FDI has remained unchanged and stands at

23 per cent (table 4.3).

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Table 4.3 National regulatory changes, 1992-2008

Item 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of countries that introduced changes

43 96 49 63 66 76 60 65 70 71 72 82 108 92 91 58 55

Number of regulatory changes

77 100 110 112 114 150 145 139 150 207 246 242 270 208 177 98 110

More favourable

77 99 108 106 98 134 136 130 147 193 234 218 234 162 142 74 85

Less favourable

0 1 2 6 16 16 9 9 3 14 12 24 36 41 36 24 25

Source: World Investment Report 2009, UNCTAD

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From a regional perspective, South, East and South-East Asia and Oceania had the

highest share of regulatory changes (25 per cent), followed by developed countries

(20 per cent) (figure 4.3).

Figure 4.3 Regional distribution of FDI related measures in 2008

Source: World Investment Report 2009, UNCTAD

In all regions, the number of changes more favourable to FDI clearly exceeded those

that were less favourable. They accounted for 75 per cent of the 16 measures adopted

in Africa, 79 per cent of the 28 measures adopted in South, East and South-East Asia

and Oceania, 80 per cent of the 15 measures adopted in the Commonwealth of

Independent States (CIS), 91 per cent of the 22 measures in the developed countries,

55 per cent of the 20 measures adopted in Latin America, and 89 per cent of the 9

measures taken in West Asia and the SEE countries combined.

Out of the 110 new measures adopted during the review period, 33% introduced more

favourable entry regulations, and another 44% of all measures improved the treatment

or operations. Only 13% and 10% were less favourable in entry and treatment or

operations, respectively (figure 4.4).

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Figure 4.4 Nature of FDI related measures in 2008

Source: World Investment Report 2009, UNCTAD

4.4 SECTORAL AND INDUSTRIAL PATTERN OF FDI

The most striking feature of the sectoral distribution of the FDI during the last

decades is the decline of the share of the primary sector globally as well as in

developed and developing countries. The share of manufacturing in total FDI

remained stable, while services sector experienced a corresponding increase globally

as well as in both developed and developing countries.

FDI in service sector has been growing over the past years at a faster rate than FDI in

other sectors. In the early 1970s, this sector accounted for only one-quarter of the

world FDI stock; in 1990 this share was less than one-half; and by 2002, it had risen

to about 60% or an estimated $4 trillion. Over the same period, the share of the

primary sector in world FDI stock declined from 9% to 6%, and that of manufacturing

fell even more, from 42% to 34%.

In 2003 the share of the primary sector remained stable (at 5%) with oil and gas in

particular and the share of manufacturing fell from 57% in 2002 to 53% in 2003. The

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share of services rose in FDI inflows into many other economies, for instance Asia's

total FDI stock increased from 43% in 1995 to 50% in 2002. In 2003, within service

sector, more than half of FDI attracted by the finance, transport, telecommunications

and business services and in 2004 investment in services particularly financial

services, accounted for the bulk of the world FDI stock and 63% of the total value of

cross-border M&As with financial services responsible for one-third of the value of

cross-border M&As in this sector.

By 2005, service sector gained the most from the surge of FDI, particularly finance,

telecommunications and real estate. The predominance of services in cross border

investments is not new. What is new is the further and sharp decline in the share of

manufacturing sector and the steep rise of FDI into the primary sector (with a six fold

increase in cross-border M&A sales), primarily the petroleum industry. Thus, the primary

sector’s share in world FDI back to a level comparable to that of the late 1980s.

The growth of FDI in the primary sector, especially in mining activities, is very recent

if viewed over the past 25 years. FDI in mining (including oil and other mining),

which accounts for the bulk of the primary sector, has been largely responsible for the

recent growth of global FDI. Current FDI growth seems to be led primarily by a few

specific industries, rather than being broad-based sectorally. Specifically, in 2005, oil

and gas, utilities (e.g. telecommunications, energies), banking and real estate were the

leading industries in terms of inward FDI. For the first time since 1987, the petroleum

(includes oil and natural gas) industry became the largest FDI recipient, accounting

for 14% of all cross-border M&A sales, followed by finance and telecommunications,

the later two partly as a result of further liberalization in some countries. These three

activities accounted for more than one third of the total value of M&A deals. They

were closely followed by real estate, which has also become an important recipient of

FDI since 2004 following the liberalization of FDI entry by various countries. In

manufacturing, FDI in the industries related to primary products rose. For example,

cross-border M&As in oil refining doubled and those in rubber and plastic goods

quadrupled, while in metals industries they rose sixfold. Metals, telecommunications

and real estate also attracted more Greenfield FDI than in 2004.

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In 2006, the primary sector’s share of the estimated total world inward FDI stock

stood at 8%, and the sector accounted for 13% of world FDI inflows in the period

2004-2006. Manufacturing accounted for nearly one third of the estimated world

inward FDI stock in 2006, but for only a quarter of world FDI inflows in the period

2004–2006. Its share in world inward FDI stock has fallen noticeably since 1990 in

both developed and developing economies declining by more than 10 percentage

points. The services sector accounted for 62% of estimated world inward FDI stock in

2006, up from 49% in 1990. Within developed countries in 2006, service sector

continued to dominate FDI flows. Manufacturing sector gained in importance in terms

of both target and acquiring firms, while the importance of the primary sector

declined compared to 2005.

In 2007, there was a significant upsurge of cross-border M&As in manufacturing,

with cross-border M&A deals in that sector rising by over 86%, compared with

increases of 1% and 36% in the primary and services sectors respectively. The

increase in FDI in the primary sector in 2007 was more evident in Greenfield

investments. Their number rose from 463 in 2005 to 490 in 2006 and 605 in 2007.

By increasing of FDI inflow to service sector nearly all of the major service groups

have benefited from the shift of FDI towards services that began more than a quarter

century ago. In the case of some services, such as trade and financial services, the

increase began well before 1990, when they accounted for 12% and 20%,

respectively, of total inward FDI stock globally. While trade, financial services and

business activities continue to account for the lion’s share of FDI in the sector, other

services, including infrastructure, have begun to attract increasing shares of FDI since

the 1990s. For example, the value of cross-border M&As worldwide in electricity, gas

and water rose from $63 billion (about 6% of total sales) in 2006 to $130 billion

(nearly 8% of the total) in 2007. The slow but steady increase in the share of

infrastructure industries in FDI, including in developing countries, raises questions as

to how FDI can contribute to development in general and to progress towards meeting

the Millennium Development Goals (MDGs), in particular, through more and better

infrastructure services for the poor.

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By 2008, there was a relative decline in the share of services in global inward FDI

while the share of the manufacturing sector increased in all regions. The share of the

primary sector rose significantly in developed countries, while it fell in developing

countries and transition economies.

In 2008, there were a few exceptions, notably in the primary sector and in the food,

beverages and tobacco industry, where FDI transactions increased. Overall, there was

a decline in M&A activity in both manufacturing and services, but with a relative shift

to non-financial services, and to food, beverages and tobacco. The value of cross-

border M&As in the primary sector increased by 17%. Rising prices of oil and other

commodities in the first half of 2008 triggered a further increase in the value of cross-

border M&A investments in the mining, quarrying and petroleum industry group, to

$83 billion. The increase in FDI in the primary sector was also reflected in the

growing number of Greenfield investments, which reached 1,022 in 2008 compared

with 611 in 2007.

In manufacturing which accounts for nearly one third of estimated world inward FDI

stocks the value of cross-border M&A sales fell by 10% in 2008. The decline was

very uneven by industry. Textiles and clothing, rubber and plastic products, as well as

metals and metal products, saw an average fall of 80%, while in industries, such as

machinery and equipment, the decrease was much less dramatic.

At regional level, in 2008, FDI directed towards the services sector in South, East and

South-East Asia continued to increase, as also reflected in the rising value of cross-

border M&A sales in that sector. In the NIEs, a major part of their cross-border

M&As continued to be in services, although in late 2008, and particularly in early

2009, they fell sharply in banking. This is because banks and private equity firms

based in the United States as well as Europe are not able to invest any more, and have

even started to divest due to the difficulties they face at home.

In China and India FDI growth was significant in such services as infrastructure

and retail. For example, following its global competitors such as Metro AG

(Germany), Wal-Mart Stores (United States) opened its first store in India in 2008.

In India in 2008, FDI in industries such as steel continued to increase, including

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from Western steelmakers, as well as from Chinese metal companies (Minmetals

and Xinxing for instance).

In west Asia sectoral data for Saudi Arabia and Turkey, which together attracted 63%

of total FDI inflows to the region in 2008, show an FDI boom in real estate

acquisitions. Inflows to this industry increased by 120%, to $10.9 billion. There was a

28% increase in the manufacturing sector mainly oil refining and petrochemicals as

well as food and beverages resulting in total investments of $17.8 billion. On the other

hand, the services sector with $20.3 billion worth of inflows registered a 3% decline,

and the primary sector saw an even larger decline of 13% with inflows amounting to

$4 billion. Within the services sector, FDI increased strongly in construction (104%)

and trade (154%), to $3.7 billion and $2.9 billion respectively, while it decreased by

36% in finance to $8.4 billion.