UNCTAD/WIR/2002 & Corrigendum

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

World Investment Report 2002 Transnational Corporations

and Export Competitiveness

UNITED NATIONS New York and Geneva, 2002

Printed in Switzerland UNCTAD/WIR/2002/Corr.1 GE.02-51422-August 2002 – 14,200 English Only

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CORRIGENDUM Ref.: Sales N° E.02.II.D.4

UNCTAD/WIR/2002

12 June 2003 Geneva

United Nations Conference on Trade and Development

WORLD INVESTMENT REPORT 2002 TRANSNATIONAL CORPORATIONS AND EXPORT COMPETITIVENESS

Page 86: Table IV.1. The world's top 100 non-financial TNCs, ranked by foreign assets, 2000 Total assets of Repsol-YPF (ranked 20th) should read $48,776, not $487,763. Page 127: Table V.3. Intel's manufacturing sites, January 2002 should read as follows:

Country Facility Function Year built Current process technology

United States Facility 1 Wafer fabrication1978, 1992, 1996, 1999, 2003

a0.13-, 0.25-, 0.35-micron 16 000

Facility 2 Wafer fabrication 1980, 1993, 2002 a

0.13-, 0.18-, 0.25-, 0.35-micron 5 500

Facility 3 Wafer fabrication 1988 0.13-, 0.18-micron 8 500

Facility 4 Wafer fabrication 1994 0.28-, 0.35-, 0.50-micron 2 700

Facility 5Wafer fabrication, assembly and testing 1996, 1999, 2001 0.13-, 0.18- micron 10 000

Facility 6 Systems Manufacturing 1996 .. 1 400

Facility 7 Wafer fabrication 2001 0.18-micron 1 845

Ireland Facility Wafer fabrication 1993, 1998, 2004 a

0.18-, 0.25-micron 3 400

Israel Facility 1 Wafer fabrication 1985 0.35-, 0.50-, 0.75-, 1.0-micron 800Facility 2 Wafer fabrication 1999 0.18-micron 1 500

Malaysia Facility 1Board manufacturing, assembly and testing 1996, 1997 .. 7 790

Facility 2 Assembly and testing 1988, 1994, 1997 ..

Philippines Facility 1 Assembly and testing 1997, 1998 .. 5 984Facility 2 Assembly and testing 1979, 1995 ..

China Facility Assembly and test 1997, 2001 .. 1 227

Costa Rica Facility Assembly and test 1997, 1999 .. 1 845

Source : www.intel.com, January 2002.

a Estimated construction completion.

Employees

Table V.3. Intel’s manufacturing sites, January 2002

Printed in Switzerland UNCTAD/WIR/2002/Corr.1 GE.02-51422-August 2002 – 14,200 English Only

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Page 299: first paragraph, line 3, …"except for New Zealand"… Should read …"except for Australia and New Zealand".... Page 315: the column of 1980 under North America For Canada, should read 23,783 For the United States, should read 215, 375. Page 315: Annex table B.4, the column of 1980 United States "United States 0", should read "United States –".

NOTE

UNCTAD serves as the focal point within the United Nations Secretariat for all matters related to foreigndirect investment and transnational corporations. In the past, the Programme on Transnational Corporations wascarried out by the United Nations Centre on Transnational Corporations (1975-1992) and the TransnationalCorporations and Management Division of the United Nations Department of Economic and Social Development(1992-1993). In 1993, the Programme was transferred to the United Nations Conference on Trade and Development.UNCTAD seeks to further the understanding of the nature of transnational corporations and their contribution todevelopment and to create an enabling environment for international investment and enterprise development.UNCTAD’s work is carried out through intergovernmental deliberations, technical assistance activities, seminars,workshops and conferences.

The term “country” as used in this study also refers, as appropriate, to territories or areas; the designationsemployed and the presentation of the material do not imply the expression of any opinion whatsoever on the partof the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of itsauthorities, or concerning the delimitation of its frontiers or boundaries. In addition, the designations of countrygroups are intended solely for statistical or analytical convenience and do not necessarily express a judgementabout the stage of development reached by a particular country or area in the development process. The referenceto a company and its activities should not be construed as an endorsement by UNCTAD of the company or itsactivities.

The boundaries and names shown and designations used on the maps presented in this publication do notimply official endorsement or acceptance by the United Nations.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have beenomitted in those cases where no data are available for any of the elements in the row;

A dash (-) indicates that the item is equal to zero or its value is negligible;

A blank in a table indicates that the item is not applicable, unless otherwise indicated;

A slash (/) between dates representing years, e.g., 1994/95, indicates a financial year;

Use of a hyphen (-) between dates representing years, e.g., 1994-1995, signifies the full period involved,including the beginning and end years;

Reference to “dollars” ($) means United States dollars, unless otherwise indicated;

Annual rates of growth or change, unless otherwise stated, refer to annual compound rates;

Details and percentages in tables do not necessarily add to totals because of rounding.

The material contained in this study may be freely quoted with appropriate acknowledgement.

UNITED NATIONS PUBLICATION

Sales No. E.02.II.D.4

ISBN 92-1-112551-0

Copyright © United Nations, 2002All rights reserved

Manufactured in Switzerland

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PREFACE

In today's globalizing world economy, no country can sustain growth or achieve development withoutactive participation in world trade. All countries need exports to help them raise standards of living andescape poverty. For developing countries in particular, the challenge is not only to expand and diversifytheir exports, but also to make them more competitive.

Transnational corporations (TNCs) are increasingly involved in this process, providing additionalresources and technology and facilitating access to new markets. But in order to take full advantage of theirpartnerships with TNCs, governments must do their utmost to mobilize their own countries' resources andcapabilities. Investments in education and health pay enormous dividends in building productive labourforces. Investments in science and technology — and in particular information and communicationstechnologies — are essential if countries are to keep pace with an increasingly knowledge-based economy.These are areas where far-sighted government policies can make the difference between integration andmarginalization.

This year's World Investment Report examines the role of TNCs in making the exports ofdeveloping and transition countries more competitive. It highlights the strategies used by TNCs in theirinternational production networks. And it aims to help countries — especially the least developed countries— adopt sound policies, attract foreign investment and make their exports, as they surely should be, a keypart of their strategy to achieve Millennium Development Goals. I hope this report reaches a wide readershipand strengthens global partnerships for development.

Kofi A. AnnanNew York, July 2002 Secretary-General of the United Nations

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ACKNOWLEDGEMENTS

The World Investment Report 2002 (WIR02) was prepared - under the overall direction ofKarl P. Sauvant - by a team led by Anh-Nga Tran-Nguyen and comprising Victoria Aranda, AmericoBeviglia Zampetti, Kumi Endo, Torbjörn Fredriksson, Masataka Fujita, Kálmán Kalotay, GabrieleKöhler, Padma Mallampally, Michael Mortimore, Abraham Negash, Ludger Odenthal, Miguel PérezLudeña, Katja Weigl and James Xiaoning Zhan. Specific inputs were prepared by Sung Soo Eun, PeterFroehler, Jörg Weber and Zbigniew Zimny.

Principal research assistance was provided by Mohamed Chiraz Baly, Bradley Boicourt,John Bolmer, Lizanne Martinez and Tadelle Taye. Four interns assisted with the WIR02 at variousstages: Fatma Ben Fadhl, David Fischer, Stijn Mentrop and Pauline Rauwerda. The production of theWIR02 was carried out by Christopher Corbet, Monica Adjivon-Conteh, Christiane Defrancisco, LyndaPiscopo, Chantal Rakotondrainibe and Esther Valdivia-Fyfe. Graphics were done by Diego Oyarzun-Reyes. WIR02 was desktop published by Teresita Sabico. The Report was edited by Vishwas Govitrikarand Praveen Bhalla.

Sanjaya Lall was principal consultant and adviser.

Experts from within and outside the United Nations provided inputs for WIR02. Majorinputs were received from Greg Felker, Don Lecraw, Henry Loewendahl and Alvin G. Wint. Inputswere also received from John O.B. Akara, Katalin Antalóczy, Octavio de Barros, Daniel Chudnovsky,Mark Curtis, Andrea Éltetö, Carlos García Fernández, Andrea Goldstein, Masayo Ishikawa, DanutaJablonska, Soon-Hyung Kwon, Antônio Corrêa de Lacerda, Andrés López, Marjan Svetlicic, Friedrichvon Kirchbach, Hoyuan Xing and Yuan Ziwei.

A number of experts were consulted on various chapters. The report has also benefitedfrom inputs provided by participants in two regional seminars organized jointly with the Center onTransnational Studies of Nankai University (in December 2001, Tianjin, China) and the United NationsEconomic Commission for Latin America and the Caribbean (in January 2002, Santiago de Chile).The UNCTAD FDI Indices were discussed at an ad-hoc expert meeting in November 2001. The specialtopic was discussed at a Global Seminar in Geneva in June 2002 in cooperation with the DevelopmentPolicy Forum of the German Foundation for International Development.

Comments and feedback were received during various stages of preparation from YilmazAkyuz, Armenia C. Ballesteros, Nazha Benabbes Taarji, Douglas van der Berghe, Karl Brenke, RudolfBuitelaar, Graciana del Castillo, Marquise David, José Durán, Persephone Economou, Enrique Egloff,Magnus Ericsson, David Frans, Klaus Friedrich, Anabel González, Charles Gore, Khalil Hamdani, SusanHayter, Yao-Su Hu, Grazia Ietto-Gillies, Yuthasak Kanasawat, Guy Karsenty, Faizullah Khilji, Kee BeomKim, Jesse Kreier, Nagesh Kumar, Sam Laird, Robert Lipsey, Raymond J. Mataloni, Andrew Mc Dowell,Mina Mashayekhi, John A. Mathews, Joseph Mathews, Joerg Mayer, Helge Müller, Rajah Rasiah, Christophvon Rohr, Frieder Roessler, René Samek, Valdas Samonis, Magdolna Sass, Leo Sleuwaegen, ChristianeStepanek-Allen, Shigeki Tejima, Taffere Tesfachew, Rob van Tulder and Janina Witkowska.

Numerous officials of central banks, statistical offices, investment promotion agencies and othergovernment offices, and officials of international organizations and non-governmental organizations, as wellas executives of a number of companies, also contributed to WIR02, especially through the provision of dataand other information. Most particularly, the Malaysian Industrial Development Authority, the Ministry ofForeign Trade and Economic Cooperation of China, the Philippines Economic Zone Authority and the Boardof Investment of Thailand provided information on policies.

The Report benefited from overall advice from John H. Dunning, Senior Economic Advisor.

The financial support of the Governments of Germany, Norway and Sweden is gratefullyacknowledged.

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Table of contents

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PREFACE ...................................................................................................................................................... iii

ABBREVIATIONS ....................................................................................................................................... xiii

OVERVIEW .................................................................................................................................................. xv

PART ONETRENDS IN INTERNATIONAL PRODUCTION

CHAPTER I. GLOBAL TRENDS ............................................................................................................. 3

Introduction .............................................................................................................................................................. 3A. Trends in FDI flows .......................................................................................................................................... 3B. Developments in international production .................................................................................................... 14

1. The significance of foreign affiliates in their host economies .............................................................. 142. The Transnationality Index of host countries ....................................................................................... 20

CHAPTER II. BENCHMARKING FDI PERFORMANCE AND POTENTIAL ................................. 23

A. Introduction and methodology ........................................................................................................................ 23B. The UNCTAD Inward FDI Performance Index ............................................................................................ 24C. The UNCTAD Inward FDI Potential Index ................................................................................................... 29D. Comparing rankings on the two Indices ........................................................................................................ 29

Annex to Chapter II. Methodology and data used for calculating UNCTAD’s Inward FDIPerformance Index and Inward FDI Potential Index .......................................................................................... 34

CHAPTER III. REGIONAL TRENDS ..................................................................................................... 37

A. Developed countries ......................................................................................................................................... 371. United States ......................................................................................................................................... 372. Western Europe ..................................................................................................................................... 40

a. European Union ........................................................................................................................ 40

b. Other Western Europe ............................................................................................................... 433. Japan ...................................................................................................................................................... 434. Other developed countries .................................................................................................................... 47

B. Developing countries ........................................................................................................................................ 491. Africa ..................................................................................................................................................... 492. Asia and the Pacific ............................................................................................................................... 553. Latin America and the Caribbean ......................................................................................................... 62

C. Central and Eastern Europe ........................................................................................................................... 69D. The least developed countries ......................................................................................................................... 73

CHAPTER IV. THE LARGEST TRANSNATIONAL CORPORATIONS ........................................ 87

A. The 100 largest TNCs worldwide .................................................................................................................... 871. Highlights .............................................................................................................................................. 872. Transnationality ..................................................................................................................................... 953. Developments in 2001 ........................................................................................................................... 99

B. The 50 largest TNCs from developing countries ........................................................................................... 991. Highlights .............................................................................................................................................. 992. The Network Spread Index ................................................................................................................... 109

C. The 25 largest TNCs from Central and Eastern Europe ............................................................................. 111

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PART TWOTNCs AND EXPORT COMPETITIVENESS

INTRODUCTION ........................................................................................................................................ 117

CHAPTER V. INTERNATIONAL PRODUCTION SYSTEMS ............................................................ 121

A. Drivers and features ......................................................................................................................................... 121B. Case studies ....................................................................................................................................................... 126

1. Control through equity relations in a technology-driven internationalproduction system: Intel ........................................................................................................................ 126

2. Control through non-equity relations in a marketing-driven internationalproduction system: Limited Brands ...................................................................................................... 132

3. Control through equity and non-equity relations in a production-driven internationalproduction system: Toyota .................................................................................................................... 134

4. Control in transition in a technology-driven international production system: Ericsson ..................... 1345. Outsourcing becomes more generalized: the rise of contract manufacturers ....................................... 139

C. Conclusions ....................................................................................................................................................... 139

CHAPTER VI. PATTERNS OF EXPORT COMPETITIVENESS ........................................................ 143

A. Global competitiveness patterns ..................................................................................................................... 143B. TNCs and exports ............................................................................................................................................. 151

1. The overall picture ................................................................................................................................ 1512. Primary products ................................................................................................................................... 1543. Services ................................................................................................................................................. 1574. Manufacturing ....................................................................................................................................... 160

C. Some winner countries ..................................................................................................................................... 1611. China ..................................................................................................................................................... 1612. Costa Rica ............................................................................................................................................. 1673. Hungary ................................................................................................................................................. 1694. Ireland .................................................................................................................................................... 1725. Mexico ................................................................................................................................................... 1736. Republic of Korea ................................................................................................................................. 176

Annex to chapter VI. Winners in world trade, 1985-2000 .................................................................................. 182

CONCLUSIONS: Benefiting from export competitiveness ..................................................................... 185

PART THREEPROMOTING EXPORT-ORIENTED FDI

INTRODUCTION ........................................................................................................................................ 193

CHAPTER VII. POLICY MEASURES .................................................................................................... 197

A. Policy related to market access ....................................................................................................................... 197B. Improving access to imported inputs ............................................................................................................. 200C. Trade facilitation .............................................................................................................................................. 201D. Export performance requirements ................................................................................................................. 203E. Incentives ........................................................................................................................................................... 204

1. The evolution of incentives ................................................................................................................... 2042. WTO rules on export subsidies ............................................................................................................. 208

a. Prohibited and actionable subsidies .......................................................................................... 208b. Special and differential treatment ............................................................................................. 211c. Doha results .............................................................................................................................. 211

3. Implications for the future use of incentives ........................................................................................ 211

F. Export processing zones ................................................................................................................................... 214

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CHAPTER VIII. TARGETED PROMOTION ......................................................................................... 221

A. Targeting export-oriented FDI ........................................................................................................................ 2211. Why target? ........................................................................................................................................... 2212. What to target? ...................................................................................................................................... 222

a. Identifying comparative advantages ......................................................................................... 223b. Segmenting the market for export-oriented FDI ...................................................................... 226

3. How to target? ....................................................................................................................................... 2304. What are the pitfalls and risks? ............................................................................................................. 235

B. Investment facilitation ..................................................................................................................................... 237C. Aftercare services ............................................................................................................................................. 238

CONCLUDING OBSERVATIONS: Benefiting more from export expansion ....................................... 243

REFERENCES ............................................................................................................................................. 249

ANNEX A. ADDITIONAL TEXT TABLES AND FIGURES ................................................................... 265

ANNEX B. STATISTICAL ANNEX ........................................................................................................... 291

SELECTED UNCTAD PUBLICATIONS ON TRANSNATIONAL CORPORATIONSAND FOREIGN DIRECT INVESTMENT ................................................................................................ 347

QUESTIONNAIRE ...................................................................................................................................... 351

Boxes

I.1. Impact of the September 11 events on FDI flows ............................................................................................. 5I.2. Changes in FDI regimes in 2001 ...................................................................................................................... 7I.3. BITs and DTTs in 2001 ..................................................................................................................................... 8I.4. Issues discussed in the WTO Working Group on the Relationship between Trade and Investment ................ 9I.5. The Doha WTO ministerial Conference on investment ................................................................................... 10I.6. UNCTAD’s post-Doha technical assistance work programme in the area of investment ................................ 11I.7. Financing international production locally ....................................................................................................... 15III.1. Going east: FDI in Germany’s new Länder ..................................................................................................... 42III.2. Is China more attractive to Japanese investors than ASEAN? ......................................................................... 44III.3. Botswana: the role of FDI in economic restructuring ...................................................................................... 53III.4. New trade and investment initiatives in sub-Saharan Africa in response to AGOA ........................................ 54III.5. The accession to the WTO of Taiwan Province of China: implications for FDI ............................................. 58III.6. FDI potential in West Asia ................................................................................................................................ 59III.7. FDI and the economic crisis in Argentina ........................................................................................................ 63III.8. Mexico: FDI in financial services .................................................................................................................... 67III.9. The new system of incentives for investors in Poland ..................................................................................... 69III.10. Toyota/PSA’s investment in the Czech Republic .............................................................................................. 69III.11. The wave of outward FDI from Slovenia ......................................................................................................... 73III.12. The United Republic of Tanzania: harnessing FDI for development ............................................................... 75III.13. UNCTAD’s Investment Policy Reviews .......................................................................................................... 81III.14. BIT negotiations with a focus on LDCs ........................................................................................................... 82III.15. Opportunities and conditions in LDCs: the UNCTAD - ICC Investment Guides ............................................ 82IV.1. Are some TNCs bigger than countries? ............................................................................................................ 90IV.2. A global player in brewing: South African Breweries ..................................................................................... 107V.1. Li & Fung: a full-package provider ................................................................................................................. 131V.2. Volkswagen’s strategy in Mexico ..................................................................................................................... 135V.3. Ford’s strategy in Mexico ................................................................................................................................. 136V.4. Flextronics: specializing in the manufacture of others’ products ..................................................................... 140VI.1. Dynamic products in world trade, 1985-2000 .................................................................................................. 147VI.2. Kenya’s dynamic horticultural export industry ................................................................................................ 155VI.3. The food value chain ......................................................................................................................................... 156VI.4. FDI in the salmon industry in Chile ....................................................................................................... 157

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VI.5. Indian computer software and services exports ................................................................................................ 158VI.6. Ireland: the growth of services exports ............................................................................................................. 159VI.7. Flextronic’s Industrial Parks in Hungary .......................................................................................................... 170VI.8. FDI and the trade balance: the case of China ................................................................................................... 186VI.9. Upgrading and embedding export-oriented operations in a host economy:

the case of Motorola in China ........................................................................................................................... 188VII.1. Potential obstacles to market access ................................................................................................................. 197VII.2. The phasing out of the Multi-Fibre Arrangement ............................................................................................. 199VII.3. Trade facilitation: what are the concerns? ....................................................................................................... 201VII.4. The Advance Cargo Information System .......................................................................................................... 202VII.5. UNCTAD’s ASYCUDA Programme ................................................................................................................ 202VII.6. The evolving use of incentives in Ireland ......................................................................................................... 204VII.7. The use of investment incentives in FDI targeting: the Malaysian experience .............................................. 206VII.8. The treatment of subsidies in the GATS ........................................................................................................... 210VII.9. Estonia: attracting export-oriented FDI by providing an enabling environment ............................................ 213VII.10. The role of EPZs in exports: evidence from selected countries ...................................................................... 214VII.11. FDI in some developing country EPZs ............................................................................................................. 215VII.12. EPZs in Hungary ............................................................................................................................................... 216VII.13. EPZs and the “race to the bottom“ ................................................................................................................... 218VIII.1. Singapore: an early mover in targeting export-oriented FDI .......................................................................... 222VIII.2. Targeting investors in a specific niche: sun-dried tomatoes in Kyrgyzstan .................................................... 223VIII.3. Trade analysis tools for investment targeting ................................................................................................... 224VIII.4. Assessing the potential for export-oriented FDI: the case of Albania ............................................................. 227VIII.5. The targeted approach of Thailand ................................................................................................................... 229VIII.6. Costa Rica’ s CINDE: the “other” story of promotional effectiveness ............................................................ 232VIII.7. Training diplomats in FDI promotion ............................................................................................................... 233VIII.8. Training courses in investor targeting ............................................................................................................... 233VIII.9. Moving from a non-focused to a targeted approach: the case of a southern European IPA ............................ 234VIII.10. Building an FDI-based cluster: the case of Socware in Sweden ...................................................................... 236VIII.11. Good governance in investment promotion ...................................................................................................... 238VIII.12. Helping an affiliate to expand exports: the case of Black & Decker in the United Kingdom ......................... 239VIII.13. Office of the Investment Ombudsman, Republic of Korea .............................................................................. 240VIII.14. Promoting supplier transnationalization ........................................................................................................... 246VIII.15. Cluster development: the case of Singapore ..................................................................................................... 248

Figures

I.1. FDI inflows and real growth rates of GDP in the world , 1980-2001 .............................................................. 6I.2. FDI inflows and real growth rates of GDP in developed countries, 1980-2001 .............................................. 6I.3. FDI inflows and real growth rates of GDP in developing countries, 1980-2001 ............................................. 6I.4. FDI inflows and real growth rates of GDP in Central and Eastern European countries, 1990-2001 ............... 6I.5. The share of the largest 5, 10 and 30 recipients in total FDI inflows

to developing countries, 1990-2001 .................................................................................................................. 11I.6. Value of cross-border M&As and their ratio to world GDP, 1987-2001 .......................................................... 12I.7. Total resource flows to developing countries, by type of flow, 1990-2001 ..................................................... 12I.8. The ratio of FDI inflows to bilateral ODA flows to developing countries, 1980-2000 ................................... 13I.9. Profitability of foreign affiliates operating in Japan and the United States, 1989-1999 .................................. 18I.10. Comparison of reinvested earnings of FDI inflows and profits of foreign affiliates

in the United States, 1983-1999 ........................................................................................................................ 19I.11. Transnationality index of host economies, 1999 .............................................................................................. 21II.1. Host country determinants of FDI .................................................................................................................... 24II.2. The UNCTAD Inward FDI Performance Index, by host economy:

the top 20 and the bottom 20, 1998-2000 ......................................................................................................... 28II.3. The UNCTAD Inward FDI Potential Index, by host economy:

the top 20 and the bottom 20, 1998-2000 ......................................................................................................... 30III.1. Developed countries: FDI flows, top 10 countries, 2000 and 2001 ................................................................ 38III.2. United States FDI inflows and outflows, by major partner, 1990-2001 ........................................................... 38III.3. United States FDI inflows and outflows, by major sector and industry, 1990-2001 ........................................ 39III.4. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index for the

United States and selected Western European countries, 1988-1990 and 1998-2000 ..................................... 39III.5. Developed countries: FDI flows as a percentage of gross fixed capital formation,

top 10 countries, 1998-2000 ............................................................................................................................. 41III.6. Planned FDI by Japanese manufacturing TNCs over the next three years, 1995-2001 ................................... 43

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III.7. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Indexfor "other" developed countries, 1988-1990 and 1998-2000 ............................................................................ 46

III.8. Japan’s imports from Japanese foreign affiliates, 1987-1999 .......................................................................... 47III.9. FDI inflows and their share in gross fixed capital formation in Africa, 1990-2001 ....................................... 48III.10. Africa: FDI inflows, top 10 countries, 2000 and 2001 ..................................................................................... 49III.11. Africa: FDI flows as a percentage of gross fixed capital formation, top 10 countries, 1998-2000 ................. 49III.12. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index

for selected countries in Africa, 1988-1990 and 1998-2000 ............................................................................ 51III.13. Africa: FDI outflows, top 10 countries, 2000 and 2001 .................................................................................. 55III.14. FDI inflows and their share in gross fixed capital formation

in developing Asia and the Pacific, 1990-2001 ................................................................................................ 56III.15. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index

for selected countries in Asia, 1988-1990 and 1998-2000 ............................................................................... 56III.16. Developing Asia and the Pacific: FDI inflows, top 10 economies, 2000 and 2001 ........................................ 57III.17. Developing Asia and the Pacific: FDI flows as a percentage of gross fixed

capital formation, top 10 economies, 1998-2000 ............................................................................................. 60III.18. Developing Asia and the Pacific: FDI outflows and their share in the world, 1990-2001 .............................. 60III.19. Developing Asia and the Pacific: FDI outflows, top 10 economies, 2000-2001 ........................................... 61III.20. FDI inflows and their share in gross fixed capital formation in

Latin America and the Caribbean, 1990-2001 .................................................................................................. 62III.21. Latin America and the Caribbean: FDI inflows, top 10 economies, 2000 and 2001 ....................................... 62III.22. Latin America and the Caribbean: FDI flows as a percentage of gross fixed

capital formation, top 10 economies, 1998-2000 ............................................................................................. 66III.23. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index

for selected countries in Latin America, 1988-1990 and 1998-2000 ............................................................... 66III.24. Spanish FDI in Brazil, Argentina, Chile and Mexico, 1994-2001 ................................................................... 67III.25. FDI in privatization in Brazil, 1996-2001 ........................................................................................................ 67III.26. FDI inflows in the manufacturing sector in Brazil, 1996-2001 ........................................................................ 67III.27. Latin America and the Caribbean: FDI outflows, top 10 economies, 2000 and 2001 .................................... 68III.28. Central and Eastern Europe: FDI inflows, top 10 countries, 2000 and 2001 .................................................. 69III.29. Central and Eastern Europe: FDI flows as a percentage of gross fixed capital formation,

top 10 countries, 1998-2000 ............................................................................................................................. 70III.30. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index

for selected countries in Central and Eastern Europe, 1992-1994 and 1998-2000 .......................................... 71III.31. Central and Eastern Europe: FDI outflows, top 10 economies, 2000 and 2001 ............................................. 72III.32. LDCs: FDI inflows as a percentage of gross fixed capital formation, top 10 countries, 1998-2000 ............... 73III.33. LDCs: FDI inflows, top 10 countries, 2000 and 2001 ..................................................................................... 74III.34. LDCs: FDI inflows and their share in the world inflows and developing-county inflows, 1986-2001 .......... 79III.35. LDC rankings based on the UNCTAD Inward FDI Performance and Potential Indices, 1998-2000 .............. 76III.36. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index

for selected LDCs, 1988-1990 and 1998-2000 ................................................................................................. 76III.37. FDI inflows and ODA flows to LDCs, 1985-2001 ........................................................................................... 77III.38. FDI inflows, cross-border M&A sales and privatizations in LDCs, 1987-2001 .............................................. 78III.39. BITs and DTTs concluded by LDCs, 1990-2001 ............................................................................................. 79IV.1. The transnationalization of the world’s top 100 TNCs, 1990-2000 ................................................................. 96IV.2 The 10 biggest increases in transnationality among the world’s top 100 TNCs, 1999-2000 ........................... 98IV.3. The 10 biggest decreases in transnationality among the world’s top 100 TNCs, 1999-2000 .......................... 98IV.4. The transnationalization of the top 50 TNCs from developing economies, 1993-2000 ................................. 103IV.5. Shares of industry groups among the top 50, 1999-2000 ................................................................................ 105IV.6. The top 50 industry groups and their average transnationality index, 1993-1999 ........................................... 106IV.7. Foreign assets of the largest TNCs from developing countries, 1999 and 2000 .............................................. 108IV.8. Average Network Spread Index of the top 50, by home economy, 2000 ......................................................... 109IV.9. Comparison of the Network Spread Index by industry, between the top 100 and the top 50 TNCs ............... 110IV.10. The top 25 TNCs of CEE: comparison of Russian and other firms, 2000 ...................................................... 111V.1. The global value chain of product components ................................................................................................ 123VI.1. World export market shares, 2000. and changes. 1985-2000 ........................................................................... 144VI.2 Shares of resource-based and non-resource based products in world trade, 1976-2000 .................................. 144VI.3. Shares of manufactured products in world exports by technology groupings, 1976-2000 .............................. 145VI.4. Average annual growth rates of world exports, by technology intensity, 1985-2000 ...................................... 146VI.5. Shares of the top 10 exporters of manufactured exports in developing countries ........................................... 149VI.6. Number of developing and CEE countries with exports of $500 million or more ........................................... 149VI.7. China: share of foreign affiliates in total exports 1986-2001 ........................................................................... 163VI.8. China: exports of high-technology products and share of foreign affiliates and

State-owned firms, 1996-2000 .......................................................................................................................... 163

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VI.9. Winners in the high-technology manufactures trade, 1985-2000 ..................................................................... 183VI.10. Winners in the medium-technology manufactures trade, 1985-2000 ............................................................... 183VI.11. Winners in the low-technology manufactures trade, 1985-2000 ...................................................................... 184

Tables

I.1. Selected indicators of FDI and international production, 1982-2001 .............................................................. 4I.2. Distribution of world FDI inflows, 1986-2001 ................................................................................................. 7I.3. Cross-border M&As worth over over $1 billion, 1987-2001 ........................................................................... 12I.4. Top 10 winners and losers in FDI flows in 2001 .............................................................................................. 13I.5. Most favoured host economies as a priority location in 2002-2005, by region,

as a percentage of total responses by TNCs ..................................................................................................... 14I.6. Significance of employment in foreign affiliates in the manufacturing sector

in selected host economies, 1985-1999 ............................................................................................................ 16I.7. Significance of sales of foreign affiliates in manufacturing in selected host economies, 1985-2000 ............. 17I.8. Significance of value added of foreign affiliates in selected host economies, 1985-1999 .............................. 17I.9. Significance of profits of foreign affiliates in manufacturing in selected host economies, 1985-1999 ........... 18I.10. Significance of R&D expenditures of foreign affiliates in selected host economies, 1986-1999 ................... 19II.1. Values of and country rankings by the UNCTAD inward FDI Performance Index and

Inward FDI Potential Index, 1988-1990 and 1998-2000 .................................................................................. 25II.2. Inward FDI Performance Index, by region, 1988-1990 and 1998-2000 .......................................................... 27II.3. Country classification by FDI performance and potential, 1988-1990 and 1998-2000 ................................... 31II.4. Correlation between the UNCTAD Inward FDI Performance Index

and factors determining FDI, 1998-2000 .......................................................................................................... 35III.1. Exports, FDI and international production of 30 largest Japanese firms, 1996 and 2001 ............................... 47III.2. Africa: accumulated FDI outflows from major developed countries, 1981-2000 ............................................ 51III.3. FDI outflows from major investors to Africa, by sector, 1996-2001 ............................................................... 52III.4. Regional headquarters established by foreign firms in Hong Kong, China, 2001 ........................................... 57III.5. The 12 largest TNCs from China, ranked by foreign assets, 2001 ................................................................... 61III.6. Annual average FDI growth rates in LDCs, 1986-2001 ................................................................................... 74III.7. Growth trends in FDI and bilateral ODA flows, 1990-2000 ............................................................................ 77III.8. LDC signatories to main international investment-related instruments, as of June 2002 ................................ 80III.9. Existence of investment promotion agencies in LDCs, as of June 2002 ......................................................... 81IV.1. The world’s non-financial 100 TNCs, ranked by foreign assets, 2000 ............................................................ 86IV.2. Snapshot of the world’s 100 top TNCs, 2000 ................................................................................................... 89IV.3. The top 20 TNCs ranked by value of cross-border M&A activity, 1987-2001 ................................................ 89IV.4. Newcomers to the world’s top 100 TNCs, 2000 ............................................................................................... 91IV.5. Departures from the world's top 100 TNCs, 2000 ............................................................................................ 92IV.6. Home economies of the world’s top 100 TNCs by transnationality index

and foreign assets, 1990, 1995 and 2000 .......................................................................................................... 93IV.7. Industry composition of the top 100 TNCs, 1990, 1995 and 2000 .................................................................. 96IV.8. The world’s top 10 TNCs in terms of transnationality, 2000 ........................................................................... 97IV.9. Average transnationality index of the top 5 TNCs in each industry, and their

shares in the assets, sales and employment of the top 100, 1990, 1995 and 2000 ........................................... 98IV.10. The top 50 non-financial TNCs from developing economies, ranked by foreign assets, 2000 ...................... 100IV.11. Snapshot of top 50 TNCs from developing economies, 2000 .......................................................................... 102IV.12. The top 5 TNCs from developing economies in terms of transnationality, 2000 ............................................. 103IV.13. Newcomers to the top 50 TNCs from developing economies, 2000 ................................................................ 103IV.14. Departures from the top 50 TNCs from developing economies, 2000 ............................................................. 104IV.15. Industry composition of the top 50 TNCs from developing economies, 1998 1999 and 2000 ........................ 104IV.16. Home countries of the top 50 TNCs from developing economies,

by transnationality index and foreign assets, 1998, 1999 and 2000 ................................................................. 108IV.17. The top 25 non-financial TNCs based in Central and Eastern Europe, ranked by foreign assets, 2000 ......... 112IV.18. The Network Spread Index of the top 50 Russian exporters, by industry, 2000 .............................................. 113V.1. Examples of different International Production Systems ................................................................................. 124V.2. The world’s leading semiconductor manufacturers, 2001 ................................................................................ 126V.3 Intel’s manufacturing sites, January 2002 ........................................................................................................ 127V.4. Winners and losers in semiconductor exports,1985-2000 ................................................................................ 128V.5. Winners and losers in North American garment imports, 1985, 2000 ............................................................. 129V.6. Winners and losers in West European garment imports, 1985, 2000 ............................................................... 130V.7. Winners and losers in Japanese garment imports, 1985, 2000 ......................................................................... 130V.8. The top 10 automobile manufacturers, ranked by vehicle production, 2000 ................................................... 133V.9. Winners and losers in the automobile industry exports to the North American market, 1985, 2000 .............. 134V.10. The top telecom equipment manufacturers, 2000 ............................................................................................. 136

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V.11. Winners and losers in telecommunications equipment exports, 1985, 2000 .................................................... 138V.12. The five largest contract electronics manufacturers, 1995 and 2002 ............................................................... 139VI.1. The structure of world trade in major product categories, by region, 1985 and 2000 ..................................... 148VI.2. The top 20 export winners, by technology category, 1985-2000 ..................................................................... 150VI.3. Shares of foreign affiliates in the exports of selected host economies,

all industries and manufacturing, selected years .............................................................................................. 154VI.4. The degree of transnationality of United States firms, by sector, 1992 and 1997 ........................................... 158VI.5. China’s competitiveness in world trade, 1985-2000 ........................................................................................ 162VI.6. China: exports by the leading foreign affiliates, 2000 .................................................................................... 164VI.7. China: shares of domestic companies and foreign affiliates in the

export of selected goods, 1996 and 2000 .......................................................................................................... 166VI.8. Costa Rica’s competitiveness in the North American market, 1985-2000 ....................................................... 167VI.9. Costa Rica: exports by the 20 leading foreign affiliates, 2000 ......................................................................... 168VI.10. Hungary’s competitiveness in the Western European market, 1985-2000 ....................................................... 169VI.11. Hungary: exports by the 50 leading foreign affiliates, 2000 ............................................................................ 171VI.12. Ireland’s competitiveness in the Western European market, 1985-2000 .......................................................... 172VI.13. Ireland: exports by the 55 leading foreign affiliates, 1998 ............................................................................... 174VI.14. Mexico’s competitiveness in the North American market, 1985-2000 ............................................................ 175VI.15. Mexico: exports by the 35 leading foreign affiliates, 2000 .............................................................................. 176VI.16. The Republic of Korea‘s competitiveness in the world market, 1985-2000 .................................................... 177VI.17. Republic of Korea: exports by the leading 50 companies, 2000 ..................................................................... 178VII.1. Estimated incentives for selected FDI projects, 1995-2000 ............................................................................. 205

Box figures

I.1.1. Effects of the September 11 events on FDI plans of Japanese TNCs .............................................................. 5I.2.1. Types of changes in FDI laws and regulations, 2001 ....................................................................................... 8I.3.1. BITs concluded in 2001, by country group ....................................................................................................... 8I.3.2. DTTs concluded in 2001, by country group ..................................................................................................... 8III.1.1. Distribution of inward FDI stock in Germany’ new Länder, by region, 1991-1999 ........................................ 42III.2.1. Japanese FDI outflows to ASEAN-4 and China, 1995-2001 ........................................................................... 44III.2.2. Planned relocation of production sites of Japanese TNCs to China

as a result of China’s accession to the WTO .................................................................................................... 45III.2.3. Investment climate of ASEAN-4 compared with China ................................................................................... 45III.6.1. The UNCTAD Inward FDI Performance Index and Inward FDI Potential Index

for selected countries in West Asia, 1988-1990 and 1998-2000 ...................................................................... 59III.7.1. Financial flows to Argentina 1994-2001 .......................................................................................................... 63VI.8.1. The trade balance of foreign affiliates in China, 1990-2001 ............................................................................ 186VI.8.2. The share of imports of capital goods in total imports by foreign affiliates in China, 1990-2001 .................. 186VIII.3.1. Exports profile of Mozambique ........................................................................................................................ 225

Box tables

I.2.1. National regulatory changes, 1991-2001 .......................................................................................................... 7III.2.1. The 10 most promising destinations for manufacturing FDI by Japanese TNCs

over the next three years, 1995-2001 surveys .................................................................................................. 50IV.1.1. How large are the top TNCs, vis-à-vis economies in 2000? ............................................................................ 98IV.1.2. The concentration ratio of the largest 100 TNCs in world GDP, 1990 and 2000 ............................................. 99V.4.1 Flextronics’ selected global facilities, 2002 ..................................................................................................... 146VI.1.1. Dynamic products in world exports, ranked by change in market share, 1985-2000 ...................................... 147VIII.4.1. Albania’s export products, 1995-1999 .............................................................................................................. 227

Annex A. Additional text tables and figures

Tables

A.I.1. Distribution of world FDI flows by absolute amounts, FDI flows per $1,000 GDPand FDI flows per capita, by region, 1990-2001 .............................................................................................. 265

A.I.2. Cross-border M&A deals with values of over $1 billion completed in 2001 ................................................... 266A.I.3. Number of parent corporations and foreign affiliates, by region and economy, latest available year ............. 270A.I.4. Comparison between FDI inward stock and assets of foreign affiliates

in selected host economies, latest available year .............................................................................................. 274

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A.I.5. Labour productivity of foreign affiliates and domestic firms in manufacturingin selected host economies, latest available year .............................................................................................. 274

A.I.6. Data for the transnationality index of host economies, 1999 ........................................................................... 275A.II.1. Raw data and scores for the variables included in the UNCTAD

Inward FDI Potential index, 1998-2000 ........................................................................................................... 276A.II.2. Raw data and scores for the variables included in the UNCTAD

Inward FDI Potential index, 1988-1990 ........................................................................................................... 280A.III.1 The largest 30 cross-border M&A sales in LDCs, 1987-2001 ......................................................................... 284A.III.2. The largest 30 foreign affiliates in LDCs, 2001 ............................................................................................... 285A.V.1. Toyota’s international production system, 2001 ............................................................................................... 286A.V.2. World motor-vehicle production by the top 10 TNCs, 2000 ............................................................................ 287A.VI.1. Distribution of total exports and intra-firm exports of foreign affiliates of

United States TNCs in the manufacturing sector, by category, 1993 and 1998 ............................................... 288A.VI.2. The trade performance of foreign affiliates and EPZs in Hungary, 1995-2000 ............................................... 288A.VI.3. The top ten Hungarian export products, 1999 .................................................................................................. 289A.VI.4. The largest contract electronics manufacturers in Central and Eastern Europe, November 2001 ................... 289

Annex B: Statistical annex

Definitions and sources ............................................................................................................................................... 291

A. General definitions ............................................................................................................................................... 2911. Transnational corporations ........................................................................................................................ 2912. Foreign direct investment .......................................................................................................................... 2913. Non-equity forms of investment ................................................................................................................ 291

B. Availability, limitations and estimates of FDI data providedin the World Investment Report ............................................................................................................................ 2921. FDI flows ............................................................................................................................................... 292

(a) FDI inflows ......................................................................................................................................... 292(b) FDI outlows ........................................................................................................................................ 296

2. FDI stocks ............................................................................................................................................... 299

C. Data revisions and updates .................................................................................................................................... 300D. Data verification ............................................................................................................................................... 300E. Definitions and sources of the data in annex tables B.5-B.10 .............................................................................. 300F. Definitions and sources of the data on cross-border M&As in annex tables B.7 - B.10 ...................................... 301

Annex tables

B.1 FDI inflows, by host region and economy, 1989-2001 ........................................................................................ 303B.2 FDI outflows, by home region and economy, 1989-2001 ................................................................................... 307B.3 FDI inward stock, by host region and economy,

1980, 1985, 1990, 1995, 1999 and 2001 .............................................................................................................. 310B.4 FDI outward stock, by home region and economy,

1980, 1985, 1990, 1995, 1999 and 2001 .............................................................................................................. 315B.5 FDI flows as a percentage of gross fixed capital formation,

by host region and economy, 1989-1999 ............................................................................................................. 319B.6 FDI stock as a percentage of gross domestic product,

by host region and economy, 1980, 1985, 1990, 1995 and 1999......................................................................... 328B.7 Cross-border M&A sales, by region/economy of seller, 1987-2001 ................................................................... 337B.8 Cross-border M&A sales, by region/economy of purchaser, 1987-2001 ............................................................ 341B.9 Cross-border M&A, by sector and industry of seller, 1987-2001 ....................................................................... 344B.10 Cross-border M&A, by sector and industry of purchaser, 1987-2001 ................................................................ 345

PART ONETRENDS IN INTERNATIONAL PRODUCTION

CHAPTER I

GLOBAL TRENDS

Introduction

Global foreign direct investment (FDI)flows declined sharply in 2001. Inflows fellby 51 per cent and outflows by 55 per cent.This reversal after steady growth since1991 and very large rises in 1999 and 2000 reflects two factors: the slowing of economicactivity in major industrial economies anda sharp decrease in their stock market activity.These combined to s low down newinternational investment, particularly thecross-border mergers and acquisitions (M&As)that have driven recent FDI. Developedcountries have borne the brunt of decliningFDI (59 per cent) but developing countrieshave a lso suffered (a l though only by arelatively small 14 per cent). The economiesin transition of Central and Eastern Europe(CEE) are the only ones to have remainedimmune to this general downturn (a 2 percent increase) .1

The fall in FDI in 2001 is likely tocontinue for most countries in 2002. However,over the longer term, international production production under the common governanceof transnational corporations (TNCs) seemsset to raise its share of global economicactivity. Part One of WIR02 deals with trendsin FDI flows and the role of TNCs in hosteconomies in terms of such aspects as FDIs tock and f lows , sa les , va lue added ,employment , p rof i t s , and research anddevelopment (R&D). It also benchmarks theFDI performance and potential of host countriesand looks at the largest TNCs.

The growth of international productionis driven by economic and technologicalforces. I t is also driven by the ongoingliberalization of FDI and trade policies.National policy regimes are converging towardsa more welcoming s tance on FDI , ascompetition for investment intensifies. Thecompetition is particularly marked for export-oriented investment, as countries try to boost

expor t compet i t iveness in a se t t ing ofaccelerating technological change and freer,closer-knit markets. Part Two analyses therole of TNCs in the export competitivenessof developing countries. Part Three thenlooks at policies that can be pursued to attractexport-oriented FDI and increase benefitsfrom it.

A. Trends in FDI flows

World FDI inflows and outflows in2001 amounted to $735 billion and $621billion, respectively (table I.1), a drop of51 per cent in the former and 55 per centin the latter.2 This was the first drop ininflows since 1991 and in outflows since1992, and the largest over three decadesin both.3 FDI inflows to developed countriesfell by about half, from $1 trillion in 2000to $503 billion in 2001. Inflows to developingcountries decreased by much less 14 percent from $238 billion to $205 billion.Trends in FDI outflows were very similar:outward investment from developed countriesdeclined from $1.4 trillion in 2000 to $0.6trillion, while that from developing countriesalso declined but by much less (annex table B.2).

Pre l iminary da ta for such majordeveloped countries as Germany, France,Japan and the United States do not provideany clear indication for the future. For somecountries, they suggest that both outflows4and inflows5 may decline further in 2002,while for others the data suggest that eitheroutflows or inflows may decline. The pictureis similar for developing countries. FDI flowsto China will probably rise in 2002, whilethose to Argentina, Brazil and Indonesiaare likely to remain well below the peakof the 1990s.

The decline in FDI in 2001 reflectsa slowdown in the world economy. Morethan a dozen countries including the worldsthree largest economies fell into recession

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in 2001 (Uni ted Nat ions Depar tment ofEconomic and Social Affairs and UNCTAD,2002; UNCTAD, 2002a). To the extent thatthe events of 11 September 2001 exacerbatedthis slowdown, they may also have contributedto the further decline in FDI. Still, the impactof these events on overseas investment plansof TNCs was modest according to varioussurveys (box I.1). FDI in 2001 was higherthan that in 1998 ($696 billion), after whichdramatic increases in cross-border M&Asled to record flows in 1999 and 2000.

The decline in FDI flows in 2001followed rapid increases during the late 1990s.There was a similar pattern during the late1980s and early 1990s, and in 1982-1983.

Thus, this is the third downward cycle inFDI, each punctuating a long upward trendin FDI every ten years or so. These swingsreflect changes in several factors. The mainones a re bus iness cyc les , s tock marke tsentiment and M&As. These short-term factorswork in tandem with longer-term factors,sometimes offset t ing and at other t imesreinforcing them.

There is, on the other hand, a stableand positive relationship between global FDIflows and the level and growth of worldGDP.6 Technologica l change , shr ink ingeconomic distance and new managementmethods favour international production.Their impact is, however, countered by cyclical

Table I.1. Selected indicators of FDI and international production, 1982-2001(Bil l ions of dollars and percentage)

Value at current prices Annual growth rateItem (Billions of dollars) (Per cent)

1982 1990 2001 1986-1990 1991-1995 1996-2000 1999 2000 2001

FDI inflows 59 203 735 23.6 20.0 40.1 56.3 37.1 -50.7FDI outflows 28 233 621 24.3 15.8 36.7 52.3 32.4 -55.0FDI inward stock 734 1 874 6 846 15.6 9.1 17.9 20.0 22.2 9.4FDI outward stock 552 1 721 6 582 19.8 10.4 17.8 17.4 25.1 7.6Cross border M&As a .. 151 601 26.4b 23.3 49.8 44.1 49.3 -47.5Sales of foreign affiliates 2 541 5 479 18 517c 16.9 10.5 14.5 34.1 15.1c 9.2cGross product of foreign affiliates 594 1 423 3 495d 18.8 6.7 12.9 15.2 32.9d 8.3dTotal assets of foreign affiliates 1 959 5 759 24 952e 19.8 13.4 19.0 21.4 24.7e 9.9eExports of foreign affiliates 670 1 169 2 600f 14.9 7.4 9.7 1.9 11.7f 0.3f

Employment of foreign affiliates (thousands) 17 987 23 858 53 581g 6.8 5.1 11.7 20.6 10.2g 7.1gMemorandumGDP (in current prices) 10 805 21 672 31 900 11.5 6.5 1.2 3.5 2.5 2.0Gross fixed capital formation 2 285 4 841 6 680h 13.9 5.0 1.3 4.0 3.3 ..Royalties and licence fee receipts 9 27 73h 22.1 14.3 5.3 5.4 5.5 ..Exports of goods and non-factor services 2 081 4 375 7 430i 15.8 8.7 4.2 3.4 11.7 -5.4

Source : UNCTAD, based on its FDI/TNC database and UNCTAD estimates.a Data are only available from 1987 onwards.b 1987-1990 only.c Based on the following regression result of sales against FDI inward stock (in mill ions dollars) for the period 1982-

1999: sales=323+2.6577*FDI inward stock.d Based on the following regression result of gross product against FDI inward stock (in millions dollars) for the period

1982-1999: gross product=364+0.4573*FDI inward stock.e Based on the following regression result of assets against FDI inward stock (in millions dollars) for the period 1982-

1999: Assets= -1 153+3.8134*FDI inward stock.f For 1995-1998, based on the regression result of exports of foreign affi l iates against FDI inward stock (in mil l ions

dollars) for the period 1982-1994: Export=254+0.474*FDI inward stock. For 1999-2001, the share of exports offoreign aff i l iates in world export in 1998 (34 per cent) was applied to obtain the values.

g Based on the following regression result of employment (in thousands) against FDI inward stock (in millions dollars)for the period 1982-1999: employment=12 138+6.0539*FDI inward stock.

h Data are for 2000.i WTO estimates.Note: Not included in this table are the value of worldwide sales by foreign aff i l iates associated with their

parent firms through non-equity relationships and the sales of the parent firms themselves. Worldwidesales, gross product, total assets, exports and employment of foreign affiliates are estimated by extrapolatingthe worldwide data of foreign aff i l iates of TNCs from France, Germany, Italy, Japan and the UnitedStates (for sales and employment) and those from Japan and the United States (for exports), thosefrom the United States (for gross product), and those from Germany and the United States (for assets)on the basis of the shares of those countries in the worldwide outward FDI stock.

CHAPTER I GLOBAL TRENDS

5

fluctuations in income and growth. On thesupply side, FDI is affected by the availabilityof investible funds from corporate profitsor loans, which is in turn affected by domesticeconomic conditions (WIR93 , p. 92). Onthe demand side, growing overseas marketslead TNCs to invest, while depressed marketsinhibit them. The more interdependent hostand home economies become, and the morewidely a recession or upswing spreads, thegreater are the corresponding movementsin global FDI (WIR93 , p. 94).

Data for 1980-2001 show that a bulgein global FDI accompanies high economicgrowth, and a trough accompanies low growth(figure I.1). However, the relationship between

GDP growth and FDI is not uniform acrossgroups of economies. They go together indeveloped (figure I.2) but not in developingcountries (figure I.3). In CEE, FDI inflowshave continued to grow since liberalizationbegan in the early 1990s, and this regionhas not seen an FDI downturn during thecurrent decline (figure I.4). One explanationfor the different patterns of FDI flows isthat business cycles spread much faster acrossdeve loped count r ies than o thers . Asupplementary explanation may be that somecountries (as in CEE) had been cut off fromsubstantial FDI flows for so long that theyhave a lot of catching up to do short-term cycles do not affect their attractiveness.

The effects of the terrorist attacks of 11September 2001 on FDI flows are difficult togauge. Company surveys suggest that they werelimited. In October/November 2001, a surveyby UNCTAD, the Agence Française pour lesInvestissements Internationaux and AndersenConsulting revisited a number of the firms theyhad surveyed before 11 September (UNCTAD,2001a). The finding was that few expected tochange their investment plans in the light ofthe attacks. Similarly, a survey by the JapanExternal Trade Organization (JETRO) found inOctober 2001 that nearly half the Japanese firmssurveyed did not expect to change their FDIplans (box figure I.1.1).a These findings areconsistent with a survey by A.T. Kearney inSeptember/October 2001: two-thirds of corporateexecutives of the worlds 1,000 largest firmssaid that they intended to invest abroad at moreor less the levels already planned, 16 per centsaid that their FDI in 2001 would increase, and20 per cent that it would decline.b A surveyof 643 firms by the Multilateral InvestmentGuarantee Agency (MIGA) in October 2001 foundthat there was no effect on the expansion plansof 64 per cent of respondents (MIGA, 2002).Virtually none of the respondents intended tocancel their FDI projects.c

On the other hand, the higher level ofuncertainty created by the September 11 events,including higher perceived political risk (associatedwith war and terrorism), may have induced some

companies to adopt a wait-and-see attitude.Firms may have placed planned investmentson hold until they had a clearer picture ofeconomic developments and the longer-termimpact of the events on the United States. Thiswas reflected in the JETRO survey, accordingto which more than half the respondents wereunable to make an assessment. Some companiesare reported to have cancelled planned investmentsafter the September 11 events.d

Box figure I.1.1. Effects of the September 11events on FDI plans of Japanese TNCs

(Percentage)

Source : UNCTAD, based on the data provided bythe JETRO International Research Division.

Box I.1. Impact of the September 11 events on FDI flows

Source : UNCTAD .a The survey was conducted by JETRO in October 2001. The results are based on responses by 659 respondents out

of 720 Japanese TNCs (both manufacturing and services). The results were made available to UNCTAD by theJETRO International Economic Research Division.

b A.T. Kearney Press release, 8 October 2001.c Based on some 130 respondents.d Business Latin America (EIU), 24 September 2001.

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CHAPTER I GLOBAL TRENDS

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The economic slowdown has intensifiedcompetitive pressures, forcing companiesto search for cheaper locations. This mayhave resulted in increased FDI in activitiesthat benefit from relocation to, or expansionin, low-wage economies. Outflows may alsohave risen from countries in which domesticmarkets have been growing slower than foreignmarkets. There are signs that both factorshave contributed to the recent increase ofJapanese FDI to China (chapter III.A.3) andthe growth of flows to CEE. More generally,there has been a redistribution of FDI towardsdeveloping countries and CEE, where growth

has recently been higher than in developedcountries. The shares of developing countriesand CEE in global FDI inflows reached 28per cent and 4 per cent respectively in 2001,compared to an average of 18 per cent and2 per cent in the preceding two years (tableI.2).7 The rise in developing countries sharesmay also reflect the further liberalizationof their FDI regimes8 a trend that continuedin 2001 (box I.2) and was reinforced by thegrowth in the number of bilateral investmenttreaties (BITs) and double taxation treaties(DTTs) (box I.3).

Box table I.2.1. National regulatory changes, 1991-2001

Item 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Number of countries that introduced changes in their investment regimes 35 43 57 49 64 65 76 60 63 69 71 Number of regulatory changes 82 79 102 110 112 114 151 145 140 150 208 of which: -more favourable to FDI a 80 79 101 108 106 98 135 136 131 147 194 - less favourable to FDI b 2 - 1 2 6 16 16 9 9 3 14

Source : UNCTAD, based on nat ional sources .a Including liberalizing changes or changes aimed at strengthening market functioning, as well as increased incentives.b Including changes aimed at increasing control as well as reducing incentives.

/...

In 2001, 208 changes in FDI laws weremade by 71 countries, raising the total numberof annual changes to its highest level since theWIR began reporting on them (box table I.2.1).Of the changes in 2001, 194 (93 per cent) created

Box I.2. Changes in FDI regimes in 2001

a more favourable investment climate (box figureI.2.1) in an effort to attract more FDI. The Asianand Pacific region introduced the largest numberof such changes (43 per cent).

Table I.2. Distribution of world FDI inflows, 1986-2001 (Percentage)

Region 1986-1990 1991-1992 1993-1998 1999-2000 a 2001

Developed countries 82.4 66.5 61.2 80.0 68.4Western Europe 38.4 46.0 33.7 51.9 45.7

European Union 36.2 45.3 32.1 50.2 43.9Japan 0.2 1.2 0.3 0.8 0.8United States 34.6 12.7 21.7 22.6 16.9

Developing countries 17.5 31.2 35.3 17.9 27.9Africa 1.8 2.2 1.8 0.8 2.3Latin America and the Caribbean 5.0 11.7 12.3 7.9 11.6Asia and the Pacific 10.6 17.4 21.2 9.2 13.9

Central and Eastern Europe 0.1 2.2 3.5 2.0 3.7

MemorandumLeast developed countries 0.4 1.1 0.6 0.4 0.5

Source: UNCTAD, FDI/TNC database.a Years characterized by exceptionally high cross-border M&A activity.Note: The shaded years are FDI trough periods, while non-shaded years are FDI growth periods.

World Investment Report 2002: Transnational Corporations and Export Competitiveness

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Box I.2. Changes in FDI regimes in 2001(concluded)

Box figure I.2.1. Types of changes in FDI lawsand regulations, 2001

Source: UNCTAD, based on national sources.

Source : UNCTAD.

Box I.3. BITs and DTTs in 2001

In 2001 alone, a total of 97 countries (thelargest number ever) were involved in theconclusion of 158 BITs, bringing the total from1,941 at the end of 2000 to 2,099 by the endof 2001. Developing countries have intensifiedthe practice of concluding BITs among themselves:66 in 2001 (compared with 36 in 2000) (boxfigure I.3.1). Asian countries concluded 70 BITs(19 among themselves), followed by Africancountries with 58 BITs (29 among themselves),and Latin American countries 21 (5 among

Box figure I.3.1. BITs concluded in 2001, bycountry group

Source: UNCTAD, BITs and DTTs databases./ . . .

Box I.3. BITs and DTTs in 2001(concluded)

themselves). CEE countries signed 18 BITs withdeveloping countries, 12 with the developedones and 10 among themselves.

The least developed countries (LDCs) haveshown a keen interest in entering into BITs(see chapter II.D). A total of 23 LDCs wereinvolved in the conclusion of 51 BITs in 2001.Of these, 13 were signed among the LDCsthemselves, 24 with the rest of the developingworld, 12 with developed countries and twowith economies in transition.

The total number of DTTs grew from 2,118at the end of 2000 to 2,185 by the end of 2001.A total of 63 countries were involved (19 fromthe developed world, 30 from developing countriesand 14 from CEE) in 67 DTTs (15 amongcountries of the developing world, six betweencountries of CEE) (box figure I.3.2).

Box figure I.3.2. DTTs concluded in 2001,by country group

Source: UNCTAD, BITs and DTTs databases.

As part of i ts work programme oninternational investment agreements, UNCTADhas organized several BIT and DTT negoti