DEVELOPING COUNTRIES MAJOR FORCE IN FOREIGN DIRECT INVESTMENT

By Supachai Panitchpakdi Reprint | | Print |

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GENEVA, Mar 3 2007 (IPS) - The extent and pace of growth of foreign direct investment (FDI) from emerging economies heralds a new role for these countries in international production systems and the world economy as a whole, writes Supachai Panitchpakdi, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD). In this article, the author writes that FDI from the South is also opening up new sources of finance, technology, and management know-how, critical ingredients for economic development. From the perspective of developing host economies, FDI from other developing countries presents a potentially broader range of sources of capital, technology, and management skills. South-South FDI has several advantages over North-South investment, including the fact that the technologies and business models of developing-country TNCs often have a lot in common. The emergence of new sources of FDI requires attention from policy makers and investment promoters in countries at all levels of development. In order to maximise the development impact of this it is important for officials and experts from both developing and developed countries to exchange views and share experiences.

The phenomenon of FDI from Southern transnational corporations (TNCs) is examined comprehensively in the World Investment Report 2006 of the United Nations Conference on Trade and Development (UNCTAD). The report looks at factors that cause the rise of FDI from developing and transition economies, maps the key players, examines the potential costs and benefits, and discusses the role of national and international policy-making in enhancing development gains from the process.

The most notable feature of FDI from the South is its rapid acceleration over the past 15 years. Total FDI flows by firms from developing and transition economies reached USD 133 billion in 2005 – the highest level ever recorded, and 10 times more than in 1990. This represents about 17 percent of world outward flows in 2005, as opposed to 5 percent in 1990 – in just 15 years. The rise in the number of large TNCs from developing and transition economies is a reflection of this trend: In 1990, only 19 such companies appeared on the Fortune 500 list of the world’s largest corporations; by 2006 that number had risen to 57. The trend is led, of course, by Asia, where three quarters of the top 100 TNCs from developing countries are headquartered.

This development has not gone unnoticed by investment promotion agencies in developed and developing countries alike, many of which have adopted specific strategies to attract FDI from the South. An UNCTAD survey of the World Association of Investment Promotion Agencies (WAIPA) members last year showed that 74 percent of them target FDI from developing and transition economies. The survey also indicated that investment promotion agencies from developing countries attach particular importance to FDI from the South. China is the most favoured target, followed by India, Malaysia, the Republic of Korea, and South Africa. A number of investment agencies have set up offices in selected developing and transition economies to attract FDI, especially in Asia; China is again the preferred choice from both developed and developing countries.

For policy makers and investment promoters it is important to understand the motives underlying the expansion of developing-country TNCs, be they ”market-seeking”, ”efficiency-seeking” or ”created asset-seeking”. Overall, market-seeking is the most popular motive. Natural resource-seeking strategies are also very common, especially because of the rapid economic expansion of many developing countries in recent years. The best illustrations of this are the large-scale resource-oriented projects initiated by Chinese and Indian companies in resource-rich countries, from the Americas to Africa and Central Asia.

From the perspective of developing host economies, FDI from other developing countries presents a potentially broader range of sources of capital, technology, and management skills. South-South FDI has several advantages over North-South investment, including the fact that the technologies and business models of developing-country TNCs often have a lot in common. This enhances the scope for linkages and technology sharing and spillovers. Developing-country TNCs also tend to use greenfield investments more than mergers and acquisitions as a mode of entry, making their investments more likely to add immediately to the host country’s production capacity. Another advantage of South-South investment is its greater employment-generating potential. The main reason for this is that developing-country TNCs may have a greater presence in labour-intensive industries and may be more inclined to use simpler, more labour-intensive technologies, especially in manufacturing.

The emergence of new sources of FDI requires attention from policy makers and investment promoters in countries at all levels of development. In order to maximise the development impact of this it is important for officials and experts from both developing and developed countries to exchange views and share experiences. Among the factors driving FDI from the South and its potential impact, dialogue together with increased awareness and understanding are needed. UNCTAD and other international organisations have a major role to play in this context by providing analysis, technical assistance, and a forum for discussion and consensus-building. The ultimate goal is to enable developing countries to realise the greatest possible benefits from the rise of South-South investment. (END/COPYRIGHT IPS)