DEVELOPMENT: For Foreign Investors, Everything Has Its Price

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Oct 3 2000 (IPS) - The flow of foreign direct investment (FDI) and the role of transnational corporations in the globalisation process are advancing in size and scope, says the United Nations Conference on Trade and Development (UNCTAD) in a report released Tuesday.

Behind this trend, reflected in forecasts for total FDI worldwide to exceed one trillion dollars this year, is a concentration of the cross-border mergers and acquisitions (M&A).

These conclusions, from the UN agency’s “World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development” (WIR2000), underscore the existence of a world market for buying and selling firms.

However, “the name of this phenomenon of mergers and acquisitions may be a bit exaggerated,” said UNCTAD Secretary- General Rubens Ricupero, “because, as the report rightly points out, the real mergers are less than three percent of the total operations studied.”

“Even the three percent do not all qualify as real mergers. They are sometimes only disguised takeovers,” he pointed out.

As another characteristic of M&As, the UNCTAD report also indicates their high concentration in terms of geography or category of countries, according to levels of development and sectors of economic activity.

The M&A phenomenon occurs, in 90 percent of the cases, in the industrialised world, particularly among the wealthiest nations.

In his presentation of the UNCTAD report, Ricupero acknowledged that this type of foreign direct investment is also on the rise in developing countries, though it remains a small portion of the total international M&A transaction activity.

The process is also highly concentrated in three or four countries of the industrialised North, particularly the United States and Great Britain, while France and Germany have been growing as purchasers of companies abroad, said the UN official.

In terms of industry, M&As are concentrated in a few areas, such as automobiles, chemicals and pharmaceuticals, and the food and beverage industry in general.

Similarly, in the service sector, such transactions tend to involve the telecommunications industry and financial services.

Through this variant of foreign direct investment, a new international market has emerged in which companies are purchased and sold, much in the same way as goods and services.

The foreign investor prefers this type of transaction because it is fast and “because it is the easiest way of acquiring assets in foreign countries, and in many cases, of acquiring competitiveness,” Ricupero explained.

One indicative example is the wave of acquisitions by European firms of US-based companies, primarily in the information technology sector, the UN official told the media during the presentation of the UNCTAD document.

The implications of M&As are both positive and negative, said. Many countries that are home to firm being acquired have expressed concern about the transfer of ownership and of control from domestic to foreign hands.

FDI through this route also has an impact in these countries in the areas of employment and competition.

The trepidations triggered by mergers and acquisitions are not limited to developing countries, as they are also evident – and perhaps even stronger – in wealthier countries, according to the report.

In the case of developing countries, the problem also lies in assessing the differences between mergers and acquisitions as an entry route for FDI, compared to so-called “greenfield investments” – such as new manufacturing facilities.

UNCTAD maintains that such investments are more attractive and favourable for developing countries because they add productive capacity where none previously existed.

Greenfield investments tend to create employment and encourage development of the workforce and its technological skills, Ricupero explained.

The impacts of FDI are greater in the short term, but tend to decline over time, depending on how they are influenced by the policies adopted by the country where the investment is taking place.

Because of this, UNCTAD recommends that governments adopt appropriate regulations for competition. The UN agency “has a role to play, particularly in assessing the development perspective of legislation on competition and helping developing countries to adopt adequate laws,” Ricupero said.