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Global oreign direct investment (FDI) ows rose moderately to $1.24 trillion in 2010, but were still15 per cent below their pre-crisis average. This is in contrast to global industrial output and trade,which were back to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.41.6 trillion, approaching its 2007 peak in 2013. This positivescenario holds, barring any unexpected global economic shocks that may arise rom a number orisk actors still in play.

For the frst time, developing and transition economies together attracted more than hal o globalFDI ows. Outward FDI rom those economies also reached record highs, with most o theirinvestment directed towards other countries in the South. Furthermore, interregional FDI betweendeveloping countries and transition economies has been growing rapidly. In contrast, FDI inowsto developed countries continued to decline.

Some o the poorest regions continued to see declines in FDI ows. Flows to Arica, least developedcountries, landlocked developing countries and small island developing States all ell, as did owsto South Asia. At the same time, major emerging regions, such as East and South-East Asia andLatin America, experienced strong growth in FDI inows.

International production is expanding, with oreign sales, employment and assets o transnationalcorporations (TNCs) all increasing. TNCs production worldwide generated value added oapproximately $16 trillion in 2010 about a quarter o global GDP. Foreign afliates o TNCsaccounted or more than one-tenth o global GDP and one-third o world exports.

State-owned TNCs are an important emerging source o FDI. There are some 650 State-ownedTNCs, with 8,500 oreign afliates across the globe. While they represent less than 1 per cent oTNCs worldwide, their outward investment accounted or 11 per cent o global FDI in 2010. The

ownership and governance o State-owned TNCs have raised concerns in some host countriesregarding, among others, the level playing feld and national security, with regulatory implicationsor the international expansion o these companies.

CHAPTER I

GLOBALINVESTMENT

TRENDS


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World Investment Report 2011: Non-Equity Modes of International Production and Development2

A. GLOBAL TRENDS AND PROSPECTS: RECOVERYOVER THE HORIZON

1. Overall trends

As stimulus packages and

other public scal policies

ade, sustained economic

recovery becomes more

dependent on private

investment. At present,

transnational corporations

(TNCs) have not yet

taken up ully their customary lead role as privateinvestors.

Global oreign direct investment (FDI) infows

rose modestly in 2010, ollowing the large

declines o 2008 and 2009. At $1.24 trillion in

2010, they were 5 per cent higher than a year

beore (gure I.1). This moderate growth was

mainly the result o higher fows to developing

countries, which together with transition

economies or the rst time absorbed more

than hal o FDI fows.

While world industrial production and trade are

back to their pre-crisis levels, FDI fows in 2010

remained some 15 per cent below their pre-crisis

average, and 37 per cent below their 2007 peak

(gure I.1).

The moderate recovery o FDI fows in 2010

revealed an uneven pattern among components

and modes o FDI. Cross-border mergers and

acquisitions (M&As) rebounded gradually, yet

greeneld projects which still account or the

majority o FDI ell in number and value. Increased

prots o oreign aliates, especially in developing

countries, boosted reinvested earnings one o the

three components o FDI fows while uncertainties

surrounding global currency markets and European

sovereign debt resulted in negative intra-companyloans and lower levels o equity investment the

other two components o FDI fows. While FDI by

private equity rms regained momentum, that rom

sovereign wealth unds (SWFs) ell considerably in

2010.

FDI inward stock rose by 7 per cent in 2010, reaching

$19 trillion, on the back o improved perormance

o global capital markets, higher protability, and

healthy economic growth in developing countries.

UNCTAD predicts FDI fows will continue their recov-

ery to reach $1.4 1.6 trillion, or the pre-crisis level,

in 2011. In the rst quarter o 2011, FDI infows rose

compared to the same period o 2010, although

this level was lower than the last quarter o 2010

(gure I.2). They are expected to rise urther to $1.7

trillion in 2012 and reach $1.9 trillion in 2013, the

peak achieved in 2007. The record cash holdings o

TNCs, ongoing corporate and industrial restructur-

ing, rising stock market valuations and gradual ex-

its by States rom nancial and non-nancial rms

shareholdings built up as supporting measures

during the crisis, are creating new investmentopportunities or companies across the globe.

However, the volatility o the business environment,

particularly in developed countries, means that

TNCs have remained relatively cautious regarding

their investment plans. In addition, risk actors such

as unpredictability o global economic governance,

a possible widespread sovereign debt crisis and s-

cal and nancial sector imbalances in some devel-

oped countries, rising infation and apparent signs o

overheating in major emerging market economies,

among others, might derail FDI recovery.

1 472

1 971

1 744

1 185 1 244

2005-2007average

2007 2008 2009 2010

~15%

~37%

Figure I.1. Global FDI inows, average 20052007and 2007 to 2010(Billions o dollars)

Source: UNCTAD, based on annex table I.1 and the FDI/TNC

database (www.unctad.org/distatistics).

Global FDI ows rose

modestly in 2010, but

the share o developing and

transition economies in

both global inows

and outows reached

record highs.


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CHAPTER I Global Investment Trends 3

Figure I.2. UNCTADs Global FDI Quarterly Index,a 2007 Q12011 Q1(Base 100: quarterly average o 2005)

Figure I.3. FDI inows, global and by group o economies, 19802010(Billions o dollars)

Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/distatistics).

Developing economies

Developed economies

Transition economies

0

500

1 000

1 500

2 000

2 500World total

52%

1980 1985 1990 1995 2000 2005 2010

a. Current trends

Global FDI infows in 2010

reached an estimated

$1,244 billion (gure I.1) a

small increase rom 2009s

level o $1,185 billion. How-

ever, there was an uneven

pattern between regions

and also between subregions. FDI infows to devel-

oped countries and transition economies contract-

ed urther in 2010. In contrast, those to developing

economies recovered strongly, and together with

transition economies or the rst time surpassed

the 50 per cent mark o global FDI fows (gure I.3).

FDI fows to developing economies rose by 12

per cent (to $574 billion) in 2010, thanks to their

relatively ast economic recovery, the strength

o domestic demand, and burgeoning South

South fows. The value o cross-border M&As into

developing economies doubled due to attractive

valuations o company assets, strong earningsgrowth and robust economic undamentals (such

as market growth).

As more international production moves to

developing and transition economies, TNCs are

increasingly investing in those countries to maintain

cost-eectiveness and to remain competitive in the

global production networks. This is now mirrored

The shit o FDI inows to

developing and transition

economies accelerated in

2010: or the frst time,

they absorbed more thanhal o global FDI ows.

0

50

100

150

200

250

300

350

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011

Source: UNCTAD.a The Global FDI Quarterly Index is based on quarterly data o FDI inlows or 87 countries, which

together account or roughly 90 per cent o global lows. The index has been calibrated such thatthe average o quarterly lows in 2005 is equivalent to 100.


4/38


by a shit in international consumption, in the wake

o which market-seeking FDI is also gaining ground.

This changing pattern o FDI infows is conrmed

also in the global ranking o the largest FDI

recipients: in 2010, hal o the top 20 host

economies were rom developing and transition

economies, compared to seven in 2009 (gure I.4).

In addition, three developing economies ranked

among the ve largest FDI recipients in the world.

While the United States and China maintained their

top position, some European countries moved

down in the ranking. Indonesia entered the top 20

or the rst time.

The shit towards developing and transition

economies in total FDI infows was also refected

in a change in the ranking o host countries by

UNCTADs Inward FDI Performance Index, which

measures the amount o FDI that countries receive

relative to the size o their economy (GDP). The

index or developed countries as a group is below

unity (the point where the countrys share in global

FDI fows and the countrys share in global GDP are

equal), and their ranking has allen in the ater-crisis

period compared to the pre-crisis period o 2005

2007. In contrast, developing countries increasedtheir perormance index in the period 20052010,

and they all have indices above unity (gure I.5).

The rise o FDI to devel-

oping countries hides

signicant regional di-

erences. Some o the

poorest regions con-

tinued to see declines

in FDI fows. In addition

to least developed countries (LDCs), landlocked

developing countries (LLDCs) and small island de-veloping States (SIDS) (chapter II), fows to Arica

continued to all, as did those to South Asia. In

contrast, major emerging regions, such as East and

South-East Asia and Latin America experienced

strong growth in FDI infows (gure I.6).

FDI fows to South, East and South-East Asia picked

Figure I.4. Global FDI inows, top 20 host economies, 2009 and 2010 a

(Billions o dollars)

Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/distatistics).a Ranked on the basis o the magnitude o 2010 FDI inlows.Note: The number in bracket ater the name o the country reers to the ranking in 2009. Brit ish

Virgin Islands, which ranked 12th in 2010, is excluded rom the list .

153

5

13

15

30

21

9

36

26

32

26

34

15

36

71

38

26

24

52

95

13

15

19

20

23

25

25

2628

32

34

39

41

46

46

48

62

69

106

0 20 40 60 80 100 120 140

Indonesia (43)

Chile (26)

Mexico (21)

Luxembourg (12)

Canada (18)

Spain (30)

India (8)

Ireland (14)

Saudi Arabia (11)

Australia (16)

France (10)

Singapore (22)

Russian Federation (7)

United Kingdom (3)

Germany (6)

Brazil (15)

Belgium (17)

Hong Kong, China (4)

China (2)

United States (1) 228

2010

2009

Slow growth o FDI ows

globally masks diverging

trends between and within

regions. Some o the poor-

est regions continued to see

declines.


5/38


Developing economies

Developed economies

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2005-2007 2008 2009 2010

Figure I.5. Inward FDI Perormance Index,a developedand developing economies, average o 20052007

and 20082010

Source: UNCTAD, based on data rom FDI/TNC database(www/unctad.org/distatistics).

a The Inward FDI Perormance Index is the ratio o a country/regions share in global FDI inlows to its share in globalGDP. A value greater than 1 indicates that the country/region receives more FDI than its relative economic size, avalue below 1 that it receives less.

Note: A ull list o countries ranked by the index is availableat www.unctad.org/wir.

up markedly, outperorming other developing

regions. Infows to the region rose by about 24 per

cent in 2010, reaching $300 billion, rising especially

in South-East Asia and East Asia. Similarly, strong

economic growth, spurred by robust domesticand external demand, good macroeconomic

undamentals and higher commodity prices, drove

FDI fows to Latin America and the Caribbean to

$159 billion. Cross-border M&As in the region rose

to $29 billion in 2010, ater negative values in 2009.

Nearly all the big recipient countries saw inward

fows increase, with Brazil the largest destination.

In contrast, infows to Arica, which peaked in

2008 driven by the resource boom, continued the

downward trend which started in 2009. Infows to

South Arica declined to little more than a quartero those or 2009. North Arica saw its FDI fows all

slightly (by 8 per cent) in 2010; the uprisings which

broke out in early 2011 impeded FDI fows in the

rst quarter o 2011 (see box II.1).

FDI fows to West Asia, at $58 billion decreased,

despite the steady economic recovery registered by

the economies o the region. Sizeable increases in

government spending by oil-rich countries helped

bolster their economies, but business conditions

in the private sector remained ragile in certain

countries.

The transition economies o South-East Europe

and the Commonwealth o Independent States

(CIS) registered a marginal decrease in FDI infows

in 2010, o roughly 5 per cent, to $68 billion, having

allen by 41 per cent in 2009. FDI fows to South-

East Europe continued to decline sharply due to

sluggish investment rom EU countries traditionally

the dominant source o FDI in the subregion. The

CIS economies saw their fows increase by less

than 1 per cent despite stronger commodity prices,

a aster economic recovery and improving stockmarkets.

FDI infows to developed countries contracted

moderately in 2010, alling by less than 1 per cent

to $602 billion. Europe stood out as the subregion

where fows ell most sharply, refecting uncertainties

about the worsening sovereign debt crisis. However,

Figure I.6. FDI inows to developing and transition economies, by region, averageo 20052007 and 2008 to 2010


Source: UNCTAD, FDI/TNC database (www.unctad.org/distatistics).

0

100

200

300

Africa Latin Americaand the

Caribbean

South, Eastand South-East Asia

West Asia Transitioneconomies

average 2005-2007 2008 200 9 2 010


6/38


7/38


strong growth in FDI outfows. Outfows rom the

largest FDI sources Hong Kong (China) and China

increased by more than $10 billion each, reaching

historical highs o $76 billion and $68 billion,

respectively. Chinese companies continued their

buying spree, actively acquiring overseas assets

in a wide range o industries and countries, and

overtaking Japanese companies in total outward

FDI.

All o the big outward investor countries rom Latin

America Brazil, Chile, Colombia and Mexico

bolstered by strong economic growth at home,

increased their acquisitions abroad, particularly in

developed countries where investment opportunities

have arisen in the atermath o the crisis.

In contrast, outfows rom major investors in West

Asia ell signicantly, due to large-scale divestments

and redirection o outward FDI rom government-

controlled entities to support their home economiesweakened by the global nancial crisis.

FDI outfows rom transition economies grew by 24

per cent, reaching a record $61 billion. Most o the

outward FDI projects, as in previous years, were

carried out by Russian TNCs, ollowed by TNCs

rom Kazakhstan. The quick recovery o natural

resource-based companies in transition economies

was boosted by strong support by the State,1 and

by recovering commodity prices and higher stock

market valuations, easing the cash fow problems

these rms had aced in 2009.

Developed countries as a group saw only a

limited recovery o their outward FDI. Refecting

their diverging economic situations, trends in FDI

outfows diered markedly between countries and

regions: outfows rom Europe and the United

States were up (9.6 and 16 per cent, respectively),

while Japanese outward FDI fows dropped urther

in 2010 (down 25 per cent). The lingering eects

o the crisis and subdued prospects in developedcountries orced many o their TNCs to invest in

emerging markets in an eort to keep their markets

and prots: in 2010 almost hal o total investment

(cross-border M&A and greeneld FDI projects)

rom developed countries took place in developing

and transition economies, compared to only 32 per

cent in 2007 (gure I.8).2

In 2010, six developing and transition economies

were among the top 20 investors (gure I.9).

UNCTADs World Investment Prospects Survey

20112013 (WIPS) conrms that developing andtransition economies are becoming important

investors, and that this trend is likely to continue in

the near uture (UNCTAD, orthcoming a).

Many TNCs in developing and transition economies

are investing in other emerging markets, where

recovery is strong and the economic outlook better.

Indeed, in 2010, 70 per cent o FDI projects (cross-

border M&A and greeneld FDI projects) rom these

economies were invested within the same regions

(gure I.8). TNCs, especially large State-owned

enterprises, rom the BRIC countries Brazil, the

Figure I.7. FDI outows rom developing and transition economies, by region,average o 20052007 and 2008 to 2010


Source: UNCTAD, FDI/TNC database (www.unctad.org/d istatistics) .

0

100

200

300

average 2005-2007 2009 2010

Africa Latin America andthe Caribbean

South, East andSouth-East Asia

West Asia Transitioneconomies

2008


8/38


Russian Federation, India and China have gained

ground as important investors in recent years as

the result o rapid economic growth in their home

countries, abundant nancial resources and strong

motivations to acquire resources and strategic

assets abroad (section C).

In 2010 there were seven mega-deals (over

$3 billion) involving developing and transition

economies (or 12 per cent o the total) (annex table

I.7), compared to only two (or 3 per cent o the total)

in 2009. Firms rom developing Asia expanded their

acquisitions in 2010 beyond their own regions. For

example Chinas outward FDI showed substantial

increases in Latin America (chapter II; ECLAC,

2011). Transition-economy rms also increased

their purchases in other transition economies in

2010.

b. FDI by sector and industry

The unchanged level o

overall FDI in 2010 also

obscures some major

sectoral dierences. Data

on FDI projects (both cross-

border M&As and greeneld

investment) indicate that the value and share o

manuacturing rose, accounting or almost hal o

the total. The value and share o the primary and

services sector declined (gure I.10). Compared

with the pre-crisis level (20052007), the picture

In the atermath o the

crisis, FDI in manuactur-

ing bounced back while

services sector FDI is still

in decline.

is quite dierent. While the primary sector has

recovered, services are still less than hal, and

manuacturing is 10 per cent below their pre-crisis

levels (annex table I.5).

The value o FDI projects in manuacturing rose by

23 per cent in 2010 compared to 2009, reaching

$554 billion. The nancial crisis hit a range omanuacturing industries hard, but the shock could

eventually prove to be a boon to the sector, as many

companies were orced to restructure into more

productive and protable activities with attendant

eects on FDI. In the United States, or example,

FDI in manuacturing rose by 62 per cent in 2010,

accompanied by a substantial rise in productivity

(Bureau o Labor Statistics, 2011).

Within manuacturing, business-cycle sensitive

industries such as metal and metal products,

electrical and electronics equipment and woodand wood products were hit by the crisis, in terms

o sales and prots (annex table I.5). As a result,

investment ell in these industries, which suered

rom serious overcapacity and wished to use cash

to restore their balance sheet. In addition, their

prospects or higher demand and market growth

remained gloomy, especially in developed countries.

Some manuacturing industries such as chemicals

(including pharmaceuticals) remained more resilient

to the crisis; while other industries, such as ood,

beverages and tobacco, textile and garments, and

Figure I.8. Distribution o FDI projects,a by host region, 2007 and 2010(Per cent)

Source:UNCTAD, based on UNCTAD cross-border M&A database and inormation romthe Financial Times Ltd, Di Markets (www.Dimarkets.com).

a Including both cross-border M&As and greenield FDI projects.

To transition economies

To developing economies

To developed economies

2007 2010 2007 2010

68

51

38 30

5863

5 7

26

45

6 4

(b) by developing and transition country TNCs(a) by developed country TNCs


9/38


Figure I.9. Global FDI outows, top 20 home economies, 2009 and 2010a


Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/distatistics).a Ranked on the basis o the magnitude o 2010 FDI outlows.Note: The number in bracket ater the name o the country reers to the ranking in 2009. British

Virg in Islands, which ranked 16th in 2010, is excluded rom the li st.

16

27

19

17

18

21

10

16

26

27

42

44

75

33

57

64

103

78

15

18

18

19

20

21

22

26

30

32

38

39

52

56

58

68

76

84

105

0 50 100 150 200

India (21)

Ireland (13)

Luxembourg (17)

Korea, Republic of (19)

Singapore (18)

Italy (16)

Spain (23)

Australia (20)

Sweden (14)

Netherlands (12)

Belgium (156)

Canada (9)

Russian Federation (8)

Japan (4)

Switzerland (10)

China (6)

Hong Kong, China (5)

France (2)

Germany (3)

United States (1) 329283

20102009

Figure I.10. Sectoral distribution o FDI projects,a20092010

(Billions o dollars and per cent)

Source: UNCTAD.a Comprises cross-border M&As and greenield investments.

The la tter re ers to the estimated amounts o capi ta linvestment.

554

361

449392

254

338

0

100

200

300

400

500

600

Primary Manufacturing Services

2009 2010

37% 48%30% 22% 33% 30%

automobiles, recovered in 2010. The pharmaceutical

industry, or example, remained attractive to oreign

investment, thanks to the dynamism o its nal

markets especially in emerging economies.

This rests, rst, on the necessity o setting up

or acquiring production acilities, as the patent

protection or a number o major drugs marketed

by global pharmaceutical rms is about to expire,

and secondly on the ageing demography o most

developed countries. Restructuring continued in

2010, as witnessed by two large deals that took

place in the industry.3 Opportunities or business

deals exist due to rapid growth in the number oscientists and pharmaceutical rms in emerging

economies, most notably in China and India.

In ood, beverages and tobacco the recovery was

due to the sustained demand or basic items,

especially in developing countries. For many large

TNCs in this industry, prots soared in 2010, and a

number o large acquisitions were made.4 In the case

o textiles and clothing, the recovery is prompted

by a growth in consumer spending, particularly in

some emerging countries. Garment production is

airly cost-sensitive, which may prompt accelerated


10/38


relocation to countries where there is cheap labour.

FDI in the primary sector decreased in 2010 despite

growing demand or raw materials and energyresources, and high commodity prices. FDI projects

(including cross-border M&A and greeneld

investments) amounted to $254 billion in 2010,

raising the share o the primary sector to 22 per cent,

up rom 14 per cent in the pre-crisis period. Natural

resource-based companies with sound nancial

positions, mainly rom developing and transition

economies, made some large acquisitions in the

primary sector. Examples include the purchase o

Repsol (Brazil) by Chinas Sinopec Group or $7

billion, and the purchase o the Carabobo block in

the Bolivarian Republic o Venezuela by a group o

investors rom India or $4.8 billion (annex table I.7).

The value o FDI projects in the services sector

continued to decline sharply in 2010, with respect

to both 2009 and the pre-crisis level o activity. All

main service industries (business services, nance,

transport and communications and utilities) ell,

although at dierent speeds. Business services

declined by 8 per cent compared to the pre-

crisis level, as TNCs are outsourcing a growing

share o their business support unctions toexternal providers, seeking to cut internal costs

by externalizing non-core business activities

(chapter IV). Transportation and telecommunication

services suered equally in 2010 as the industrys

restructuring is more or less completed ater

the round o large M&A deals beore the crisis,

particularly in developed countries.

FDI in the nancial industry the epicentre o the

current crisis experienced the sharpest decline,

and is expected to remain sluggish in the medium

term. Over the past decade, its expansion wasinstrumental in integrating emerging economies

into the global nancial system, and it has brought

substantial benets to host countries nancial

systems in terms o eciency and stability. However,

it also produced a bubble o unsustainable lending,

which had to burst. In the period o post-bubble

correction, issues relating to the management o

country risk and the assessment o conditions in

host-country nancial systems play a major role in

supporting expansion abroad.

Utilities were also strongly aected by the crisis, as

some investors were orced to reduce investment or

even divest due to lower demand and accumulated

losses.

c. FDI by modes of entry

There are diverging

trends between the two

main modes o FDI entry:

M&As and greeneld

(new) investment. The

value o cross-border

M&A deals increased by

36 per cent in 2010, to

$339 billion, though it was still roughly one-third o

the previous peak in 2007 (gure I.11). Higher stock

prices increased the purchasing power o investors

to invest abroad, as higher values o corporate

assets in 2010 raised the leverage o investors

in undertaking M&As by using shares in part-

payment. At the same time, the ongoing corporate

and industrial restructuring is creating new

acquisition opportunities, in particular or cash-rich

TNCs, including those rom emerging markets. On

the other hand, greeneld investment the other

mode o FDI declined in 2010. Diering trends

between cross-border M&As and greeneld FDIare not surprising, as to some extent companies

tend to consider the two modes o market entry as

alternative options. However, the total project value

o greeneld investments has been much higher

than that o cross-border M&As since the crisis.

Developing and transition economies tend to

host greeneld investment rather than cross-

border M&As. More than two-thirds o the total

value o greeneld investment is directed to these

economies, while only 25 per cent o cross-border

M&As are undertaken there. At the same time,investors rom these economies are becoming

increasingly important players in cross-border M&A

markets, which previously were dominated by

developed country players.

During the rst ve months o 2011, both greeneld

investments and cross-border M&As registered

a signicant rise in value (gure I.11; annex

tables I.36 and I.8). Cross-border M&As rose by

58 per cent, though rom a low level, compared

with the corresponding period o 2010.

Greenfeld investment has

become much larger than

cross-border M&As.

Recovery o FDI ows in

2011 relies on the rise o

both greenfeld investments

and cross-border M&As.


11/38


Figure I.11. Value and number o cross-border M&As and greenfeld FDI projects, 2007May 2011

Source: UNCTAD, based on UNCTAD cross-border M&A database and inormation rom the Financial Times

Ltd, Di Markets (www.Dimarkets.com).Note: Data or value o greenield FDI projects reer to estimated amounts o capital investment.

M&A value Greenfield FDI value M&As number Greenfield FDI number

$ billion

0

2

4

6

8

10

12

14

1618

0

200

400

600

800

1 000

1 200

1 400

1 6001 800

2007 2008 2009 2010

Thousands

0

1

2

3

4

5

6

7

0

50

100

150

200

250

300

350

400

2010(Jan-May)

2011(Jan-May)

d. FDI by components

Stagnant global fows in

2010 were accompanied

by diverging trends in the

components o FDI infows

(igure I.12). Improved

economic perormance in

many parts o the world, andincreased prots o oreign

aliates, lited reinvested earnings to nearly double

their 2009 level (gure I.13). This refects the general

increase in prots globally. For example, the prots

to sales ratio o the United States S&P 500 rms

in 2010 improved urther, while prots o Japanese

rms also rose in 2010. Also in developing countries,

operating prots o companies rom China and the

Republic o Korea rose signicantly in 2010.

However, not all reinvested earnings are actually

reinvested in productive capacity. They may beput aside to await better investment opportunities

in the uture, or to nance other activities (box

I.2), including those that are speculative (box I.5).

About 40 per cent o FDI income was retained

as reinvested earnings in host countries in 2010 (

gure I.13).

The increase in reinvested earnings compensated

or the decline in equity capital fows, which were

down slightly despite an up-tick in cross-border

M&As. The continuing depressed level o equity

investments was still the key actor keeping FDI

In 2010, reinvested

earnings grew ast, while

equity capital investment

and intra-company loans

declined. Cash reserves

o oreign afliates grew

substantially.

Figure I.12. FDI inows by component, 20072010a


Source: UNCTAD, based on data rom FDI/TNC database(www/unctad.org/distatistics).

a Based on 106 countries that account or 85 per cent ototal FDI inlows during the period 2007-2010.

0

200400

600

800

1 000

1 200

1 400

1 600

1 800

2007 2008 2009 2010

Other capital Reinvested earnings Equity

Figure I.13. FDI income, 20052010a


Source: UNCTAD.a Based on 104 countries that account or 81 per cent o total

FDI inlows during the period 2005-2010.

$ billion Per cent

0

5

10

15

20

25

30

3540

45

0

200

400

600

800

1000

1200

2005 2006 2007 2008 2009 2010

Reinvested earningsRepatriated earnings on Inward FDIReinvested earnings as a % share of income


12/38


Box I.2. FDI ows and the use o unds or investment

FDI is traditionally broken down into three components: equity capital, intra-company loans, and reinvested earnings

o oreign aliates. These component parts can be considered as sources o unds or investment, additional tounds raised on local and international capital markets. However, the decision by a TNC to nance an investment inproductive assets in a host country through an increase in equity capital, a loan, or by using income earned in thehost country is driven by a wide range o actors, most o which are beyond the reach o host-country policymakersto infuence.

From a policymakers perspective, it may be more relevant to see how FDI fows are used (use o unds). TNCs canemploy FDI (1) or the creation, expansion or improvement o productive assets, generating additional productivecapacity, (2) to nance changes in ownership o assets (M&As), or (3) to add to the nancial reserves o oreignaliates. The latter may be motivated by decisions on the level o nancial leverage o the rm, by the need to retaincash or planned uture investments, by scal considerations (e.g. to deer tax liabilities upon repatriation o prots),or by other actors, including opportunistic behaviour on the part o TNCs to prot rom changes in exchange ratesor local asset-price rises.

The traditional method o analysing FDI by sources o unds tends to overlook the signicance o such parkedunds held in oreign aliates o TNCs. Reinvested earnings consist o income earned by oreign aliates that isnot repatriated to the home country o the parent rm; rms do not necessarily reinvest this income in additionalproductive capacity. The dierence between FDI fows and actual capital expenditures by oreign aliates representsFDI not immediately employed or the creation o additional productive capacity and, as such, it is a good proxy or

the increase in cash reserves in oreign aliates.

Box fgure I.2.1. Estimated value o the non-used part o FDI byUnited States TNCs, 20012010


Source: UNCTAD based on FDI database and Bureau o Economic Analysis.

This proxy indicator or overseas cash reserves o United States rms over the last 10 years shows a peak in 2004,

a steep drop in 2005 and an ascent to new heights in 2008 with estimates or 2009 and 2010 equally high (boxgure I.2.1). The 2004 peak and the 2005 trough can be explained by the Homeland Investment Act which provideda tax break on repatriated prots in 2005. Anticipating the tax break, rms hoarded cash in their overseas aliatesin 2004 and brought back several years worth o retained earnings in 2005 (some $360 billion). For the last threeyears, levels have been similar to the anomalous 2004 peak, leading to the conclusion that cash reserve levels inoreign aliates may well exceed what is required or normal operations.

The sensitivity o overseas cash reserves to the tax rate on und repatriation can also be observed in Japan. A 2009tax change on the repatriation o oreign earnings is estimated to bring back an additional $40 billion in overseasunds annually (chapter II; WIR10).

The implications are signicant. Under-employed cash reserves o TNCs represent untapped unds that could begainully employed to stimulate the global economy, create jobs and nance development.

Source: UNCTAD.

-200

-150

-100

-50

0

50

100

150

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


13/38


fows relatively low. It is a source o concern, as

among the components o FDI, equity investment

compared with reinvested earnings and intra-

company loans is the one that is related mostdirectly to TNCs long-term international investment

strategies. Intra-company loans declined also, as

parent rms withdrew or were paid back loans

rom their aliates, in particular those in developed

host countries, in order to strengthen their balance

sheets. This was especially true o European

TNCs which, acing ears o a sovereign debt

crisis spreading in many parts o the euro zone,

signicantly reduced loans to their aliates in the

United Kingdom and the United States.

Given the act that oreign aliates hold a signicantamount o retained earnings on their balance

sheets (box I.2), unless they are repatriated to their

parent rms in home countries, reinvested earnings

continue to play an important role in determining

the level o investment fows.

e. FDI by special funds: privateequity and sovereign wealthfunds

Private equity funds

In 2010, the value o privateequity-sponsored cross-

border M&As increased by

14 per cent to $122 billion,

compared to $107 billion

in 2009 ater two years o

consecutive decline (table

I.1).5 At the same time, the

corresponding number

o cross-border M&As

reached a record high, with 2,050 deals completed.

The actors behind the increase in FDI by private

equity unds are largely related to the stabilization

o macroeconomic conditions. Also, investors

were looking or yields, in a declining interest rate

environment. Positive trends were supported by

stronger private equity activity in emerging markets

(Emerging Markets Private Equity Association,

2011). Thus 31 per cent o FDI by private equity

rms, amounting to $38 billion, was directed to

developing and transition economies in 2010

(gure I.14), up rom 26 per cent in 2009. This rise

refects the increasing interest o private equity

Private equity-sponsored

FDI has regained

momentum, although it ell

short o its pre-crisis level.

It is directed more towards

developing and transition

economies, secondary

buyouts and smaller

acquisitions.

rms in developing country rms and venture

capital business, which provide better business

opportunities than beore.

Despite stronger private equity-sponsored cross-

border M&As in 2010, their value is still more than

70 per cent lower than the peak level in 2007. The

relative contribution o private equity to global FDI

continues to decline. The volume share o private

equity in total cross-border M&As ell rom 19 per

cent in 2009 to 17 per cent in 2010 (table I.1). The

relative contribution o private equity unds to total

FDI contracted by nearly 40 per cent rom 2004, its

peak year, to 2010.

A more benign global economic environment should

see undraising and investment picking up in 2011,

also bolstering a more positive outlook or private

equity-sponsored FDI. Private equity investors

were estimated to have held nearly a trillion dollars

o uninvested capital at the beginning o 2010,

including reserves or uture use, that could result

Table I.1. Cross-border M&As by private equityfirms, 1996May 2011(Number o deals and value)

Number of deals Value

Year NumberShare in total

(%) $ billionShare in total

(%)

1996 932 16 42 16

1997 925 14 54 15

1998 1 089 14 79 11

1999 1 285 14 89 10

2000 1 340 13 92 7

2001 1 248 15 88 12

2002 1 248 19 85 18

2003 1 488 22 109 27

2004 1 622 22 157 28

2005 1 736 20 207 222006 1 698 18 271 24

2007 1 917 18 457 27

2008 1 785 18 322 25

2009 1 993 25 107 19

2010 2 050 22 122 17

2011 591 17 91 20

Source: UNCTAD, cross-border M&A database (www.unctad.org/distatistics).

Note: Value is on a gross basis, which is dierent rom otherM&A tables based on a net value. The table includesM&As by hedge unds. Private equity irms and hedgeunds reer to acquirers as investors not elsewhereclassiied. This classiication is based on the Thomson

Finance database on M&As.


14/38


in a surge in volume o cross-border M&As in 2011

(Bain & Co., 2011).

On the supply side, there are now more opportunities.

There are two actors. First, companies owned by

private equity rms are becoming targets or other

private equity rms. The relative perormance o

these secondary buyouts (i.e. buyouts o private

equity invested rms) is only slightly lower than that

o primary buyouts: this is because the ormer can

be executed aster than the latter in issuing IPOs

(initial public oerings), and because secondary

buyouts entail a lower risk prole.6 Second, private

equity rms are now seeking smaller rms, and are

engaged in smaller-scale buyouts. This is an area

to which private equity rms have not paid much

attention in the past, yet one where many attractive

rms are to be ound.

However, private equity unds continue to ace

regulations in response to the global nancial crisis,

partly due to the G-20s commitment to subject all

signicant nancial market actors to appropriate

regulation and supervision. For example, the EU

Alternative Investment Funds Managers Directive7

and the United States' Dodd-Frank Wall Street

Reorm and Consumer Protection Act8 will aect

directly and indirectly the operations o private

equity unds and their und-raising ability, and in

consequence their contribution to FDI.

Figure I.14. Cross-border M&As by private equityunds directed to developing and transition economies,

20052010



Note: Figures in parenthesis reer to the percentage sharein total private equity. Data or 20052007 and20082010 are annual averages.

0

10

20

30

40

50

20052007 20082010 2007 2008 2009 2010

(13%)

(20%)

(10%) (14%)

(26%)

(31%)

Average

Sovereign wealth funds

Sovereign wealth

unds (SWFs) ares p e c i a l - p u r p o s e

investment unds or

arrangements that

are owned by gov-

ernment.9 At the end

o 2009, more than

80 SWFs, with an estimated total o $5.9 trillion in

assets, could be identied.10 In 2010 alone, nearly

20 governments, mostly rom emerging econo-

mies, considered or decided to establish an SWF.

While unds that invest mainly in debt instruments(e.g. government bonds) were largely unaected by

the global nancial crisis, SWFs with considerable

equity exposure suered a dramatic erosion o the

value o their investments. By the end o 2009,

however, with the recovery o stock markets

worldwide, almost all SWFs had been able to

recoup their losses rom 2008.

In 2010 the positive outlook or most SWFs held

rm, supported by the overall recovery in equity

markets. However, total SWF-sponsored FDI in

2010 amounted to only $10.0 billion, a signicantdrop rom 2009s $26.5 billion (gure I.15). The

largest SWF-sponsored deals included investments

in inrastructure, retail, transportation, natural

resources and utilities in Australia, Canada, the

United Kingdom and the United States (table I.2).

The all in SWF-sponsored FDI in 2010 is a

considerable deviation rom the trend o SWFs

becoming more active oreign direct investors,

that started in 2005. There are two reasons or this

slump. First, unlike in earlier years, in 2010 FDI by

SWFs based in the Gul region (e.g. United Arab

Emirates) was almost absent (table I.2). Asian

and Canadian SWFs were the main investors in

2010. Second, while SWF-sponsored FDI is not

necessarily pro-cyclical, the low appetite or direct

investments in 2010 can be traced back to the

exceptionally uncertain global nancial environment

o previous years. Because o that uncertainly,

in 2010 SWFs directed about one-third o their

FDI to acquire shares o, or inject capital into,

private equity unds and other unds,11 rather than

investing in acquiring shares issued by industry

SWF-sponsored FDI declined

substantially because oseverely reduced investment

rom the Gul region.

However, its long-term

potential as a source o

investment remains.


15/38


Figure I.15. Cross-border M&As by SWFs, 20012010(Million dollars and per cent)


0

0.5

1.0

1.5

2.0

2.5

3.0

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per cent$ billion

ValueShare in global outflows

Table I.2. Selected large FDI deals by SWFs in 2010

Value($ million)

Acquiring companyAcquiring

nationTarget company Target nation

Industry of the acquiredcompany

3 090Canada Pension PlanInvestment Board

Canada Intoll Group Australia Finance

2 227 Qatar Holding LLC Qatar Harrods United Kingdom Retail1 581 China Investment Corp China AES Corp United States Electricity, gas and water

881Canada Pension PlanInvestment Board

Canada 407 ETR Concession Co CanadaTransport, storage andcommunications

800 China Investment Corp China Penn West Energy Trust CanadaMining, quarrying andpetroleum

576 Ontario Teachers PensionPlan

Canada Camelot Group PLC United Kingdom Community, social andpersonal service activities

400 Temasek Holdings(Pte)Ltd Singapore Odebrecht Oleo & Gas SA BrazilMining, quarrying andpetroleum

259Caisse de Depot &Placement du Quebec

Canada HDF(UK)Holdings Ltd United Kingdom Finance

194 GIC Real Estate Pte Ltd SingaporeSalta Properties-IndustrialProperty Portfolio

Austra lia Business services

100 Temasek Holdings(Pte)Ltd Singapore Platmin Ltd South AfricaMining, quarrying andpetroleum

91Canada Pension PlanInvestment Board

Canada Vornado Realty Trust United States Business services

43 Oman Investment Fund OmanPetrovietnam InsuranceJoint Stock Corp

Viet Nam Finance


(e.g. the Canadian Pension Plan Investment Boards

investment in Intoll Group, an inrastructure und,

or $3 billion table I.2).

While expenditure on FDI has declined, the

undamental drivers or stronger SWF-sponsored

FDI activity remain robust. Strong commodity prices

in 2010 in particular have created a positive unding

environment or SWFs, including those that have

been actively involved in FDI in previous years. The

oreign assets o the Qatar Investment Authority, an

active strategic investor, were estimated to grow

rom $65 billion in 2009 to $90 billion in 2010, and

$120 billion in 2011.12 It has been suggested that

the China Investment Corporation, established in

2007 with a mandate to diversiy Chinas oreign

exchange holdings, and an active investor in energy,

natural resources, and inrastructure-related assets,

received $100200 billion in new unds in 2010.13

Other SWFs have seen strong returns in 2010,

supporting policy decisions to become more


16/38


proactive sponsors o FDI. Since 2009, or example,

the Norwegian Government Pension Fund Global,

with more than $400 billion under management and

owning roughly 1 per cent o the worlds equity, isnow allowed to own up to 10 per cent o a listed

company the threshold to be considered FDI

making the und a considerable potential source o

FDI.14 Greater availability o unds, as well as policies

that give SWFs more leeway to acquire larger

stakes in attractive assets, together with improved

in-house und management capacity, will result in

SWFs becoming more visible sources o FDI.

2. Prospects

Judging rom the data on FDIfows, cross-border M&As and

greeneld investment or the rst

ew months o 2011, the recovery

o FDI is relatively strong. This

trend may well continue into the remaining period

o 2011. New investment opportunities await or

cash-rich companies in developed and developing

countries. Emerging economies, particularly Brazil,

China, India and the Russian Federation, have

gained ground as sources o FDI in recent years. A

recovery in FDI is on the horizon.However, the business environment remains volatile,

and TNCs are likely to remain relatively cautious

regarding their investment plans. Consequently,

medium-term prospects or FDI fows which have

not really picked up yet ater the sharp slump in

2008 and 2009, and which had only a moderate

recovery in 2010 may vary substantially, depending

on whether or not the potential risks in the global

economy materialize or not.

To illustrate these uncertainties, UNCTAD proposes

baseline and pessimistic scenarios or utureFDI growth (gure I.16). The ormer scenario is

based on the results o various leading indicators,

including UNCTADs World Investment Prospects

Survey 20112013 (WIPS) (UNCTAD, orth-

coming a), an econometric model o orecasting

FDI infows (box I.3), and data or the rst our to

ve months o 2011 or cross-border M&As and

greeneld investment values. Taking these various

indicators together, FDI fows could range rom

$1.41.6 trillion in 2011 (with a baseline scenario

o $1.52 trillion) the pre-crisis average o

Recovery is

underway, but risks

and uncertainties

remain.

20052007. They are expected to rise urther to

$1.7 trillion in 2012 and reach $1.9 trillion in 2013,

the peak achieved in 2007.

However, there is also a possibility o stagnant FDI

fows (pessimistic scenario) i the abovementioned

risks such as the unpredictability o global economic

governance, worsening sovereign debt crisis, and

scal and nancial imbalances were to materialize.

Ater the sharp recession at the end o 2008 and

beginning o 2009, the economic environment has

improved signicantly over the past two years. The

recovery in world output growth rests on a number

o actors, including stabilization o the nancial

system, the resilient growth o emerging markets,

the stimulus package programmes implemented in

various major economies in the world, and the pick-

up in nal demand in developed countries, ollowing

a return to condence or both households and

companies. Recent orecasts suggest that global

GDP will grow by 3 per cent in 2011. Moreover,

domestic investment, is expected to pick upstrongly not only in developing countries but

also in advanced economies (table I.3). Take or

example the Republic o Korea, where investment

expenditure in 2011 is expected to rise by nearly 10

per cent, to a record high.15

The improvement in the global macroeconomic

outlook has had a direct positive eect on the

capacity o TNCs to invest. Ater two years o

slump, prots o TNCs picked up signicantly in

2010 (gure I.17), and have continued to rise in

2011: in the rst quarter the S&P 500 United States

Figure I.16. Global FDI ows, 20022010,and projection or 20112013


Source: UNCTAD.

500

1 000

1 500

2 000

2 500

2 00 2 2 00 3 2 00 4 2 0 05 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1 2 0 12 2 01 3

Pessimisticscenario

Baseline


17/38


Box I.3. Forecasting global and regional ows o FDI

Part o UNCTADs orecast or FDI fows is based on an econometric model, by which not only global but also

regional estimations are made possible or 20112013. As FDI decisions are a strategic choice by rms choosingamong alternative locations, the single country/region model cannot demonstrate how a TNC chooses a particularlocation over others. Existing studies typically portray FDI as reacting to individual host country/region actors,but ail to capture the impact o actors elsewhere on the other regions that may attract investment to, or divertinvestment rom, the country in question. Consequently, in order to explain and orecast global and regional FDI,actors in all regions must be taken into consideration simultaneously.

UNCTADs econometric model or FDI uses panel dataor the period 19952010 rom 93 countries, whichaccount or more than 90 per cent o FDI in their ownrespective regions (Arica, West Asia, South, East andSouth-East Asia, Latin America and the Caribbean,EU and other developed countries).a The variablesemployed in the model include: market growth o

G-20 countries as main home and host countries oglobal FDI (G-20 growth rate), market size (one yearlagged GDP o each individual country), the one-yearlagged price o oil to capture natural-resource FDIprojects, trade openness (the share o exports plusimports over GDP), and the lagged dependent variableo FDI to capture the eects o FDI in the previousperiods (autocorrelation). The regression results aresummarized in box table I.3.1.

Based on this model, FDI fows are projected to pickup in 2011 reaching the pre-crisis level mainly due todynamism in the economic growth o G-20 countries.FDI infows are expected to reach the peak level o

2007 in 2013 (box table I.3.2).

However, the results o the model are based mainly oneconomic undamentals and do not take into accountthe various risk actors mentioned in the Report. This

is due to diculties in quantiying them.

Source: UNCTAD.a The only exception is Latin America and the Caribbean,

where the countries included represent around 70 percent o FDI inlows. Lower coverage is due to the absenceo macroeconomic data or the Caribbean.

rms increased their prots by 12 per cent over the

corresponding period o 2010. For Japan, despite

a negative economic growth rate due to the natural

disaster, listed rms still achieved prots,16 and even

in the atermath o the disaster, Japanese rms are

vigorously investing abroad (box I.4). Firms now

Box table I.3.1. Regression results o FDI orecasting

model, fxed eects panel regressiona

Explanatory variable Coefcients

G20 growth0.37

(3.87)***

GDP (-1) 0.01(3.32)***

Openness0.01

(3.48)***

Oil price (-1)0.02

(3.9)***

FDI(-1)0.50

(7.2)***

Constant-0.63(-0.58)

R2 0.81

Observations 1395Source: UNCTAD estimates, based on UNCTAD (or FDI inlows),

IMF (G20 growth, GDP and openness), United Nations(oil price) rom the Link project.

a The o l lowing model FDIjt=

o+

1*G20

t+

2*GDP

jt -1

+3*Openess

jt+

4*Oil_price

jt-1+

5*FDI

jt-1+e

jtis estimated with

ixed eect panel regression using estimated generalized leastsquares with cross-sections weights. Coeicients computedby using white heteroscedasticity consistent standard errors.Statistical signiicance at the 1 per cent (***) and 5 per cent(**) levels.

Box table I.3.2. Summary o econometric medium-term baseline scenarios

o FDI ows, by groupings(Billions o dollars)

Averages Projections2005-2007 2008-2010 2009 2010 2011 2012 2013

Global FDI ows 1 471 799 1 390 934 1 185 030 1 243 671 1 523 598 1 685 792 1 874 620Developed countries 967 947 723 284 602 835 601 906 790 183 887 729 1 026 109Developing countries 444 945 580 716 510 578 573 568 655 800 713 946 749 531Transition economies 58 907 86 934 71 618 68 197 77 615 84 117 98 980

Source: UNCTAD.


18/38


Table I.3. Real growth rates of GDP and grossfixed capital formation (GFCF), 20102012

(Per cent)

Variable Region 2010 2011 2012

World 3.6 3.1 3.5

GDPgrowth rate

Developed economies 1.6 1.3 1.7

Developing economies 7.1 6.0 6.1

Transition economies 3.8 4.0 4.2

World 5.9 6.5 7.2

GFCFgrowth rate

Advanced economiesa 2.5 4.2 6.2

Emerging and developingeconomiesa

9.6 8.9 8.2

Source: UNCTAD, based on United Nations, 2011 or GDPand IMF, 2011a or GFCF.

a IMFs classiications o advanced, emerging and developingeconomies are not the same as the United Nationsclassiications o developed and developing economies.

have record levels o cash holdings. TNCs sales

have also increased signicantly as compared to2009, both globally and or their oreign aliates

(section C).

These improvements at both the macroeconomic

and microeconomic levels are refected in TNCs

opinions about the global investment climate.

According to 2011s World Investment Prospects

Survey (WIPS),17TNCs exhibit a growing optimism

going towards 2013 (gure I.18). Some 34 per

cent o respondents expressed optimistic or

very optimistic views or the global investment

environment in 2011, compared to more than hal

Figure I.17. Proftability a and proft levels o TNCs,19972010


Source: UNCTAD, based on data rom Thomson One Banker.a Proitability is calculated as the ratio o net income to total

sales.Note: The number o TNCs covered in this calculation is

2,498.

-10123

45678

- 2000

200400

600800

1 0001 2001 400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per cent$ billion

Profits Profitability

(53 per cent) in 2013. Perhaps more strikingly,

the share o TNCs responding that they were

pessimistic or very pessimistic or 2013 ell to

1 per cent.

Responses to the WIPS also suggest strongly the

continuing importance o developing and transition

economies as destinations or FDI (gure I.19).

While the composition o the top ve destinations

has not changed much in recent years or

example, in 2005 the top ve were China, India,

United States, Russian Federation, and Brazil

the mix o the second tier o host economies has

shited over time. Refecting the spread o FDI in

developing Asia beyond the top destinations, the

rankings o economies such as Indonesia, Viet

Nam, and Taiwan Province o China have risen

markedly compared to previous surveys. Peru and

Chile have likewise improved their position as Latin

American destinations, thanks largely to their stable

investment climates and strong macroeconomicactors. Arican countries are conspicuous by

their absence rom the list o top potential host

economies or TNCs.

While improving macro- and microeconomic

undamentals, coupled with rising investor optimism

and the strong pull o booming emerging markets,

should signal a strong rebound in global FDI

fows, risks and uncertainties continue to hamper

the realization o new investment opportunities.

Such actors include the unpredictability o global

governance (nancial system, investment regimes,

Figure I.18. Level o optimism o TNCs regarding theinvestment environment, 20112013

(Percentage o responses by TNCs surveyed)

Source: UNCTAD, orthcoming a.

34%

49%53%

2011 2012 2013


19/38


Box I.4 Eects o the natural disaster on Japanese TNCs and outward FDI

On 11 March 2011, the northern part o Japan experienced a devastating earthquake and tsunami. The region

that was most badly aected is home to a number o niche hi-tech companies, all major producers o specializedcomponents (e.g. Renasas Electronics, which controls a 30 per cent share o the global market or microcontrollers).The earthquake itsel and the subsequent interruption o power supplies resulted in a severe disruption o supplychains, not only in Japan but internationally. Despite the severity o the damage, by June most o the supply chainshad been restored: or example, production at Toyota had recovered to 90 per cent o its pre-earthquake level.

While Japanese rms have shown remarkable resilience, the chain o events has prompted Japanese manuacturersto reconsider their procurement strategies. In a recent survey o Japanese rms by the Nikkei,a one-quarter o therespondents said that they would increase procurement rom abroad, while a urther th intended to diversiy theirprocurement sources within Japan. The survey indicated that about two-thirds o the rms intended to maintain orincrease their level o total investment in the atermath o this natural disaster.

In the short term, the supply disruption will have reduced the revenues o those oreign aliates o Japanese TNCsthat were aected by supply disruption, and thus their reinvested earning. On the other hand, the temporary loss orevenues might have induced the parent companies o these aliates to extend intra-company loans. In the mediumterm, the strategy o diversiying procurement sources could strengthen outward FDI. However, the overall impacto the earthquake on outward FDI rom Japan is likely to be limited, especially against the backdrop o buoyantoutward FDI through M&A by Japanese rms. Over the long run, Japan will again be a leading investor or outward

FDI.

Source: UNCTAD.a Based on a survey o 100 CEOs by the Nikkei(29 May 2011).

etc.); the worsening sovereign debt crisis in some

developed countries and the resultant scal

austerity; regional instability; energy price hikes and

risks o infation; volatility o exchange rates; and

ears o investment protectionism. Although each

can serve as a disincentive to investment in its own

right, the prominence o all o these risks at the

same time could seriously obstruct FDI globally.

0

10

20

30

40

50

60

70

80

90

China

Un

itedStates

India

Brazil

Russian

Federation

Poland

Indonesia

Australia

Germany

Mexico

Viet

Nam

Thailand

Unite

dKingdom

Singapore

TaiwanProvinceof

China

Peru

Czec

hRepublic

Chile

France

Colombia

Malaysia

Figure I.19. Top host economies or FDI in 20112013(Number o times the country is mentioned as a

top FDI priority by respondent TNCs)

Source: UNCTAD, orthcoming a.


20/38


* * *

UNCTADs WIPS and econometric model

projections or FDI fows in the coming years paint

a picture o cautious but increasing optimism,

with global FDI fows set to increase to between

$1.4 and $1.6 trillion in 2011, building upon

the modest recovery experienced in 2010. At

the high end o that range, FDI fows would

be slightly more than the average pre-crisis

level, yet would still be below the 2007 peak o

$2 trillion. World trade, by contrast, is already back

at pre-crisis levels (table I.5).

While the FDI recovery resumes, the worldwide

demand or private productive investment is

increasing as public investment, which rescued

the global economy rom a prolonged depression,

declines in one country ater another. With

unsustainably high levels o public debt at both

national and sub-national levels in many countries,

and with nervous capital markets, governments

must now rein in their decits and let private

investment take over the lead role in generating and

supporting a sustained recovery.

The FDI recovery in 2010 was slow not because

o a lack o unds to invest, or because o a lack

o investment opportunities. Responses by TNCs

to UNCTAD's WIPS (UNCTAD, orthcoming a)

indicate increasing willingness to invest, and clear

priority opportunity areas. However, the perception

among TNC managers o a number o risks in

the global investment climate, including nancial

instability and the possibility o a rise in investment

protectionism, is acting as a brake on renewed

capital expenditures.

A number o developed countries, where the need

or private investment to take over rom dwindling

public investment is greatest, are ranked ar

lower on the investment priority list o TNCs than

either the size o their economies or their past FDI

perormance would seem to warrant. Policymakers

rom those countries would be well advised to

take a lead role among their international peers in

continuing to ensure a avourable and stable global

investment climate.


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Domestic investment still accounts or the majority

o the total investment in developing and transition

economies.18 Foreign investment can only

complement this. However, each orm o oreign

investment plays a distinct and important role in

promoting growth and sustainable development,

boosting countries competitiveness, generating

employment, and reducing social and income

disparities.

Non-FDI fows may work either in associationwith FDI, or separately rom it. As no single type

o fow alone can meet investment needs, it is vital

to leverage their combinations to maximize their

development impact. This section will discuss

the development implications o various orms o

investment, and the benets o combining FDI with

other sources o external nance, be they private

or public.

Foreign investors may nance their activities using

a range o instruments in addition to FDI. These

have dierent motivations, behave dierently,and consequently have dierent impacts on

development. This makes it necessary to review

each instrument and the synergies between

them. Diering motivations, characteristics and

responses also drive dierent groups o investors

in an enterprise or instance, private investors

(individuals, enterprises, unds etc.) and public

investors (e.g. via ODA and other ocial nance).

There is a sign o continued

recovery in capital fows, but

caution is needed. Sincethe rst hal o 2009, private

capital fows to emerging

and developing economies

have been rebounding, led

by FDI, but these remain below their peak o 2007

(table I.4).

However, is the recovery in development nance to

developing and transition economies sustainable?

The recovery is due to a combination o structural

(long-term) and cyclical (short-term) pull and push

actors. High expected GDP growth in developing

B. FDI AS EXTERNAL SOURCES OF FINANCETO DEVELOPING COUNTRIES

The recovery o external

capital ows to developing

countries is under way, ledby FDI. However, caution is

needed as to its sustainabil-

ity, as FDI may be volatile.

Table I.4. Capital flows to developing countries,20052010


Type o ows 2005 2006 2007 2008 2009 2010

Total 579 930 1 650 447 656 1 095

FDI 332 435 571 652 507 561

Portolio investment 154 268 394 -244 93 186

Other investmenta 94 228 686 39 56 348

Memorandum

Ofcial grants,

excluding technical

cooperation

56.9 106.9 76.1 86.4 95 ..

Change in reserves 539 647 1 063 774 673 927

Workers' remittances 173 204 245 288 281 297

Source: UNCTAD, based on data rom IMF, 2011a (on portolio,other investment and reserve assets), rom UNCTAD(on FDI inlows and workers remittances) and romthe World Bank (on oicial grants excluding technicalcooperation).

a Other investments include loans rom commercial banks,

oicial loans and trade credits.

countries is heralding protable investment

opportunities (cyclical pull), while policy rameworks

are perceived to be more resilient to uture shocks,

especially in Asia (structural pull). Developed

countries with excess liquidity, thanks to quantitative

easing and low interest rates, are motivated to

invest in developing countries with relatively higher

rates and returns (cyclical push) (Akyuz, 2011; IMF,

2011b).19 However, there remain concerns about

volatility.

First, the capital surge is exposing developing and

transition economies to greater instability, putting

direct upward pressure on their exchange rates.

And the low interest rate environment in developed

economies cannot be sustained indenitely.20

As a positive sign or emerging and developing

economies, FDI has been the main source o infows

during 20092010, implying greater stability and a

return to condence or longer-term, productive

investment. Less positively, the global recovery

may be more ragile, because FDI is relatively less

signicant this time in developed economies, whichare now highly exposed to volatile portolio and

especially other capital elements such as bank

loans.


22/38


Second, FDI in recent years is gradually becoming

more volatile in developing and transition economies,

although it remains much less volatile than portolio

and other investments (such as commercial loansand trade credits) (gure I.20). It is argued that this

might refect its changing composition, or example

a shit rom equity to debt components, which

would also make it more sensitive to the changes in

United States monetary policy that have triggered

previous crises. As a consequence, assumptions

about FDIs stability relative to other types o

capital should be treated with caution especially or

emerging economies (IMF, 2011a), bearing in mind

the dramatic rise and all in FDI infows to such

countries as Brazil ($45 billion in 2008, $26 billionin 2009 and $48 billion in 2010), the Republic o

Korea ($8.4 billion in 2008, $7.5 billion in 2009 and

$6.9 billion in 2010) and South Arica ($9 billion in

2008, $5.4 billion in 2009 and $1.6 billion in 2010).

FDI is also likely to contain some short-term and

volatile fows, or hot money. Stabilization o capital

fows now represents an important challenge to

many developing countries (box I.5).

Each o the three components o FDI fows (equity

investment, reinvested earnings and intra-company

loans) has reasons or fuctuation. Intra-companydebt generally comes with more fexible terms and

conditions than commercial loans, being related

more to the decisions o the parent company in

order to help its oreign aliates to expand or cover

the running costs during start-up, restructurings,

or upswings.21 Reinvested earnings fuctuate quite

signicantly, depending on protability and the level

o repatriation rom abroad in the orm o dividend

payments. Although equity investment continues

to be the most stable component o FDI, global

production chains have changed considerably and

it has become much easier or equity to relocate.

Despite the instability o FDI fows in recent years,

the act that net private fows to developing

countries remain positive is largely due to FDI: the

recovery has not extended yet to all private fows

in all regions, and non-FDI fows were negative in

many years and regions even during the FDI boom(gure I.21). FDI would thereore appear to be much

less volatile than these other private fows (namely

private portolio and private other capital).

All private oreign capital fows portolio investment,

bank loans and FDI contribute to development.

Thus, the recent crisis, and the nature and inherent

ragility o the current upswing, are both matters

o concern to developing countries. This makes

the role o ocial development assistance (ODA)

very important. ODA is less prone to fuctuations;

however, ailure by developed countries to meet

stipulated objectives has led to deep scepticism

about its eectiveness in addressing core

development needs o beneciary countries.

Figure I.20. The volatility o private capital ows, by type, 20032010

Source: UNCTAD.a In 2003 and 2004, the value o standard deviation exceeded 3.

Note: The volatility o each type o capital low is calculated as relative standard deviation or the immediately preceding 10

years. The relative standard deviation o 2010 is based on lows between 2001 and 2010.

0

1

2

3

20 03 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 00

1

2

3

2003a 2004a 2005 2006 2007 2008 2009 2010

Other investment

FDI

Portfolio investment

Other investment

FDI

Portfolio investment

Developed countries Developing and transition economies


23/38


Some developing countries are concerned that a

surge in capital infows could exacerbate imbalanc-es and complicate their macroeconomic policies.Against this backdrop, capital controls are back ontheir policy agenda. The IMF also has now sotenedits customary stance against capital controls (Ostry etal., 2011), making it easier or some Asian and LatinAmerican countries to introduce measures to restrictshort-term, volatile fows, while maintaining the morepreerential treatment o long-term capital. In principle,these measures should not aect FDI, as the lattershould contain only long-term fows. Reality is morecomplex, as fows recorded statistically under FDIcould encompass some short-term fows.

In 2010, FDI fows rose signicantly to some develop-ing countries. In certain cases, the increase o FDI was

not necessarily accompanied by investment in xedassets or cross-border acquisitions. A part o thismoney might have entered developing host countriesor the purpose o short-term capital gains. In coun-tries where FDI infows exceed considerably the capi-tal expenditures o oreign aliates, the latter may holdpart o the unds received rom their parent rms inassets other than immediate investment, or examplespeculative unds.

Moreover, short-term speculative fows may be misre-ported under FDI outfows when they leave the homecountry, but are not recorded as FDI infows in hostcountries as the money transerred is spent instanta-neously or speculative purposes, and does not stay

long enough in the accounts o oreign aliates. Thiskind o money is either reserved or special-purposeentities and nancial holding companies, or is invest-ed in real estate and property which may easily beliquidated. Indeed FDI in real estate is rising in manycountries, in particular in China (chapter II) and in LatinAmerica as it at one time was in pre-crisis West Asia.Such misreporting happens because the distinctionbetween long-term capital fows (FDI) and short-termcapital fows is increasingly blurred. As a result o thegrowth o this short-term capital, recently FDI fowshave become more volatile than beore (gure I.20).

While some speculative short-term private capitalfows may have become part o FDI statistics, mostcontinue to be recorded under errors and omissions,as they usually escape being captured in the estab-lished items o the balance o payments. In 2009 (themost recent year or which data are available), the val-ue o errors and omissions was equivalent to almosthal that o all FDI infows globally, up rom only about10 per cent in previous years.

As the markets or dierent types o capital fows areinterrelated, the establishment o measures targetingexclusively short-term capital fows is increasingly di-cult. Take or example the capital controls introduced in20092010 in the real estate markets o various Asianeconomies: direct controls to limit the size o fowsaected both short- and long-term capital fows (IMF,2011a).

Source: UNCTAD

Box I.5. FDI and capital controls Figure I.21. Composition o private capital ows todeveloping and transition economies, 20042010

(Billions of dollars)

- 40

- 20

-

20

40

60

80

100

- 300

- 200

- 100

-

100

200

300

400

2004 2005 2006 2007 2008 2009 2010

2004 2005 2006 2007 2008 2009 2010

-

- 150

- 100

- 50

-

50

100

150

200

250

2004 2005 2006 2007 2008 2009 2010

Africa

South, East, and South-East Asia

Latin America and the Caribbean

FDI Portfolio Other Capital

Source: UNCTAD, based on data rom IMF, 2011a.


24/38


1. Accelerating internationalization o frms

International production is expanding, with sales,

employment and assets o oreign aliates all

increasing (table I.5). UNCTAD estimates that TNCs

worldwide, in their operations both at home and

abroad, generated value added o approximately

$16 trillion in 2010 (gure I.22), accounting or

more than a quarter o global GDP. In 2010, oreign

aliates accounted or more than one-tenth o

global GDP and one-third o world exports.

International production by TNCs (i.e. value addedby oreign aliates) accounts or around 40 per

cent o TNCs total value added (gure I.22), up

rom around 35 per cent in 2005. International

production networks thus continue to expand,

although the rate o growth was slower during the

crisis, due to the drop in FDI fows.

This continuing expansion refects the consistentlyhigh rates o return obtained by TNCs on FDI

back up to 7.3 per cent in 2010, ater a one-year

dip during the crisis (table I.5). Returns are thus

back to pre-crisis levels, despite a steady decrease

in leverage, as proxied by outward FDI stock over

oreign assets. Leverage peaked during the FDI

boom years rom 2005 to 2007, with the stock

(equity) over assets ratio declining rom nearly 40

per cent to 25 per cent, but it has since decreased,

with the equity/asset ratio climbing up to 36 per

cent in 2009 and 2010.Other indicators o international production also

showed positive gains in 2010. Sales o oreign

aliates rose 9.1 per cent, refecting strong

revenues in developing and transition economies.

Employment continued to expand, as eciency-

seeking investments expanded during the crisis.

C. FURTHER EXPANSION OF INTERNATIONAL PRODUCTION

Table I.5. Selected indicators of FDI and international production, 19902010

Item

Value at current prices Annual growth rate or change on return(Billions o dollars) (Per cent)

199020052007

average 2008 2009 201019911995

19962000

20012005 2009 2010

FDI inows 207 1 472 1 744 1 185 1 244 22.5 40.1 5.3 -32.1 4.9FDI outows 241 1 487 1 911 1 171 1 323 16.9 36.3 9.1 -38.7 13.1FDI inward stock 2 081 14 407 15 295 17 950 19 141 9.4 18.8 13.4 17.4 6.6FDI outward stock 2 094 15 705 15 988 19 197 20 408 11.9 18.3 14.7 20.1 6.3Income on inward FDI 75 990 1 066 945 1 137 35.1 13.1 32.0 -11.3 20.3

Rate of return on inward FDIa 6.6 5.9 7.3 7.0 7.3 -0.5 - 0.1 -0.3 0.3

Income on outward FDI a 122 1 083 1 113 1 037 1 251 19.9 10.1 31.3 -6.8 20.6Rate of return on outward FDIa 7.3 6.2 7.0 6.9 7.2 -0.4 - - -0.2 0.3

Cross-border M&As 99 703 707 250 339 49.1 64.0 0.6 -64.7 35.7

Sales o oreign afliates 5 105 21 293 33 300 30 213b 32 960b 8.2 7.1 14.9 -9.3 9.1Value-added (product) o oreign afliates 1 019 3 570 6 216 6 129b 6 636b 3.6 7.9 10.9 -1.4 8.3Total assets o oreign afliates 4 602 43 324 64 423 53 601b 56 998b 13.1 19.6 15.5 -16.8 6.3Exports o oreign afliates 1 498 5 003 6 599 5 262c 6 239c 8.6 3.6 14.7 -20.3 18.6Employment by oreign afliates (thousands) 21 470 55 001 64 484 66 688b 68 218b 2.9 11.8 4.1 3.4 2.3

GDP 22 206 50 338 61 147 57 920d 62 909d 6.0 1.4 9.9 -5.3 8.6Gross fxed capital ormation 5 109 11 208 13 999 12 735 13 940 5.1 1.3 10.7 -9.0 9.5Royalties and licence ee receipts 29 155 191 187 191 14.6 10.0 13.6 -1.9 1.7Exports o goods and non-actor services 4 382 15 008 19 794 15 783d 18 713d 8.1 3.7 14.7 -20.3 18.6

Source: UNCTAD.a Calculated with FDI income or the countries that have the data or both this and FDI stock.b Data or 2009 and 2010 are estimated based on a ixed eects panel regression o each variable against outward stock and a lagged

dependent variable or the period 1980-2008.c Data or 19951997 are based on a linear regression o exports o oreign ailiates against inward FDI stock or the period 1982 1994.

For 19982010, the share o exports o oreign ailiates in world export in 1998 (33.3%) was applied to obtain values.d Based on data rom IMF, 2011a.Note: Not included in this table are the value o worldwide sales by oreign ailiates associated with their parent irms through non-equity

relationships and o the sales o the parent irms themselves. Worldwide sales, gross product, total assets, exports and employmento oreign ailiates are estimated by extrapolating the worldwide data o oreign ailiates o TNCs rom Australia, Austria, Belgium,Canada, Czech Republic, Finland, France, Germany, Greece, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Portugal, Slovenia,Sweden, and the United States or sales; those rom the Czech Republic, France, Israel, Portugal, Slovenia, Sweden, and theUnited States or value-added (product); those rom Austria, Germany, Japan and the United States or assets; those rom CzechRepublic, Japan, Portugal, Slovenia, Sweden, and the United States or exports; and those rom Australia, Austria, Belgium, Canada,Czech Republic, Finland, France, Germany, Italy, Japan, Latvia, Lithuania, Luxembourg, Macao (China), Portugal, Slovenia, Sweden,Switzerland, and the United States or employment, on the basis o the shares o those countries in worldwide outward FDI stock.


25/38


Underlying this improvement in international

production has been an acceleration o the

internationalization o TNCs and, indeed, o the

initial internationalization o previously non-TNCrms. Three o the major actors driving this new

burst o internationalization are: rst, the crisis

caused rms to rationalize their corporate structure

and increase eciencies wherever possible

(including the options to close down or to sell to

others), oten by relocating business unctions to

cost-advantageous locations; second, the rapid

recovery in emerging market economies, compared

to the relatively weak response in developed

economies, orced many TNCs to embrace these

markets, in an eort to protect prots and generategrowth; and the rise o emerging market TNCs

including State-owned TNCs.

During the economic

and nancial crisis,

many companies

embarked on sig-

nicant layos and

organizational restructuring in order to remain pro-

itable. For TNCs in developed economies, which

make up nearly 80 per cent o the TNCs in the

world, and account or some 70 per cent o globalFDI outfows, this oten meant making cuts in their

In 2010, oreign activity o

the largest non-fnancial TNCs

rebounded, and its share in total

activity remained high.

home economy operations, while moving or open-

ing new acilities abroad to take advantage o spe-

cic comparative advantages in those locations. In

2010, oreign activity o the largest non-nancialTNCs rebounded, and its share in total activity re-

mained high. However not all o the largest TNCs

increased their internationalization. Financial TNCs,

or example, experienced signicant diculties in

2010 (box I.6).

These trend

unctad wir2011 chapter i en

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