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Foreign direct investment 16 April 2010 Kalman Kalotay, UNCTAD/DIAE

Study Tour for Russian Member Universities of the Vi Network (State University Higher School of Economics Moscow, Moscow, State Institute of International Relations (MGIMO) and St. Petersburg State University). Foreign direct investment 16 April 2010 Kalman Kalotay, UNCTAD/DIAE . Outline.

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Foreign direct investment 16 April 2010 Kalman Kalotay, UNCTAD/DIAE

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  1. Study Tour for Russian Member Universities of the Vi Network(State University Higher School of Economics Moscow, Moscow, State Institute of International Relations (MGIMO) and St. Petersburg State University) Foreign direct investment 16 April 2010 Kalman Kalotay, UNCTAD/DIAE

  2. Outline • Introduction to UNCTAD/DIAE • I. Basic concepts • II. Why FDI? • III. The “big picture” • IV. Regional trends • V. FDI in the Russian Federation • VI. The global crisis and FDI

  3. Introduction to UNCTAD/DIAE Who are we? • Division on Investment and Enterprise: focal point within the United Nations Secretariat for all matters related to foreign direct investment and transnational corporations. • History: the Programme on Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations (1975–1992) and the Transnational Corporations and Management Division of the United Nations Department of Economic and Social Development (1992–1993). 1993: transfer to UNCTAD (est. 1964).

  4. How do we carry out our work? • Forum for consensus building (meetings) • Research and analysis • Data collection and analysis of new trends (World Investment Reports, investment trends monitor) • Policy research on development questions • Publications (Transnational Corporations journal, UNCTAD Current Studies on FDI and Development etc.) • Technical cooperation and capacity building • Assistance in negotiating bilateral investment treaties • Assisting in drafting investment laws • Investment Policy Reviews • Publishing investment guides • Help in setting up Investment Promotion Agencies • Assistance in enterprise development and business linkages

  5. World Investment Reports: main source of data and analysis • 2009: Agriculture • 2008: Infrastructure • 2007: Extractive Industries • 2006: FDI from Developing and Transition Economies • 2005: TNCs and the Internationalization of R&D • 2004: The Shift Towards Services • 2003: FDI Policies for Development • 2002: TNCs and Export Competitiveness • 2001: Promoting Linkages • 2000: Cross-border M&As • 1999: FDI and the Challenge of Development • 1998: Trends and Determinants • 1997: Competition Policy • 1996: Investment and Trade • 1995: TNCs and Competitiveness • 1994: TNCs and Employment • 1993: Integrated International Production • 1992: TNCs as Engines of Growth • 1991: The Triad in FDI

  6. I. Basic concepts

  7. What is foreign direct investment? • Balance-of-payments concept • Distinguish between portfolio and direct investment • Portfolio investment: short-term oriented capital flows resulting in control of less than 10 per cent of the equity or voting shares in a foreign company. • Direct investment: results in long-term relationship and a lasting interest and control of a resident in a foreign economy. • FDI flows consist of three different components: • Equity capital • Reinvested earnings • Intra-company loans

  8. Different types of FDI (by motivation of investors) • Natural resource-seeking • Oil and gas extraction, mining, etc • Market-seeking (horizontal FDI) • Access a domestic or regional (EU, NAFTA, ASEAN) market • Efficiency-seeking (vertical FDI) • Specialize and divide production in line with the comparative advantages of different locations; export-oriented FDI • Strategic-asset seeking (primarily through M&As)

  9. Modes of entry of FDI projects • Main modes: • Greenfield investment • Acquisition • Merger • Subsidiary modes: • Joint venture • Expansion investment

  10. II. Why FDI?

  11. FDI is as important as tradeExports and sales in $ trillions

  12. Foreign affiliates’ gross product vs. world GDPIn $ trillions

  13. Some benefits of FDI • In contrast to other capital flows, FDI can bring additional benefits to a host economy: • Access to international markets • Access to foreign sources of supply • Management know-how • Transfer of knowledge and technology • Employment creation and skills development • Competition • Relative stability compared to other flows (in case of crisis)

  14. Some related concerns • FDI is no panacea • Benefits are not automatic • Sovereignty issue • Anti-competitive practices • Transfer pricing/tax evasion • Environmental degradation • Footlooseness and lack of technology spillovers • Risk for excessive competition • Divestment in crisis

  15. III. The “big picture”

  16. Rise until 2007 in global FDI$ billions • Global FDI declined from $2 trillion in 2007 to $1.7 trillion in 2008 • Transition economies posted a new record high, with inflows reaching $114 billion, a 26% increase

  17. The FDI landscape has shifted in favour of developing and transition economies Developing and transition economies accounted for 43% in 2008 (31% in 2007)

  18. Top recipients of FDI inflows Global FDI inflows, top 20 economies, 2007–2008 ($ billion) • The United States remained the largest recipient country, followed by France, China, the United Kingdom, and the Russian Federation • Half of the top 20 recipients were emerging economies

  19. IV. South-East Europe and CIS

  20. Eighth consecutive year of growth of FDI inflows in 2008… FDI inflows, by value and as a percentage of gross fixed capital formation, 1995−2008

  21. …but FDI declined in 2009 • Slowdown (and some decline) in the second half of 2008 • Latest estimate for 2009: • 39% fall in the region, 41% in the Russian federation, 55% in Ukraine, compared to -39% globally FDI inflows of selected countries, 2008−2009, by quarter (Millions of dollars)

  22. FDI inflows in large recipient countries, 2008 Top 5 recipients of FDI inflows, 2007–2008 • Russian Federation: a record level of $70 billion; main targets: electricity generation, real estate and automotive industries • Kazakhstan: a record level of $15 billion; main target: oil and gas projects • Ukraine: more than $10 billion; main targets: acquisitions in banking and steel industries (Billions of dollars)

  23. FDI outflows reached new highs in 2008, but declined in 2009 FDI outflows of selected countries, 2008−2009, by quarter Russian TNCs dominated the region’s outward FDI. Main trends: • First half of 2008: expansion, • to seek new markets for their products abroad, and • to gain access to technology • Second half of 2008 and first quarter of 2009: some divestments; some acquisitions frozen or cancelled (in construction or automotive industry) (Billions of dollars)

  24. Prospects Comparison of the results of WIPS 2008–2010 with WIPS 2009–2011 (Per cent of respondents) • Decline of FDI inflows in the near future due to: • The economic and financial crisis, • A fall in commodity prices, and • The near exhaustion of major privatization opportunities • In the medium term, the outlook for investment in the region is rather positive • Outward FDI is expected to slow down, although Russian TNCs are more optimistic about future plans than their foreign counterparts in developed countries

  25. V. FDI in the Russian Federation

  26. Inflows and outflows grew rapidly between 2002 and 2008, but declined in 2009(Millions of dollars)

  27. However, devaluation of FDI stocks already showed a major problem in 2008(Millions of dollars)

  28. Growth of FDI inflows was fast in international comparison (Millions of dollars)

  29. Cross-border M&As, 1991–2006: primary sector dominatesConfirms natural resource seeking motives

  30. Evolution of industry composition in the Russian Federation

  31. Old EU members dominate (UK, DE), but developing countries are second (CN, IN), and other developed countries third (US) Cross-border M&As, 1991–2006: countries of origin

  32. Rise and decline of source countries • Rise of resource-seeking China • Decline and recovery of resource-seeking India • Rise and decline of the round-tripping hub of Cyprus • Rise (BP-TNK) and decline of the United Kingdom

  33. Growth of outward FDI flows was even more impressive than of inflows: proof of leapfrogging(Millions of dollars)

  34. Despite devaluation in 2008, Russian outward stock is bigger than that of China(Millions of dollars)

  35. Is the Russian Federation and outlier in the investment development path? I.Outward per inward FDI stocks

  36. Is the Russian Federation and outlier in the investment development path? II.FDI outflows per inflows

  37. VI. Impact of the global crisis on FDI

  38. To recall:In 2008, the crisis ends a global FDI boomin developed countries$ billions 38

  39. Cross-border M&As declined strongly in wake of the crisis Value of global cross-border M&As, 1988-2009a aData for 2009 are estimated by annualizing data for the first half of 2009. The value of cross-border M&As declined by 35% in 2008 to $673 billion, and plummet further by 76% in the 1st half of 2009

  40. All components of FDI (equity, reinvested earnings, intra-company loans) have declined • In late 2008 and the first few months of 2009, significant declines were recorded in all three components of FDI inflows: equity investments, intra-company loans and reinvested earnings • Decline in equity investments is particularly large Global FDI inflows by component, 2000–2009 ($ million) a Data for 2009 are estimated by annualizing data for the first half of 2009.

  41. FDI estimate for 2009 • World: -39% • Developed countries: -41% • Developing countries: -35% • Transition economies: -39% • US: -57% • Japan: -53% • South Africa: -25% • Brazil: -41% • Mexico: -41% • Turkey: -56% • China: -3% • Hong Kong (China): -43% • India: -19% • Malaysia: -67% • Russian Federation: -41% • Ukraine: -55% • Poland: -19%

  42. Effects of the crisis on different types of FDI • The most directly affected types of investment so far have been market-seeking projects, especially those aimed at developed countries • Resource-seeking FDI projects could suffer, at least in the short-term, from the decline in world demand • The impact of the crisis on efficiency-seeking projects is more ambiguous: risk aversion versus cost efficiency

  43. Channels of transmission of the crisis to FDI flows • Reduced access to finance: negatively affected TNCs’ capacity to invest, both internally and externally (more than 40 % decline in stock markets) • Gloomy prospects (recession): reduced firms’ propensity to invest for further expansion of production capacities • Risk aversion: Investment plans scaled back due to a high level of perceived risks and uncertainties, in order to develop resilience to possible “worst-case” scenarios regarding financial and economic conditions

  44. Reasons for the sharp impact of the financial and economic crisis on TNCs’ FDI plans

  45. Somewhat better prospects for TNCs’ FDI plans after 2009

  46. Global FDI Prospects, 2009-2011 ($ billion) • Global FDI flows are expected to fall further to below $1.2 trillion in 2009 • With a slow recovery in 2010 (to a level up to $1.4 trillion) • Gaining momentum in 2011 (approaching $1.8 trillion)

  47. Thank you very much for your attention • Questions?

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