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World Investment Report 2008 Transnational Corporations and the Infrastructure Challenge Kalman Kalotay UNCTAD Investment Issues Analysis Branch 26 November 2008
Key messages • Global FDI flows rose for the 4th consecutive year, surpassing the peak of 2000 • Sovereign wealth funds (SWFs) are emerging as new actors on the FDI scene • Global financial crises had a limited impact on FDI flows in 2007, but will begin to bite in 2008. • FDI flows set to decline in 2008
Global FDI flows surpassed the peak of 2000, … FDI inflows, global and by group of economies, 1980-2007 ($ billion)
… including record flows to all developing regions East Asia: $157 billion – record South-East Asia: $61 billion – record South Asia: $31 billion – record West Asia: $71 billion – record Africa: $53 billion – record LAC: $126 billion – record LDCs: $13 billion – record
Sovereign wealth funds (SWFs) are emerging as new actors on the FDI scene FDI flows by sovereign wealth funds, 1987–2007 • The amount invested by SWFs in FDI was 0.2% their total assets (US$ 5 trillion) in 2007 • 79% of total amount invested in FDI took place in the last three years • Three quarters of FDI by SWFs has been in developed countries • Investments were concentrated mainly in business services • Due to negative public perceptions, international organizations are establishing principles and guidelines relating to FDI by SWFs
Most policy changes continue to favour FDI, but restrictions also come to play
FDI flows set to decline in 2008 Value of cross-border M&As, 2006-2008, by quarter Impact of financial instability on FDI flows 2008-2010: Result from the UNCTAD survey • A slowdown in economic growth as a result of financial and credit crises • Corporate profits are declining • Global FDI flows for 2008 are estimated to be $ 1.6 trillion, 10% lower than in 2007 • Cross-border M&As for the first half of 2008 fell 29% compared to the second half of 2007 • However, FDI flows to developing countries in 2008 are resilient
South-East Europe and the CIS:FDI inflows reached a new record level in 2007 FDI inflows in value and as a percentage of gross fixed capital formation, 1995-2007 • Foreign investors were eager to access the fast growing consumer markets and the natural resources of CIS • Privatization-linked projects remained the main drivers of FDI flows to South-East Europe. (Billions of dollars) Source: UNCTAD, World Investment Report 2008,Transnational Corporations and the Infrastructure Challenge.
Patterns of FDI inflows by country • FDI flows to the Russian Federation rose to more than $50 billion due to: • fast growing local consumer market; • liberalization of electricity generation; and • natural-resource related projects. • The FDI potential of South-East Europe and the CIS remains higher than its performance Inward FDI Performance and Potential indices rankings of selected countries, 2006 Source: UNCTAD, World Investment Report 2008,Transnational Corporations and the Infrastructure Challenge.
Patterns of FDI inflows by country (cont’) Top 10 recipients of FDI inflows, 2006–2007 (Billions of dollars) Source: UNCTAD, World Investment Report 2008,Transnational Corporations and the Infrastructure Challenge.
FDI outflows more than doubled in 2007 • Russian TNCs invested abroad to acquire strategic assets or increase their global market share • Russian firms are increasing: • their downstream presence abroad in the energy industry, and • their value-added production activities in the metals industry FDI outflows, 1995-2007 (Billions of dollars) Source: UNCTAD, World Investment Report 2008,Transnational Corporations and the Infrastructure Challenge.
Policy developments • In some CIS countries new natural- resource related laws were approved: • In the Russian Federation, the strategic sector law was promulgated to clarify rules on foreign ownership limitations • In Kazakhstan, the law allows the government to change existing natural-resource contracts unilaterally • South-East European countries: • accelerating privatization
Prospects • Buoyant FDI inflows in larger economies(Russian Federation, Kazakhstan, Ukraine) • Privatizations expected (Uzbekistan, Ukraine, Albania) FDI prospects in South-East Europe and CIS, 2008-2010 (Per cent of respondents)
PART TWO Transnational Corporations and the Infrastructure Challenge
Key messages • Investment in infrastructure is essential for development • TNCs, among others, can help bridge the infrastructure gap of developing countries • Since 1990 TNC investment in infrastructure has risen both globally and in developing countries • The universe of infrastructure TNCs now includes significant number of developing country TNCs • The impact of TNC participation on infrastructure industries in developing countries is mixed • Leveraging TNC participation in infrastructure in host countries is a huge challenge for national policies and institutions
Why investment in infrastructure is important • Efficient infrastructure services are crucial for competitiveness and economic growth • Good quality infrastructure is essential for international trade and integration into the world economy • Access to affordable infrastructure services, such as electricity and drinking water, is an important determinant of living standards • The development of infrastructure helps to eliminate poverty and attain the UN Millennium Development Goals • Low-income countries have huge infrastructure investment needs but lack the necessary capacity domestically to meet them
Rise of FDI in infrastructure industries, with a peak in 2000 • Global FDI stock in infrastructure rose 30-fold to $786 billion between 1990 and 2006 • In developing countries, it rose 29-fold to $199 billion • There was a peak in FDI flows in infrastructure industries around 2000, largely due to M&As in infrastructure FDI inflows in electricity, gas and water, and in telecommunications, 1991-2006, $ billion, three-year moving averages M&A Peak Global infrastructure FDI flows, 1991-2006 ($ billion)
Share of foreign investors in infrastructure industries of developing and transition economies variesCommitments in 1996–2006, %
Forms of TNC involvement vary by industry in commitments in developing and transition economies in 1996–2006FDI in telecoms, concessions in others
Largest TNCs in Infrastructure 2006*Companies from developing economies (in green) now key players * Ranked by foreign assets
The universe of infrastructure TNCs is changing • Increasing number of private and state-owned TNCs • Important role for TNCs from the South • Especially in ports and telecommunications • Significant in LDCs • Sometimes investment in infrastructure and extractive industries is complementary • Rise of new financiers in infrastructure industries • Private equity firms • Sovereign wealth funds Chinese and Indian investments in infrastructure in Africa, up to April 2008
Impact on infrastructure services • TNCs have made a difference in the quantity and quality of infrastructure services in developing countries • but there can be both benefits (e.g. extension of services to more customers) and costs (e.g. TNCs might drive local firms out of the industry. • The overall effect depends on industry characteristics, host country regulation and the behaviour of foreign affiliates • Overall improvements are most common in telecommunications and transportation (e.g. ports) • TNCs recover their investment costs by price increases, which particularly affects access for the poor and universal access
Host country national policies and institutions Development partner policies Leveraging TNC participationPolicy challenges and options • Creating strong, transparent and accountable institutional and regulatory frameworks • Sequencing of reform • Assessing options and negotiating with TNCs • Building necessary capabilities to deal with public-private partnerships • Involving TNCs in infrastructure places more, rather than less, responsibility on public officials. • ODA to infrastructure • Better use of available funds • Readiness to take risk • More capacity-building • Evaluating options • Negotiations with TNCs • Role for the UN? • Risk-mitigation targeted to low-income countries • Support to regional projects • Keep all options open
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