In one of this year's largest videoconferences, Ralf Krüger, of UNCTAD's Division on Investment and Enterprise, presented the findings of the Word Investment Report (WIR) 2009 to about 60 professors, students, and guests of three Russian Vi university members: Moscow State Institute of International Relations (MGIMO), Higher School of Economics of the Moscow University (HSE) and St. Petersburg State University (SPSU).
Moderated by Vi Chief, Vlasta Macku and professors Anna Abramova (MGIMO), and Olga Trofimenko (SPSU), the multi-site conference held on 24 November featured a number of prominent guests, among them Nikolai Platonov and Efim Stroev, from the Permanent Mission of the Russian Federation in Geneva.
"It has become a very good tradition," said Macku, as she lauded efforts of the Russian universities to integrate the videoconferences into their academic activities.
Also attending the conference were Sergey F. Sutyrin, Head of SPSU's World Economy Department, Irina Nikolaevna Platonova, Head of the Department of International Economic Relations and International Economic Affairs, and Nikolai Nikolaevich Liventsev, professor in the same department, who emphasized the importance of this form of collaboration, and expressed his interest in gaining "first hand information from the UNCTAD report."
In his opening speech, Platonov appreciated the opportunity to meet "with future experts on international investment" and thanked the Vi for organizing the conference. He said that UNCTAD is the most effective and useful organization in the area of investment for its member countries and stressed the significance of the WIR, the Investment Policy Reviews (IPR), the work on International Investment Agreements (IIAs), and the joint UNCTAD-WTO-OECD report on protectionist measures for the Pittsburg summit.
Krüger's presentation of this year's WIR illustrated the significant changes that have occurred in the landscape of Foreign Direct Investment (FDI) as a result of the current global financial crisis.
FDI has experienced significant reductions in different forms of investments, among them cross-border Mergers and Acquisitions (M&A) as well as Greenfield investments. According to Krüger, the crisis came at the same time as an increasing share of unfavorable policies toward foreign investments. In addition, there are a number of covert protectionist measures such as "stretching" national security arguments. Further decline in FDI inflows is expected, due to the economic and financial crisis, the fall in commodity prices, and the near exhaustion of major privatization opportunities.
However, while FDI inflows to developed economies fell by 29 percent in 2008, inflows to developing economies rose by 17 percent, with the transition economies of South-East Europe and the Commonwealth of Independent States (CIS) reaching a record-high increase of 26 percent.
In Russia, the electricity and real estate sectors and the automobile industry attracted large investments in 2008. Kazakhstan reached a record level of FDI inflows, most of it into oil and gas projects, and Ukraine benefited from investments in the banking sector and the steel industry.
In general, the last wave of privatizations of formerly state-owned enterprises in Russia and the CIS triggered significant investments in 2008. Capital outflows from the region were dominated by Russian transnational corporations (TNCs) that increased their investments in the first half of 2008 but had to divest and put acquisitions on hold in the second half of 2008 and first quarter of 2009.
Krüger dedicated a large part of his presentation to the agricultural sector, which has become an important target of TNCs - particularly with contract farming gaining in influence. He stressed that the share of agriculture in FDI inflows is significant in some countries, reaching up to 15.1 percent in Cambodia. The share of contract farming in a country's output of some agricultural products may be as high as 75 percent for poultry production in Brazil, or 90 percent for cotton and fresh milk production in Vietnam. In this context Krüger pointed out the fact that land acquisition is increasing, with a large number of investors coming from the south (Arab countries and China, for example) and aiming at financial profits and/or food security.
The term contract farming covers a variety of arrangements, differing by type of contractor, type of product, intensity of coordination (usually vertical) between farmer and TNC, and number of key stakeholders involved. Five different basic models of contract farming can be distinguished:
Centralized: Classical model. TNC buys products from a large number of (small) farmers. Strict vertical coordination, tight quality control, quantity determined at beginning of growing season. Products require a high degree of processing.
Nucleus estate: Contractor not only sources from independent farmers but has own production facilities (central estate) to guarantee throughput or for research and breeding purposes. Mainly used for perennial crops.
Multipartite: Contractor is a joint venture between a statutory entity and a private company. Public or private actors may provide credit, extension services and inputs. Used by developing countries as part of the liberalization process.
Informal: Individual entrepreneurs or small companies contracting informally with farmers on a seasonal basis. Fewer options for vertical coordination. Used for crops that require only a minimal amount of processing.
Intermediary: Contractual arrangements between a processor or major trader, a collector (or “middle person”), and a number of farmers. Vertical coordination more difficult as there is no direct link between the principal contractor and the farmers.
Source: UNCTAD: World Investment Report 2009, p. 119 (see references there)
TNCs can play an important role in filling the investment gap in agriculture and in providing access to technology. However, their engagement involves a number of potential disadvantages such as job loss caused by non-labor-intensive technology, dependence of farmers on one client (i.e. the contracting TNC), environmental damage, social disturbances, and political interference.
Nonetheless, the WIR recommends that developing countries promote arrangements such as contract farming, and facilitate the cooperation by building the capacities of local farmers. FDI inflows should be promoted by providing a legal framework, and by closing investment contracts with foreign investors. Likewise, investors should consider the pros and cons of investments into agricultural land, taking into account alternative investments in infrastructure. The report suggest that the international community should look into the development of a set of internationally agreed core principles for large-scale land acquisitions, encourage FDI in developing economies, and consider linking TNCs to Official Development Aid (ODA) programmes.
The presentation of the WIR was followed by an intense discussion that concentrated on the future of Russian participation in FDI, the strategy and policy advice for Russian TNCs, and the challenges in the agricultural sector, especially with respect to FDI and food security.
Regarding investments in the agricultural sector and the acquisition of land in foreign countries, Krüger said that an internationally agreed set of standards and model contracts could help to ensure that developing countries benefit from the investments. He gave the example of Japan, whose government is promoting the establishment of rules to increase transparency in large land deals. Moreover, non-governmental organizations (NGOs) as well as ODA could be (and are already) employed to organize farmers and enable them to voice their views. Host country food-security issues have to be considered as well, and host countries should be careful about granting foreign TNCs too much influence.
With respect to the evolution of FDI flows in recent years, Krüger said that in many developed countries FDI inflows have decreased for various reasons. In France and Germany, for instance, the amount of intra-company loans (a component of FDI) has fallen significantly, with lower inflows from private equity funds also largely responsible for the reduction in FDI into Germany. Krüger assumes that the share of developed countries in FDI will increase again somewhat after the crisis. However, the growing share of developing and transition economies in FDI has been a trend even before the current crisis and by now the investment landscape has changed substantially. In terms of FDI flows into and out of Russia, Krüger said that Russian companies will take on a leading role in the region, and increasingly so as soon as commodity prices recover.
The videoconference ended with Macku and Krüger thanking the audience for their thorough preparation for the videoconference and their qualified questions. Abramova and Trofimenko thanked the presenter and the Vi, and said they were looking forward to the presentation of the Trade and Development Report 2009 scheduled for December 3.