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World Investment Report 2015: Reforming International Investment Governance - Overview

Report by UNCTAD, 2015

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This Report tackles the key challenges in international investment protection and promotion, including the right to regulate, investor-state dispute settlement, and investor responsibility. It examines the fiscal treatment of international investment, including contributions of multinational corporations in developing countries, fiscal leakage through tax avoidance, and the role of offshore investment links. Furthermore, it offers a menu of options for the reform of the international investment treaties regime, together with a roadmap to guide policymakers at the national, bilateral, regional and multilateral levels. Finally, the Report proposes a set of principles and guidelines to ensure coherence between international tax and investment policies.

U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


WORLD
INVESTMENT


REPORT


REFORMING INTERNATIONAL INVESTMENT GOVERNANCE


OVERVIEW


EMBARGO
The contents of this Report must not
be quoted or summarized in the print,
broadcast or electronic media before


24 June 2015, 17:00 GMT.
(1 p.m. New York; 7 p.m. Geneva;


10.30 p.m. Delhi; 2 a.m. on 25 June, Tokyo)




U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


KEY MESSAGES AND
OVERVIEW


WORLD
INVESTMENT


REPORT2015
REFORMING INTERNATIONAL INVESTMENT GOVERNANCE


New York and Geneva, 2015




World Investment Report 2015: Reforming International Investment GovernanceII


NOTE


The Division on Investment and Enterprise of UNCTAD is a global centre
of excellence, dealing with issues related to investment and enterprise
development in the United Nations System. It builds on four decades of
experience and international expertise in research and policy analysis,
fosters intergovernmental consensus-building, and provides technical
assistance to over 150 countries.


The terms country/economy as used in this Report also refer, as appropriate,
to territories or areas; the designations employed and the presentation of
the material do not imply the expression of any opinion whatsoever on the
part of the Secretariat of the United Nations concerning the legal status
of any country, territory, city or area or of its authorities, or concerning the
delimitation of its frontiers or boundaries. In addition, the designations of
country groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgment about the stage of development
reached by a particular country or area in the development process. The
major country groupings used in this Report follow the classification of the
United Nations Statistical Office:


• Developed countries: the member countries of the OECD (other than
Chile, Mexico, the Republic of Korea and Turkey), plus the new European
Union member countries which are not OECD members (Bulgaria,
Croatia, Cyprus, Latvia, Lithuania, Malta and Romania), plus Andorra,
Bermuda, Liechtenstein, Monaco and San Marino.


• Transition economies: South-East Europe, the Commonwealth of
Independent States and Georgia.


• Developing economies: in general, all economies not specified above.
For statistical purposes, the data for China do not include those for Hong
Kong Special Administrative Region (Hong Kong SAR), Macao Special
Administrative Region (Macao SAR) and Taiwan Province of China.




III


Reference to companies and their activities should not be construed as an
endorsement by UNCTAD of those companies or their activities.


The boundaries and names shown and designations used on the maps
presented in this publication do not imply official endorsement or acceptance
by the United Nations.


The following symbols have been used in the tables:


Two dots (..) indicate that data are not available or are not separately
reported. Rows in tables have been omitted in those cases where no data
are available for any of the elements in the row.


• A dash (–) indicates that the item is equal to zero or its value is negligible.


• A blank in a table indicates that the item is not applicable, unless
otherwise indicated.


• A slash (/) between dates representing years, e.g., 2010/11, indicates a
financial year.


• Use of a dash (–) between dates representing years, e.g., 2010–2011,
signifies the full period involved, including the beginning and end years.


• Reference to “dollars” ($) means United States dollars, unless otherwise
indicated.


• Annual rates of growth or change, unless otherwise stated, refer to
annual compound rates.


• Details and percentages in tables do not necessarily add to totals
because of rounding.


The material contained in this study may be freely quoted with appropriate
acknowledgement.






V


BAN Ki-moon
Secretary-General of the United Nations


PREFACE


This year’s World Investment Report, the 25th in the series, aims to inform
global debates on the future of the international policy environment for cross-
border investment.


Following recent lackluster growth in the global economy, this year’s Report
shows that Foreign Direct Investment (FDI) inflows in 2014 declined 16 per
cent to $1.2 trillion. However, recovery is in sight in 2015 and beyond.
FDI flows today account for more than 40 per cent of external development
finance to developing and transition economies.


This Report is particularly timely in light of the Third International Conference on
Financing for Development in Addis Ababa – and the many vital discussions
underscoring the importance of FDI, international investment policy making
and fiscal regimes to the implementation of the new development agenda
and progress towards the future sustainable development goals.


The World Investment Report tackles the key challenges in international
investment protection and promotion, including the right to regulate, investor-
state dispute settlement, and investor responsibility. Furthermore, it examines
the fiscal treatment of international investment, including contributions of
multinational corporations in developing countries, fiscal leakage through tax
avoidance, and the role of offshore investment links.


The Report offers a menu of options for the reform of the international
investment treaties regime, together with a roadmap to guide policymakers at
the national, bilateral, regional and multilateral levels. It also proposes a set of
principles and guidelines to ensure coherence between international tax and
investment policies.


I commend this publication as an important tool for the international investment
community in this crucial year for sustainable development.




World Investment Report 2015: Reforming International Investment GovernanceVI


ACKNOWLEDGEMENTS


The World Investment Report 2015 (WIR15) was prepared by a team led by James X. Zhan.
The team members included Richard Bolwijn, Kwangouck Byun, Bruno Casella,
Joseph Clements, Hamed El Kady, Kumi Endo, Masataka Fujita, Noelia Garcia Nebra, Axèle
Giroud, Joachim Karl, Ventzislav Kotetzov, Guoyong Liang, Hafiz Mirza, Shin Ohinata, Sergey
Ripinsky, Diana Rosert, William Speller, Astrit Sulstarova, Claudia Trentini, Elisabeth Tuerk,
Joerg Weber and Kee Hwee Wee.


WIR15 benefited from the advice of Jeffrey Owens, Senior Tax Advisor.


Research and statistical assistance was provided by Bradley Boicourt, Mohamed Chiraz Baly
and Lizanne Martinez. Contributions were also made by Bekele Amare, Ana Conover Blancas,
Hasinah Essop, Charalampos Giannakopoulos, Thomas van Giffen, Natalia Guerra, Rhea
Hoffmann, Mathabo Le Roux, Kendra Magraw, Abraham Negash, Chloe Reis, Davide Rigo,
Julia Salasky, John Sasuya, Carmen Saugar Koster, Catharine Titi, as well as interns Anna
Mouw and Elizabeth Zorrilla.


The manuscript was copy-edited with the assistance of Lise Lingo, and typeset by Laurence
Duchemin and Teresita Ventura.


Sophie Combette and Nadege Hadjemian designed the cover, and Pablo Cortizo designed
the figures and maps.


Production and dissemination of WIR15 was supported by Elisabeth Anodeau-Mareschal,
Anne Bouchet, Nathalie Eulaerts, Rosalina Goyena, Tadelle Taye and Katia Vieu.


At various stages of preparation, in particular during the experts meetings organized to discuss
drafts of WIR15, the team benefited from comments and inputs received from external experts:
Wolfgang Alschner, Carlo Altomonte, Douglas van den Berghe, Nathalie Bernasconi, Yvonne
Bol, David Bradbury, Irene Burgers, Jansen Calamita, Krit Carlier, Manjiao Chi, Steve Clark, Alex
Cobham, Aaron Cosbey, Lorrain Eden, Maikel Evers, Uche Ewelukwa, Michael Ewing-Chow,
Alessio Farcomeni, Michael Hanni, Martin Hearson, Steffen Hindelang, Lise Johnson, Michael
Keen, Eric Kemmeren, Jan Kleinheisterkamp, Victor van Kommer, Markus Krajewski, Federico
Lavopa, Michael Lennard, Jan Loeprick, Ricardo Martner, Makane Mbengue, Nara Monkam,
Hans Mooij, Ruud de Mooij, Peter Muchlinski, Alexandre Munoz, Thomas Neubig, Andrew
Packman, Joost Pauwelyn, Facundo Perez Aznar, Raffaella Piccarreta, Andrea Saldarriaga,
Mavluda Sattorova, Ilan Strauss, Lauge Skovgaard Poulsen, Christian Tietje, Jan van den
Tooren, Gerben Weistra and Paul Wessendorp. MEED provided assistance in obtaining data
for the West Asia region.


Also acknowledged are comments received from other UNCTAD divisions, including from
the Division for Africa, Least Developed Countries and Special Programmes, the Division on
Globalization and Development Strategies, and the Division on Technology and Logistics, as
part of the internal peer review process, as well as comments from the Office of the Secretary-
General as part of the review and clearance process. The United Nations Cartographic Section
provided advice for the regional maps.


Numerous officials of central banks, government agencies, international organizations and
non-governmental organizations also contributed to WIR15. The financial support of the
Governments of Finland, Norway, Sweden and Switzerland is gratefully acknowledged.




VII


TABLE OF CONTENTS


PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V


ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI


KEY MESSAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX


OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1


GLOBAL INVESTMENT TRENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1


REGIONAL TRENDS IN FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15


INVESTMENT POLICY TRENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22


REFORMING THE INTERNATIONAL INVESTMENT REGIME:


AN ACTION MENU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27


INTERNATIONAL TAX AND INVESTMENT POLICY COHERENCE . . . . . . . . . . . . . . . 33






KEY MESSAGES IX


KEY MESSAGES


GLOBAL INVESTMENT TRENDS


Global FDI inflows declined in 2014. Global foreign direct investment (FDI)
inflows fell by 16 per cent to $1.23 trillion in 2014, mostly because of
the fragility of the global economy, policy uncertainty for investors and
elevated geopolitical risks. New investments were also offset by some large
divestments.


Inward FDI flows to developing economies reached their highest level ever,


at $681 billion with a 2 per cent rise. Developing economies thus extended
their lead in global inflows. China became the world’s largest recipient of FDI.
Among the top 10 FDI recipients in the world, 5 are developing economies.


The low level of flows to developed countries persisted in 2014. Despite
a revival in cross-border mergers and acquisitions (M&As), overall FDI
flows to this group of economies declined by 28 per cent to $499 billion.
They were significantly affected by a single large-scale divestment from the
United States.


Investments by developing-country multinational enterprises (MNEs) also


reached a record level: developing Asia now invests abroad more than any


other region. Nine of the 20 largest investor countries were from developing
or transition economies. These MNEs continued to acquire developed-
country foreign affiliates in the developing world.


Most regional groupings and initiatives experienced a fall in inflows in


2014. The groups of countries negotiating the Transatlantic Trade and
Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) saw
their combined share of global FDI inflows decline. ASEAN (up 5 per cent to
$133 billion) and the RCEP (up 4 per cent to $363 billion) bucked the trend.




World Investment Report 2015: Reforming International Investment GovernanceX


By sector, the shift towards services FDI over the past 10 years has continued,
in response to increasing liberalization in the sector, the increasing tradability
of services, and the growth of global value chains in which services play an
important role. In 2012, services accounted for 63 per cent of global FDI
stock, more than twice the share of manufacturing, at 26 per cent. The
primary sector represented less than 10 per cent of the total.


Cross-border M&As in 2014 rebounded strongly to $399 billion. The number
of MNE deals with values larger than $1 billion increased to 223 – the highest
number since 2008 – from 168 in 2013. At the same time, MNEs made
divestments equivalent to half of the value of acquisitions.


Announced greenfield investment declined by 2 per cent to $696 billion.
Developing countries continued to attract two thirds of announced greenfield
investment. Greenfield investment by both developed- and developing-
country MNEs remained unchanged.


FDI by special investors varied. The significance of private equity funds
in the global M&A market, with $200 billion in acquisitions in 2014, was
reflected mainly in transactions involving large companies. Sovereign wealth
funds, which invested $16 billion in FDI in 2014, are increasingly targeting
infrastructure internationally. State-owned MNEs’ international expansion has
decelerated; in particular, their cross-border M&As declined by 39 per cent
to $69 billion.


International production by MNEs is expanding. International production rose
in 2014, generating value added of approximately $7.9 trillion. The sales and
assets of MNEs’ foreign affiliates grew faster than those of their domestic
counterparts. Foreign affiliates of MNEs employed about 75 million people.


FDI recovery is in sight. Global FDI inflows are projected to grow by 11 per
cent to $1.4 trillion in 2015. Expectations are for further rises to $1.5 trillion
in 2016 and to $1.7 trillion in 2017. Both UNCTAD’s FDI forecast model
and its business survey of large MNEs signal a rise of FDI flows in the
coming years. The share of MNEs intending to increase FDI expenditures




KEY MESSAGES XI


over the next three years (2015–2017) rose from 24 to 32 per cent.
Trends in cross-border M&As also point to a return to growth in 2015. However,
a number of economic and political risks, including ongoing uncertainties in
the Eurozone, potential spillovers from geopolitical tensions and persistent
vulnerabilities in emerging economies, may disrupt the projected recovery.


REGIONAL INVESTMENT TRENDS


FDI inflows to Africa remained flat at $54 billion. Although the services share in
Africa FDI is still lower than the global and the developing-country averages, in
2012, services accounted for 48 per cent of the total FDI stock in the region,
more than twice the share of manufacturing (21 per cent). FDI stock in the
primary sector was 31 per cent of the total. Services FDI is concentrated in a
few countries, including South Africa, Nigeria and Morocco.


Developing Asia (up 9 per cent) saw FDI inflows grow to historically high
levels. They reached nearly half a trillion dollars in 2014, further consolidating
the region’s position as the largest recipient in the world. FDI inflows to East
and South-East Asia increased by 10 per cent to $381 billion. In recent years,
MNEs have become a major force in enhancing regional connectivity in the
subregion, through cross-border investment in infrastructure. The security
situation in West Asia has led to a six-year continuous decline of FDI flows
(down 4 per cent to $43 billion in 2014); weakening private investment in parts
of the region is compensated by increased public investment. In South Asia
(up 16 per cent to $41 billion), FDI has increased in manufacturing, including
in the automotive industry.


FDI flows to Latin America and the Caribbean (down 14 per cent) decreased
to $159 billion in 2014, after four years of consecutive increases. This was
mainly due to a decline in cross-border M&As in Central America and the
Caribbean and to lower commodity prices, which dampened FDI to South
America. The FDI slowdown, after a period of strong inflows driven by high
commodity prices, may be an opportunity for Latin American countries to re-
evaluate FDI strategies for the post-2015 development agenda.




World Investment Report 2015: Reforming International Investment GovernanceXII


FDI in transition economies decreased by 52 per cent to $48 billion in
2014. Regional conflict coupled with falling oil prices and international
sanctions has damaged economic growth prospects and shrunk investor
interest in the region.


FDI inflows to developed countries fell by 28 per cent to $499 billion.
Divestment and large swings in intracompany loans reduced inflows to the
lowest level since 2004. Outflows held steady at $823 billion. Cross-border
M&A activities gathered momentum in 2014. Burgeoning FDI income is
providing a counterbalance to trade deficits, particularly in the United
States and Japan.


FDI flows to structurally weak, vulnerable and small economies varied.
FDI to the least developed countries (LDCs) increased by 4 per cent.
Landlocked developing countries (LLDCs) experienced a decline of 3 per
cent in FDI inflows, mostly in those in Asia and Latin America. By contrast,
FDI inflows to small island developing States (SIDS) increased by 22 per
cent, due to a rise in cross-border M&A sales. The relative importance of
FDI, its greater stability and its more diverse development impact compared
with other sources of finance means that it remains an important component
of external development finance to these economies. Over the decade to
2014, FDI stock tripled in LDCs and SIDS, and quadrupled in LLDCs. With
a concerted effort by the international investment-development community,
it would be possible to have FDI stock in structurally weak economies
quadruple again by 2030. More important, further efforts are needed to
harness financing for economic diversification to foster greater resilience
and sustainability in these countries.


INVESTMENT POLICY TRENDS


Countries’ investment policy measures continue to be geared predominantly
towards investment liberalization, promotion and facilitation. In 2014, more
than 80 per cent of investment policy measures aimed to improve entry
conditions and reduce restrictions. A focus was investment facilitation




KEY MESSAGES XIII


and sector-specific liberalization (e.g. in infrastructure and services).
New investment restrictions related mostly to national security concerns
and strategic industries (such as transport, energy and defence).


Measures geared towards investment in sectors important for sustainable
development are still relatively few. Only 8 per cent of measures between
2010 and 2014 were specifically targeted at private sector participation
in key sustainable development sectors (infrastructure, health, education,
climate-change mitigation). In light of the SDG investment gap (WIR14),
greater focus on channeling investment into key sectors for sustainable
development would be warranted.


Countries and regions continue their search for reform of the international
investment agreements (IIAs) regime. Thirty-one new IIAs were concluded
in 2014, most with provisions related to sustainable development. Canada
was the most active country (with seven new treaties). The IIA universe grew
to 3,271 treaties. At the same time, countries and regions considered new
approaches to investment policymaking. Reacting to the growing unease
with the current functioning of the global IIA regime, together with today’s
sustainable development imperative and the evolution of the investment
landscape, at least 50 countries and regions were engaged in reviewing
and revising their IIA models. Brazil, India, Norway and the European Union
(EU) published novel approaches. South Africa and Indonesia continued
their treaty terminations, while formulating new IIA strategies.


Pre-establishment commitments are included in a relatively small but
growing number of IIAs. Some 228 treaties now provide national treatment
for the “acquisition” or “establishment” of investments. Most involve the
United States, Canada, Finland, Japan, and the EU, but a few developing
countries (Chile, Costa Rica, the Republic of Korea, Peru and Singapore)
also follow this path.


There were 42 new investor-State dispute settlement (ISDS) cases in 2014,
bringing the total number of known treaty-based claims to 608. Developing
countries continue to bear the brunt of these claims, but the share of




World Investment Report 2015: Reforming International Investment GovernanceXIV


developed countries is on the rise. Most claimants come from developed
countries. Forty-three decisions were rendered in 2014, bringing the overall
number of concluded cases to 405. Of these, States won 36 per cent,
investors 27 per cent. The remainder was either settled or discontinued.


REFORMING THE INTERNATIONAL INVESTMENT REGIME:
AN ACTION MENU


There is a pressing need for systematic reform of the global IIA regime.
As is evident from the heated public debate and parliamentary hearing
processes in many countries and regions, a shared view is emerging on the
need for reform of the IIA regime to ensure that it works for all stakeholders.
The question is not about whether or not to reform, but about the what,
how and extent of such reform. This report offers an action menu for such
reform.


IIA reform can build on lessons learned from 60 years of IIA rule making:
(i) IIAs “bite” and may have unforeseen risks, and safeguards need to be
put in place; (ii) IIAs have limitations as an investment promotion tool, but
also underused potential; and (iii) IIAs have wider implications for policy and
systemic coherence, as well as capacity-building.


IIA reform should address five main challenges. IIA reform should aim at
(i) safeguarding the right to regulate in the public interest so as to ensure
that IIAs’ limits on the sovereignty of States do not unduly constrain public
policymaking; (ii) reforming investment dispute settlement to address
the legitimacy crisis of the current system; (iii) promoting and facilitating
investment by effectively expanding this dimension in IIAs; (iv) ensuring
responsible investment to maximize the positive impact of foreign
investment and minimize its potential negative effects; and (v) enhancing
the systemic consistency of the IIA regime so as to overcome the gaps,
overlaps and inconsistencies of the current system and establish coherence
in investment relationships.




KEY MESSAGES XV


UNCTAD presents policy options for meeting these challenges. This report
sets out options for addressing the standard elements found in an IIA. Some
of these reform options can be combined and tailored to meet several
reform objectives:


• Safeguarding the right to regulate: Options include clarifying or
circumscribing provisions such as most-favoured-nation (MFN) treatment,
fair and equitable treatment (FET), and indirect expropriation, as well as
including exceptions, e.g. for public policies or national security.


• Reforming investment dispute settlement: Options include (i) reforming
the existing mechanism of ad hoc arbitration for ISDS while keeping its
basic structure and (ii) replacing existing ISDS arbitration systems. The
former can be done by fixing the existing mechanism (e.g. improving the
arbitral process, limiting investors’ access, using filters, introducing local
litigation requirements) and by adding new elements (e.g. building in
effective alternative dispute resolution or introducing an appeals facility).
Should countries wish to replace the current ISDS system, they can do
so by creating a standing international investment court, or by relying on
State-State and/or domestic dispute resolution.


• Promoting and facilitating investment: Options include adding inward and
outward investment promotion provisions (i.e. host- and home-country
measures), and joint and regional investment promotion provisions,
including an ombudsperson for investment facilitation.


• Ensuring responsible investment: Options include adding not lowering of
standards clauses and establishing provisions on investor responsibilities,
such as clauses on compliance with domestic laws and on corporate
social responsibility.


• Enhancing systemic consistency of the IIA regime: Options include
improving the coherence of the IIA regime, consolidating and streamlining
the IIA network, managing the interaction between IIAs and other bodies
of international law, and linking IIA reform to the domestic policy agenda.




World Investment Report 2015: Reforming International Investment GovernanceXVI


When implementing IIA reform, policymakers have to determine the most
effective means to safeguard the right to regulate while providing for the
protection and facilitation of investment. In so doing, they need to consider
the compound effect of options. Some combinations of reform options may
“overshoot” and result in a treaty that is largely deprived of its traditional
investment protection rationale.


In terms of process, IIA reform actions should be synchronized at the
national, bilateral, regional and multilateral levels. In each case, the reform
process includes (i) taking stock and identifying the problems, (ii) developing
a strategic approach and an action plan for reform, and (iii) implementing
actions and achieving the outcomes.


All of this should be guided by the goal of harnessing IIAs for sustainable
and inclusive development, focusing on the key reform areas and following
a multilevel, systematic and inclusive approach. In the absence of a
multilateral system, given the huge number of existing IIAs, the best way
to make the IIA regime work for sustainable development is to collectively
reform the regime with a global support structure. Such a structure can
provide the necessary backstopping for IIA reform, through policy analysis,
coordination among various processes at different levels and dimensions,
management of the interaction with other bodies of law, technical assistance
and consensus-building. UNCTAD plays a key role in this regard. Only a
common approach will deliver an IIA regime in which stability, clarity and
predictability help achieve the objectives of all stakeholders: effectively
harnessing international investment relations for the pursuit of sustainable
development.


INTERNATIONAL TAX AND INVESTMENT POLICY COHERENCE


Intense debate and concrete policy work is ongoing in the international
community on the fiscal contribution of MNEs. The focus is predominantly
on tax avoidance – notably in the G20 project on base erosion and profit
shifting (BEPS). At the same time, sustained investment is needed for global




KEY MESSAGES XVII


economic growth and development, especially in light of financing needs for
the Sustainable Development Goals (SDGs). The policy imperative is to take
action against tax avoidance to support domestic resource mobilization and
continue to facilitate productive investment for sustainable development.


UNCTAD estimates the contribution of MNE foreign affiliates to government
budgets in developing countries at approximately $730 billion annually.
This represents, on average, some 23 per cent of total corporate
contributions and 10 per cent of total government revenues. The relative
size (and composition) of this contribution varies by country and region. It
is higher in developing countries than in developed countries, underlining
the exposure and dependence of developing countries on corporate
contributions. (On average, the governments of African countries depend
on foreign corporate payments for 14 per cent of their budget funding.)


Furthermore, the lower a country is on the development ladder, the greater
is its dependence on non-tax revenue streams contributed by firms.
In developing countries, foreign affiliates, on average, contribute more
than twice as much to government revenues through royalties on natural
resources, tariffs, payroll taxes and social contributions, and other types of
taxes and levies, than through corporate income taxes.


MNEs build their corporate structures through cross-border investment.
They do so in the most tax-efficient manner possible, within the constraints
of their business and operational needs. The size and direction of FDI
flows are thus often influenced by MNE tax considerations, because the
structure and modality of investments enable opportunities to avoid tax on
subsequent investment income.


An investment perspective on tax avoidance puts the spotlight on the role
of offshore investment hubs (tax havens and special purpose entities in
other countries) as major players in global investment. Some 30 per cent
of cross-border corporate investment stocks have been routed through
offshore hubs before reaching their destination as productive assets.
(UNCTAD’s FDI database removes the associated double-counting effect).




World Investment Report 2015: Reforming International Investment GovernanceXVIII


The outsized role of offshore hubs in global corporate investments is
largely due to tax planning, although other factors can play a supporting
role. MNEs employ a range of tax avoidance levers, enabled by tax rate
differentials between jurisdictions, legislative mismatches and tax treaties.
MNE tax planning involves complex multilayered corporate structures.
Two archetypal categories stand out: (i) intangibles-based transfer
pricing schemes and (ii) financing schemes. Both schemes, which are
representative of a relevant part of tax avoidance practices, make use
of investment structures involving entities in offshore investment hubs –
financing schemes especially rely on direct investment links through hubs.


Tax avoidance practices by MNEs are a global issue relevant to all
countries: the exposure to investments from offshore hubs is broadly
similar for developing and developed countries. However, profit shifting
out of developing countries can have a significant negative impact on
their prospects for sustainable development. Developing countries are
often less equipped to deal with highly complex tax avoidance practices
because of resource constraints or lack of technical expertise.


Tax avoidance practices are responsible for a significant leakage of
development financing resources. An estimated $100 billion of annual tax
revenue losses for developing countries is related to inward investment
stocks directly linked to offshore hubs. There is a clear relationship between
the share of offshore-hub investment in host countries’ inward FDI stock
and the reported (taxable) rate of return on FDI. The more investment is
routed through offshore hubs, the less taxable profits accrue. On average,
across developing economies, every 10 percentage points of offshore
investment is associated with a 1 percentage point lower rate of return.
These averages disguise country-specific impacts.


Tax avoidance practices by MNEs lead to a substantial loss of government
revenue in developing countries. The basic issues of fairness in the
distribution of tax revenues between jurisdictions that this implies must
be addressed. At a particular disadvantage are countries with limited tax




KEY MESSAGES XIX


collection capabilities, greater reliance on tax revenues from corporate
investors, and growing exposure to offshore investments.


Therefore, action must be taken to tackle tax avoidance, carefully
considering the effects on international investment. Currently, offshore
investment hubs play a systemic role in international investment flows:
they are part of the global FDI financing infrastructure. Any measures at
the international level that might affect the investment facilitation function
of these hubs, or key investment facilitation levers (such as tax treaties),
must include an investment policy perspective.


Ongoing anti-avoidance discussions in the international community pay
limited attention to investment policy. The role of investment in building the
corporate structures that enable tax avoidance is fundamental. Therefore,
investment policy should form an integral part of any solution to tax
avoidance.


A set of guidelines for coherent international tax and investment policies
may help realize the synergies between investment policy and initiatives
to counter tax avoidance. Key objectives include removing aggressive
tax planning opportunities as investment promotion levers; considering
the potential impact on investment of anti-avoidance measures; taking
a partnership approach in recognition of shared responsibilities between
host, home and conduit countries; managing the interaction between
international investment and tax agreements; and strengthening the role of
both investment and fiscal revenues in sustainable development as well as
the capabilities of developing countries to address tax avoidance issues.




World Investment Report 2015: Reforming International Investment GovernanceXX


WIR14 showed the massive worldwide financing needs for sustainable
development and the important role that FDI can play in bridging the
investment gap, especially in developing countries. In this light, strengthening
the global investment policy environment, including both the IIA and the
international tax regimes, must be a priority. The two regimes, each made
up of a “spaghetti bowl” of over 3,000 bilateral agreements, are interrelated,
and they face similar challenges. And both are the object of reform efforts.
Even though each regime has its own specific reform priorities, there is
merit in considering a joint agenda. This could aim for more inclusiveness,
better governance and greater coherence to manage the interaction
between international tax and investment policies, not only avoiding
conflict between the regimes but also making them mutually supportive.
The international investment and development community should, and can,
eventually build a common framework for global investment cooperation for
the benefit of all.




OVERVIEW 1


OVERVIEW


GLOBAL INVESTMENT TRENDS


Global FDI fell in 2014 but recovery is in sight


Global foreign direct investment (FDI) inflows fell by 16 per cent in 2014
to $1.23 trillion, down from $1.47 trillion in 2013 (figure 1). This is mostly
explained by the fragility of the global economy, policy uncertainty for
investors and elevated geopolitical risks. New investments were also offset
by some large divestments. The decline in FDI flows was in contrast to
macroeconomic variables such as GDP, trade, gross fixed capital formation
and employment, which all grew (table 1).


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).


Figure 1. FDI inflows, global and by group of economies, 1995−2014 (Billions of dollars)


55%


0


500


1 000


1 500


2 000


1995 2000 2005 2010 2014


Developing economiesTransition economies Developed economies World total




World Investment Report 2015: Reforming International Investment Governance2


Although the outlook for FDI remains uncertain, an upturn in FDI flows
is anticipated in 2015. Strengthening economic growth in developed
economies, the demand-stimulating effects of lower oil prices and
accommodating monetary policy, and continued investment liberalization
and promotion measures could favourably affect FDI flows. Both UNCTAD’s
FDI forecast model and its business survey of large MNEs show a rise of FDI
flows in and after 2015.


Global FDI inflows are expected to grow by 11 per cent to $1.4 trillion
in 2015. Flows could increase further to $1.5 trillion and $1.7 trillion in
2016 and 2017, respectively. The share of MNEs intending to increase FDI
expenditures over the years 2015 to 2017 rose from 24 to 32 per cent,
according to UNCTAD’s business survey. Data for the first few months of
2015 are consistent with this forecast. However, a number of economic
and political risks, including ongoing uncertainties in the Eurozone, potential
spillovers from geopolitical tensions and persistent vulnerabilities in emerging
economies, may disrupt the projected recovery.


Variable 2008 2009 2010 2011 2012 2013 2014 2015a 2016a


GDP 1.5 -2.0 4.1 2.9 2.4 2.5 2.6 2.8 3.1
Trade 3.0 -10.6 12.6 6.8 2.8 3.5 3.4 3.7 4.7
GFCF 3.0 -3.5 5.7 5.5 3.9 3.2 2.9 3.0 4.7
Employment 1.2 1.1 1.2 1.4 1.4 1.4 1.3 1.3 1.2
FDI -20.4 -20.4 11.9 17.7 -10.3 4.6 -16.3 11.4 8.4


Memorandum
FDI value (in $
trillions)


1.49 1.19 1.33 1.56 1.40 1.47 1.23 1.37 1.48


Source: UNCTAD, FDI/MNE database for FDI in 2008–2014; United Nations (2015) for GDP; IMF (2015) for GFCF
and trade; ILO for employment; and UNCTAD estimates for FDI in 2015–2016.


a Projections.
Note: FDI excludes Caribbean offshore financial centres. GFCF = gross fixed capital formation.


Table 1. Growth rates of global GDP, GFCF, trade, employment and FDI, 2008–2016 (Per cent)




OVERVIEW 3


Developing-country FDI inflows reached a record level


Developing-economy inflows reached $681 billion (table 2). This group now
accounts for 55 per cent of global FDI inflows. Five of the top 10 FDI hosts
are now developing economies (figure 2).


FDI inflows: top 20 host economies, 2013 and 2014
(Billions of dollars)


Figure 2.


Developed economies Developing and transition economies


20132014 20132014


(x) = 2013 ranking


Poland (148)


France (11)


Colombia (22)


Finland (185)


Russian Federation (5)


Switzerland (187)


Indonesia (19)


Mexico (10)


Spain (12)


Chile (21)


Netherlands (14)


India (15)


Australia (8)


Canada (4)


Brazil (7)


Singapore (6)


United Kingdom (9)


United States (1)


Hong Kong, China (3)


China (2)


65


0


43


16


-5


69


-23


19


45


42


17


32


28


54


71


64


48


74


124


14


15


16


19


21


22


23


23


23


23


30


34


52


54


62


68


72


92
231


103


129


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
Note: Excludes Caribbean offshore financial centres.




World Investment Report 2015: Reforming International Investment Governance4


Region FDI inflows FDI outflows
2012 2013 2014 2012 2013 2014


World 1 403 1 467 1 228 1 284 1 306 1 354


Developed economies 679 697 499 873 834 823
Europe 401 326 289 376 317 316
North America 209 301 146 365 379 390


Developing economies 639 671 681 357 381 468
Africa 56 54 54 12 16 13
Asia 401 428 465 299 335 432


East and South-East Asia 321 348 381 266 292 383
South Asia 32 36 41 10 2 11
West Asia 48 45 43 23 41 38


Latin America and the
Caribbean 178 186 159 44 28 23


Oceania 4 3 3 2 1 0
Transition economies 85 100 48 54 91 63


Structurally weak, vulnerable
and small economiesa 58 51 52 10 13 10


LDCs 24 22 23 5 7 3
LLDCs 34 30 29 2 4 6
SIDS 7 6 7 2 1 1


Memorandum: percentage
share in world FDI flows


Developed economies 48.4 47.5 40.6 68.0 63.8 60.8
Europe 28.6 22.2 23.5 29.3 24.3 23.3
North America 14.9 20.5 11.9 28.5 29.0 28.8


Developing economies 45.6 45.7 55.5 27.8 29.2 34.6
Africa 4.0 3.7 4.4 1.0 1.2 1.0
Asia 28.6 29.2 37.9 23.3 25.7 31.9


East and South-East Asia 22.9 23.7 31.0 20.7 22.4 28.3
South Asia 2.3 2.4 3.4 0.8 0.2 0.8
West Asia 3.4 3.0 3.5 1.8 3.1 2.8


Latin America and the
Caribbean 12.7 12.7 13.0 3.4 2.2 1.7


Oceania 0.3 0.2 0.2 0.1 0.1 0.0
Transition economies 6.1 6.8 3.9 4.2 7.0 4.7


Structurally weak, vulnerable
and small economiesa 4.1 3.5 4.3 0.7 1.0 0.8


LDCs 1.7 1.5 1.9 0.4 0.6 0.2
LLDCs 2.5 2.0 2.4 0.2 0.3 0.4
SIDS 0.5 0.4 0.6 0.2 0.1 0.1


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
a Without double counting countries that are part of multiple groups.


Table 2. FDI flows, by region, 2012–2014
(Billions of dollars and per cent)




OVERVIEW 5


However, the increase in developing-country inflows is primarily a developing
Asia story. FDI inflows to that region grew by 9 per cent to almost $465
billion, more than two thirds of the total for developing economies.
This rise was visible in all subregions except West Asia, where inflows
declined for the sixth consecutive year, in part because of a further
deterioration in the regional security situation. FDI flows to Africa remained
unchanged at $54 billion, as the drop of flows to North Africa was offset by
a rise in Sub-Saharan Africa. Inflows to Latin America and the Caribbean
saw a 14 per cent decline to $159 billion, after four consecutive increases.


The Russian Federation dropped from 5th to 16th place as a recipient
country, largely accounting for the 52 per cent decline in transition-economy
FDI inflows to $48 billion.


Despite a revival of cross-border merger and acquisitions (M&As), FDI flows
to developed economies declined by 28 per cent to $499 billion. FDI inflows
to the United States fell to $92 billion, significantly affected by a single
large-scale divestment, without which the level of investment would have
remained stable. FDI flows to Europe fell by 11 per cent to $289 billion, one
third of their 2007 peak.


Most regional groupings and initiatives experienced a fall in FDI inflows
in 2014


The decline in global FDI flows also affected FDI to regional economic groups
in 2014. For example, the groups of countries negotiating the Transatlantic
Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership
(TPP) saw their respective shares of global FDI inflows decline (figure 3).
Two Asian groups – ASEAN (up 5 per cent to $133 billion) and RCEP (up 4
per cent to $363 billion) – bucked the trend. Longer-term efforts will, for the
most part, lead to increased FDI in regional groups by opening up sectors
to investment and aligning policies for the treatment of investors.




World Investment Report 2015: Reforming International Investment Governance6


Developing-economy FDI outflows exceed one third of global total, led
by Asian MNEs


In 2014, MNEs from developing economies invested almost $468 billion
abroad, a 23 per cent increase from the previous year. Developing economies
now account for more than one third of global FDI outflows, up from 13 per
cent in 2007 (figure 4). Developing and transition economies represent 9 of
the 20 largest investor economies globally (figure 5).


Outward FDI stock from developing economies to other developing
economies countries grew by two-thirds from $1.7 trillion in 2009 to


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
Note: Ranked in descending order of 2014 FDI flows. G20 = only the 19 member countries of the G20


(excludes the European Union); APEC = Asia-Pacific Economic Cooperation; TTIP = Transatlantic Trade
and Investment Partnership; TPP = Trans-Pacific Partnership; RCEP = Regional Comprehensive Economic
Partnership; BRICS = Brazil, Russian Federation, India, China and South Africa; NAFTA = North American
Free Trade Agreement; ASEAN = Association of Southeast Asian Nations; MERCOSUR = Common Market
of the South.


53


52


30


28


28


21


14


11


673


133


169


252


345


350


363


635


65257


61


24


38


35


20


24


9


683


126


346


294


517


564


349


894


837


Figure 3. FDI inflows to selected regional and interregional groups, 2013 and 2014 (Billions of dollars and per cent)


Share in
world (%)


Share in
world (%)


Regional/
interregional groups


2013


FDI inflows
(Billions of dollars)


FDI inflows
(Billions of dollars)


2014


APEC


G20


RCEP


TTIP


TPP


BRICS


NAFTA


ASEAN


MERCOSUR




OVERVIEW 7


$2.9  trillion in 2013. East Asia and South-East Asia were the largest
recipient developing regions. The share of the poorest developing regions
in South-South FDI is still low, but it is growing. Much developing-economy
FDI goes to each economy’s immediate geographic region. Familiarity
eases a company’s early internationalization drive, and regional markets
and value chains are a key driver. Specific patterns of South-South FDI are
also determined by MNE investment motives, home government policies
and historical connections. Developed- and developing-economy FDI
outflows differ in their composition: while more than half of developing-
country MNE outflows are in equity investment, developed-country outflows
have a larger reinvested earnings component (now at 81 per cent) (figure 6).
Equity outflows are more likely to result in new productive investment;
reinvested earnings may also translate into increased cash holding.


Figure 4.
Developing economies: FDI outflows and their share
in total world outflows, 2000−2014
(Billions of dollars and per cent)


5


10


15


20


25


30


35


40


0


100


200


300


400


500


600


2000 2002 2004 2006 2008 2010 2012 2014


ShareValue Developing economies Share in world FDI outflows


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
Note: Excludes Caribbean offshore financial centres.




World Investment Report 2015: Reforming International Investment Governance8


Cross-border M&A activity rebounded strongly in 2014; announced
greenfield projects declined slightly


After two consecutive years of decline, cross-border M&A activity picked
up in 2014. In net terms, the value of cross-border M&As increased by
28 per cent, reaching $399 billion, facilitated by the availability of cheap
debt coupled with considerable MNE cash reserves. Competitive
pressure to find new pockets of growth and the need to cut costs
through synergies and economies of scale were important deal drivers.


Developed economies Developing and transition economies


20132014 20132014


(x) = 2013 ranking


FDI outflows: top 20 home economies, 2013 and 2014
(Billions of dollars)


Figure 5.


14


8


17


14


10


21


31


28


26


24


29


57


25


51


87


30


136


101


81


13


13


13


16


17


19


23


31


31


32


41


41


43


53


56


112


114


116


143


Taiwan Province
of China (21)


Chile (29)


Kuwait (19)


Malaysia (22)


Switzerland (25)


Norway (17)


Italy (9)


Korea, Republic of (13)


Spain (14)


Ireland (16)


Singapore (12)


Netherlands (6)


France (15)


Canada (7)


Russian Federation (4)


Germany (10)


Japan (2)


China (3)


Hong Kong, China (5)


United States (1) 337328


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
Note: Excludes Caribbean offshore financial centres.




OVERVIEW 9


Equity outflows Reinvested earnings Other capital (intracompany loans)


Figure 6. FDI outflows by component, by group of economies, 2007−2014 (Per cent)


Developed-economya MNEs


Developing-economyb MNEs


54


27


20


50


31


20


66


40


-6


54


45


2 46


45


49


40


44


16


47


49


55


35


10


53 51 45 41 40 34
17 10


34
23


50 59 51 62
74 81


12
27


5 1 8 4
10 10


0


25


50


75


100


2007 2008 2009 2010 2011 2012 2013 2014


0


25


50


75


100


2007 2008 2009 2010 2011 2012 2013 2014


Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
a Economies included are Australia, Belgium, Bulgaria, Canada, Croatia, Cyprus, the Czech Republic, Denmark, Estonia,


Finland, Germany, Greece, Hungary, Iceland, Ireland, Israel, Latvia, Lithuania, Luxembourg, Malta, the Netherlands,
Norway, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States.


b Economies included are Algeria, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Bangladesh, Barbados,
Belize, the Plurinational State of Bolivia, Botswana, Brazil, Cambodia, Cabo Verde, Chile, Costa Rica, Curaçao,
Dominica, El Salvador, Fiji, Grenada, Guatemala, Honduras, Hong Kong (China), India, Indonesia, the Republic of
Korea, Kuwait, Lesotho, Malawi, Mexico, Mongolia, Montserrat, Morocco, Namibia, Nicaragua, Nigeria, Pakistan,
Panama, the Philippines, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Sao Tome and
Principe, Seychelles, Singapore, Sint Maarten, South Africa, Sri Lanka, the State of Palestine, Suriname, Swaziland,
Taiwan Province of China, Thailand, Trinidad and Tobago, Turkey, Uganda, Uruguay, the Bolivarian Republic of
Venezuela and Viet Nam.




World Investment Report 2015: Reforming International Investment Governance10


The re-emergence of large deals was a key factor in the increase in the
value of cross-border deal activity. In 2014 the number of MNE acquisitions
with values larger than $1 billion jumped to 223, from 168 in 2013. At the
same time, MNEs have made significant divestments, equivalent to half of
the total value of acquisitions.


Announced greenfield investment remained sluggish, decreasing by 2 per
cent to $696 billion. Greenfield investment by developed-country MNEs
rose marginally, while that by developing-country and transition-economy
MNEs declined. Nevertheless, developing countries accounted for 30 per
cent of total announced cross-border greenfield investments in 2014.


The long-term shift towards investment in services continues


In 2012, the latest year for which data are available, services accounted
for 63 per cent of global FDI stock, almost two and a half times the share
of manufacturing (26 per cent), and nine times the share of the primary
sector (7 per cent) (figure 7). This share was up from 58 per cent in 2001,
continuing a longer-term relative shift of global FDI towards services.
Inasmuch as services account for 70 per cent of global value added, in
principle the share of services FDI in global FDI could rise further.


Figure 7. Global inward FDI stock, by sector, 2012
(Per cent of total value)


7


2663


4 Primary


Manufacturing


Services


Unspecified


Source: UNCTAD FDI/MNE database (www.unctad.org/fdistatistics).




OVERVIEW 11


Beyond secular trends in the structure of the world economy, a number of
factors are behind the increase in the level and share of services FDI. These
include increasing liberalization in the services sector in host economies;
technological developments in information and communication technology
that make services more tradable; and the rise of global value chains,
which has given an impulse to the internationalization of services related to
manufacturing.


Private equity acquisitions up, but their share in global M&As fell


In 2014, cross-border gross M&As by private equity funds rose to $200
billion. This amounted to about 17 per cent of the global M&A total, but
was down 6 percentage points from the level in 2013, and 13 percentage
points lower than in 2008. The upward trend in the value of private equity
investments is likely to continue as a result of several factors: cash and
commitments from investors are particularly high, estimated at about $360
billion; low interest rates in developed countries are making leveraged
debt more attractive; and volatile global financial markets are expected to
generate more cross-border investment opportunities. North America and
Europe continued to be the major target regions for cross-border M&As by
private equity funds, although Asia reached a historically high share in total
private equity deals in 2014.


FDI by SWFs remains a fraction of their assets under management; State-
owned MNE purchases slow


There are more than 100 sovereign wealth funds (SWFs), managing
over $7 trillion worth of assets and accounting for about one tenth of
the world’s total assets under management, but FDI constitutes only
a small proportion of those assets. The value of FDI by SWFs rose in
2014 to $16 billion, ending a three-year decline. Some SWFs have been
engaging in long-term investments through FDI, including through cross-
border corporate acquisitions and overseas real estate purchases.




World Investment Report 2015: Reforming International Investment Governance12


More than half of SWFs have started or expanded FDI in infrastructure,
which represents an important asset class for them, because of both the
sector’s large-scale investment opportunities and its relatively stable returns.


In contrast, investment by State-owned MNEs (SO-MNEs) fell: cross-border
M&As and greenfield projects in 2014 declined, by 39 and 18 per cent,
respectively, to their lowest levels since the outbreak of the global financial
crisis. The retreat of SO-MNEs is partly related to strategic decisions,
such as the decision by a number of developed-country companies to
consolidate their assets in some economies while selling them off in others.
Policy factors have also affected SO-MNE internationalization; for example,
stricter control of foreign ownership in extractive industries.


International production continues to expand: foreign sales and assets
of MNEs grew faster than those of domestic firms


International production by MNEs’ foreign affiliates expanded in 2014.
Sales and value added rose by 7.6 per cent and 4.2 per cent, respectively.
Employment of foreign affiliates reached 75 million (table 3). The financial
performance of foreign affiliates in host economies improved, with the rate
of return on inward FDI rising from 6.1 per cent in 2013 to 6.4 per cent in
2014. However, this level is still lower than that in the pre-crisis average
(2005-2007).


At the end of 2014, some 5,000 MNEs had an estimated $4.4 trillion in cash
holdings, 40 per cent more than during the 2008–2009 crisis. However,
there are signs that the largest 100 MNEs and companies in specific
industries (e.g. utilities) are beginning to reduce their cash reserves (figure 8).
In the last two years, MNEs in some industries (e.g. oil and gas, and utilities
industries) have started to use cash holdings for more capital expenditures
and acquisitions.




OVERVIEW 13


Item


Value at current prices
(Billions of dollars)


1990 2005–2007(pre-crisis average) 2012 2013 2014


FDI inflows 205 1 397 1 403 1 467 1 228
FDI outflows 244 1 423 1 284 1 306 1 354
FDI inward stock 2 198 13 894 22 073 26 035 26 039
FDI outward stock 2 254 14 883 22 527 25 975 25 875
Income on inward FDIa 82 1 024 1 467 1 517 1 575


Rate of return on inward
FDIb 4.4 7.6 7.0 6.1 6.4


Income on outward FDIa 128 1 105 1 445 1 453 1 486
Rate of return on
outward FDIb 5.9 7.6 6.6 5.8 5.9


Cross-border M&As 98 729 328 313 399


Sales of foreign affiliates 4 723 21 469 31 687 33 775c 36 356c


Value-added (product) of
foreign affiliates 881 4 878 7 105 7 562


c 7 882c


Total assets of foreign
affiliates 3 893 42 179 88 536 95 230


c 102 040c


Exports of foreign affiliates 1 444 4 976 7 469 7 688d 7 803d


Employment by foreign
affiliates (thousands) 20 625 53 306 69 359 71 297


c 75 075c


Memorandum
GDPe 22 327 51 799 73 457 75 453 77 283
Gross fixed capital
formatione 5 592 12 219 17 650 18 279 18 784


Royalties and licence fee
receipts 31 172 277 298 310


Exports of goods and
servicese 4 332 14 927 22 407 23 063 23 409


Source: UNCTAD.
a Based on data from 174 countries for income on inward FDI and 143 countries for income on outward FDI in 2014, in


both cases representing more than 90 per cent of global inward and outward stocks.
b Calculated only for countries with both FDI income and stock data.
c Data for 2013 and 2014 are estimated based on a fixed effects panel regression of each variable against outward stock


and a lagged dependent variable for the period 1980–2012.
d For 1998–2014, the share of exports of foreign affiliates in world exports in 1998 (33.3%) was applied to obtain values.


Data for 1995–1997 are based on a linear regression of exports of foreign affiliates against inward FDI stock for the
period 1982–1994.


e Data from IMF (2015).


Table 3. Selected indicators of FDI and international production, 2014 and selected years




World Investment Report 2015: Reforming International Investment Governance14


ShareValue


Figure 8.
Cash holdings of the largest 100 MNEs and their
share of total assets, 2006−2014
(Billions of dollars and per cent)


200


0


400


600


800


1 000


1 200


1 400


2006 2007 2008 2009 2010 2011 2012 2013 2014
6


7


8


9


10


11


12


13


Cash holdings Share of total assets


Source: UNCTAD, based on data from Thomson ONE.




OVERVIEW 15


REGIONAL TRENDS IN FDI


FDI remained stable in Africa


FDI flows to Africa overall remained flat at $54 billion (table 2). North Africa
saw its FDI flows decline by 15 per cent to $11.5 billion. FDI fell overall in the
region because of tension and conflict in some countries, despite significant
inflows in others. FDI into Egypt grew by 14 per cent to $4.8 billion, and
flows into Morocco by 9 per cent to $3.6 billion.


FDI flows to West Africa declined by 10 per cent to $12.8 billion, as Ebola,
security issues and falling commodity prices negatively affected several
countries. East Africa saw its FDI flows increasing by 11 per cent, to
$6.8 billion. FDI rose in the gas sector in the United Republic of Tanzania,
and Ethiopia is becoming a hub for MNEs in garments and textiles.
Central Africa received $12.1 billion of FDI in 2014, up 33 per cent
from 2013. FDI flows in Congo almost doubled, reaching $5.5 billion as
foreign investors were undeterred, despite falling commodity prices.
The Democratic Republic of the Congo continued to attract notable flows.
Southern Africa received $10.8 billion of FDI in 2014, down 2.4 per cent
from 2013. While South Africa remained the largest host country in the
region ($5.7 billion, down 31 per cent from 2013), Mozambique played a
significant role in attracting FDI ($4.9 billion).


FDI inflows into Africa are increasingly due to the rise of developing-country
MNEs. A number of developed countries (in particular France, the United
States and the United Kingdom) were large net divestors from Africa during
2014. Demand from developing-economy investors for these divested
assets was significant. As a result, African M&As increased by 32 per cent
from $3.8 billion in 2013 to $5.1 billion in 2014, especially in oil and gas and
in finance.


Services account for the largest portion of Africa’s stock of inward FDI,
although the share is lower than in other regions, and concentrated in a




World Investment Report 2015: Reforming International Investment Governance16


relatively small number of countries, including Morocco, Nigeria and South
Africa. Finance accounts for the largest portion of Africa’s stock of services
FDI; by 2012 more than half of Africa’s services FDI stock was held in
finance (56 per cent), followed by transport, storage and communications
(21 per cent) and business activities (9 per cent).


Developing Asia now the largest recipient region of FDI


Following a 9 per cent rise in FDI inflows, developing Asia reached a
historically high level of $465 billion in 2014, consolidating the region’s
position as the largest recipient region in the world.


Inflows to East Asia rose by 12 per cent to $248 billion. China, now the
largest FDI host economy in the world, accounted for more than half of this
figure. Hong Kong (China) witnessed a 39 per cent increase in inflows to
$103 billion. In South-East Asia, FDI inflows rose by 5 per cent to $133
billion. This increase was driven mainly by Singapore, now the world’s fifth
largest recipient economy, where inflows reached $68 billion. Other South-
East Asian economies also saw strong FDI growth: inflows to Indonesia
went up by 20 per cent to $23 billion.


Policy efforts to deepen regional integration are driving greater connectivity
between economies in East and South-East Asia. This is especially so in
infrastructure, where MNEs are major investors across the region. Hong
Kong (China), China, Japan and Singapore are among the most important
regional sources of equity investment in the sector. They are also active
through non-equity modalities. Regional infrastructure investment is set to
grow further, supported by policies to boost connectivity, such as China’s
“One Belt, One Road” strategy and the opening up of transport industries
to foreign participation by ASEAN member countries. FDI inflows to
South Asia rose to $41 billion in 2014. India, accounting for more than three
quarters of this figure, saw inflows increase by 22 per cent to $34 billion.
The country also dominated FDI outflows, with a five-fold increase to $10
billion, recovering from a sharp decline the year before. A number of other




OVERVIEW 17


South Asian countries, such as Pakistan and Sri Lanka, saw rising FDI
from China. In attracting manufacturing FDI, especially in capital-intensive
industries, South Asia lags behind East and South-East Asian economies.
However, some success stories have emerged, such as the automotive
industry, with Automakers now expanding beyond India to locate production
activities in other countries in the region, including Bangladesh and Nepal.


The security situation in West Asia has led to a six-year continuous decline
of FDI flows (down 4 per cent to $43 billion in 2014); weakening private
investment in parts of the region is compensated by increased public
investment. In GCC economies, State-led investment in construction
focused on infrastructure and oil and gas development has opened up
opportunities for foreign contractors to engage in new projects in the region
through non-equity modes. FDI outflows from the region decreased by 6
per cent to $38 billion, due to the fall of flows from Kuwait and Qatar − the
two largest investors in the region. FDI flows from Turkey almost doubled to
$6.7 billion.


FDI flows declined after four years of increases in Latin America and the
Caribbean


FDI flows to Latin America and the Caribbean, excluding the Caribbean
offshore financial centres, decreased by 14 per cent to $159 billion in 2014.
This was mainly the consequence of a 78 per cent decline in cross-border
M&As in Central America and of lower commodity prices, which reduced
investment in the extractive industries in South America. Flows to South
America declined for the second consecutive year, down 4 per cent to $121
billion, with all the main recipient countries, except Chile, registering negative
FDI growth. In Central America and the Caribbean, FDI declined 36 per cent
to $39 billion, partly because of unusually high levels in 2013 due to a cross-
border megadeal in Mexico.


There were two main waves of FDI in the past few decades. The first
wave began in the mid-1990s as a result of liberalization and privatization




World Investment Report 2015: Reforming International Investment Governance18


policies that encouraged FDI into sectors such as services and extractive
industries, which had previously been closed to private and/or foreign
capital. The second wave began in the mid-2000s in response to a surge
in commodity prices, leading to increased FDI in extractive industries in
the region (especially South America). After more than a decade of strong
growth driven by South America, the FDI outlook in Latin America and the
Caribbean is now less optimistic. For the region, this is an occasion for a
reflection on the experience of the two FDI waves across the region. In the
context of the post-2015 development agenda, policymakers may consider
potential policy options on the role of FDI for the region’s development path.


FDI flows in transition economies more than halved in 2014


FDI inflows to the transition economies fell by 52 per cent to reach $48 billion
in 2014 − a value last seen in 2005. In the Commonwealth of Independent
States (CIS), regional conflict coupled with falling oil prices and international
sanctions reduced foreign investors’ confidence in the strength of local
economies. The Russian Federation − the largest host country in the
region − saw its FDI flows fall by 70 per cent due to the country’s negative
growth prospects, and as an adjustment after the level reached in 2013
due to the exceptional Rosneft−BP transaction. In South-East Europe,
FDI flows remained stable at $4.7 billion. Foreign investors mostly targeted
manufacturing because of competitive production costs and access to EU 
markets.


FDI outflows from the transition economies fell by 31 per cent to $63 billion as
natural-resource-based MNEs, mainly from the Russian Federation, reduced
their investment abroad, particularly due to constraints in international
financial markets and low commodity prices.


In the Russian Federation, sanctions, coupled with a weak economy and
other factors, began affecting inward FDI in the second half of 2014, and
this is expected to continue in 2015 and beyond. Market-seeking foreign
investors – for example, in the automotive and consumer industries – are




OVERVIEW 19


gradually cutting production in the country. Volkswagen (Germany) will
reduce its production in Kaluga, and PepsiCo (United States) has announced
it will halt production at some plants. The geographical profile of investors in
the country is changing. As new investment from developed-country MNEs
is slowing down, some of the losses are being offset by other countries.
In 2014, China became the fifth largest investor in the Russian Federation.


Inflows to developed economies down for the third successive year


FDI inflows to developed countries lost ground for the third successive year,
falling by 28 per cent to $499 billion, the lowest level since 2004. Inflows to
Europe continued the downward trend since 2012 to $289 billion. Inflows to
North America halved to $146 billon, mainly due to Vodafone’s $130 billion
divestment of Verizon, without which they would have remained stable.


European countries that made the largest gains in 2014 were those that had
received a negative level of inflows in 2013, such as Finland and Switzerland.
FDI to the United Kingdom jumped to $72 billion, leaving it in its position as
the largest recipient country in Europe. In contrast, large recipients of FDI
in 2013 saw their inflows fall sharply, such as Belgium, France and Ireland.
Inward FDI to Australia and to Japan both contracted.


FDI outflows from developed countries held steady at $823 billion. Outflows
from Europe were virtually unchanged at $316 billion. Outflows from Germany
almost trebled, making it the largest European direct investor. France also
saw its outflows increase sharply. In contrast, FDI from other major investor
countries plummeted. In North America, both Canada and the United States
saw a modest increase of outflows. Outflows from Japan declined by 16 per
cent, ending a three-year run of expansion.


The impact of MNE operations on the balance of payments has increased, not
only through FDI, but also through intra-firm trade and FDI income. The recent
experience of the United States and Japan shows that growing investment
income from outward FDI provides a counterbalance to the trade deficit.




World Investment Report 2015: Reforming International Investment Governance20


Furthermore, outward FDI has helped create avenues for exports of
knowledge-intensive goods and services.


FDI to structurally weak, vulnerable and small economies witnessed
divergent trends


FDI flows to the least developed countries (LDCs) increased by 4 per cent
to $23 billion, mainly due to increases in Ethiopia, Zambia, Myanmar and the
Lao People’s Democratic Republic. Announced greenfield investments into
the group reached a six-year high, led by a $16 billion oil and gas project in
Angola. In contrast, a large reduction of FDI flows took place in Mozambique,
and other recipients, including Bangladesh, Cambodia, the Democratic
Republic of Congo and the United Republic of Tanzania, also saw weak or
negative FDI growth.


FDI flows to the landlocked developing countries (LLDCs) fell by 3 per cent
to $29 billion. The Asian countries in the group experienced the largest fall,
mainly due to a drop in investment in Mongolia which saw its inflows decline
for a third successive year. In Central Asian LLDCs, investors from developing
and transition economies are increasingly important in terms of the value
of FDI stock, led by China, Russia, Turkey, the United Arab Emirates, the
Republic of Korea and the Islamic Republic of Iran. FDI remains the largest
source of external finance for LLDCs, having overtaken official development
assistance after the global financial crisis.


FDI inflows to small island developing States (SIDS) increased by 22 per
cent to $7 billion in 2014, mostly due to a rise in cross-border M&A sales.
Trinidad and Tobago, the Bahamas, Jamaica and Mauritius were the largest
destinations of FDI flows to SIDS, accounting for more than 72 per cent of the
total. Flows to Trinidad and Tobago were lifted by a $1.2 billion acquisition in
the petrochemical industry; cross-border acquisitions also drove the increased
FDI flows in Mauritius. A number of cross-border megadeals took place in
Papua New Guinea’s oil and gas industry. In contrast, flows to Jamaica – the
group’s second largest recipient − decreased by 7 per cent to $551 million.




OVERVIEW 21


A stock-taking of external finance flows to structurally weak, small
and vulnerable economies since the First Conference on Financing for
Development in Monterrey in 2002 demonstrates the potential of FDI in
pursuit of sustainable development and in the context of the post-2015
development agenda. Because of the size, stability and diverse development
impact of FDI compared with other sources of finance, it remains an
important component in external development finance. In particular, given
its contribution to productive and export capacities, FDI plays a catalytic
role for development in these economies, including in partnership with other
sources of finance. A holistic approach – encompassing all sources, public
and private, domestic and foreign – is essential for mobilizing development
finance effectively into all three economic groups; a perspective to be
discussed at the Third Financing for Development Conference in Addis
Ababa in July 2015, and subsequently.


Over the past decade (2004–2014), FDI stock tripled in LDCs and SIDS,
and quadrupled in LLDCs. With a concerted effort by the international
investment-development community, it would be possible to have FDI stock
in these structurally weak economies quadruple by 2030. More important,
further efforts are needed to harness financing for economic diversification to
foster greater resilience and sustainability in these countries.




World Investment Report 2015: Reforming International Investment Governance22


INVESTMENT POLICY TRENDS


Countries’ investment policy measures continue to be predominantly
geared towards investment liberalization, promotion and facilitation


UNCTAD data show that, in 2014, 37 countries and economies adopted at
least 63 policy measures affecting foreign investment. Of these measures,
47 related to liberalization, promotion and facilitation of investment, while 9
introduced new restrictions or regulations on investment (the remaining 7
measures are of a neutral nature). The share of liberalization and promotion
increased significantly, from 73 per cent in 2013 to 84 per cent in 2014
(figure 9).


A number of countries introduced or amended their investment laws or
guidelines to grant new investment incentives or to facilitate investment


0


25


50


75


100


2000 2002 2004 2006 2008 2010 2012 2014


6


94
84


16


Figure 9. Changes in national investment policies, 2000−2014
(Per cent)


Liberalization/Promotion Restriction/Regulation


Source: UNCTAD, Investment Policy Monitor.




OVERVIEW 23


procedures. Several countries relaxed restrictions on foreign ownership
limitations or opened up new business activities to foreign investment
(e.g. in infrastructure and services). Newly introduced investment restrictions
or regulations related mainly to national security considerations and strategic
sectors (such as transport, energy and defense).


Measures geared towards investment in sectors important for
sustainable development are still relatively few


The share of policy measures related to sustainable development among all
reported investment policy measures between 2010 and 2014 is relatively
small (approximately 8 per cent). Most of those measures were specifically
aimed at increasing private sector participation in key sustainable
development sectors (infrastructure, health, education, climate change
mitigation). Countries should enhance their investment facilitation efforts
to channel more investment into sectors that are particularly important for
sustainable development. At the same time, they need to put in place a
sound regulatory framework that seeks to maximize positive development
impacts of investment and to minimize associated risks by safeguarding
public interests in these politically sensitive sectors.


The expansion of the IIA universe continues, with intensified efforts at
the regional level


With the addition of 31 international investment agreements (IIAs), the IIA
regime had grown to 3,271 treaties (2,926 BITs and 345 “other IIAs”) by the
end of 2014 (figure 10). Most active in concluding IIAs in 2014 were Canada
(seven), Colombia, Côte d’Ivoire, and the European Union (EU) (three each).
Overall, while the annual number of BITs continues to decline, more and
more countries are engaged in IIA negotiations at regional and subregional
levels. For example, the five ongoing efforts in the TPP, TTIP, RCEP, Tripartite
and PACER Plus negotiations involve close to 90 countries.




World Investment Report 2015: Reforming International Investment Governance24


2014 also saw the conclusion of 84 double taxation treaties (DTTs).
These treaties govern the fiscal treatment of cross-border investment
operations between host and home states. The network of DTTs and BITs
grew together, and there are now over 3,000 DTTs in force worldwide. BIT
and DTT networks largely overlap; two thirds of BIT relationships are also
covered by a DTT.


Countries and regions are searching for IIA reform


An increasing number of countries and regions are reviewing their model IIAs
in line with recent developments in international investment law. This trend is
not limited to a specific group of countries or region but involves countries


Figure 10. Trends in IIAs signed, 1980−2014


Annual “other IIAs” All IIAs cumulativeAnnual BITs


0


500


1000


1500


2000


2500


3000


3500


0


50


100


150


200


250


300


350


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


Cumulative
number of IIAs


Annual
number of IIAs


Source: UNCTAD, IIA database.




OVERVIEW 25


in Africa (where 12 countries are reviewing their models), Europe and North
America (10), Latin America (8), and Asia (7), and 6 economies in transition,
as well as at least 4 regional organizations. South Africa and Indonesia
continued their treaty terminations, while formulating new IIA strategies.
Brazil, India and Indonesia revealed their novel approaches at the UNCTAD
Expert Meeting on the Transformation of the IIA Regime, held in February
2015. This was followed by the EU (with a concept paper) and Norway
(with a new model BIT) in May 2015. These new approaches converge
in their attempt to modernize IIAs and further improve their sustainable
development dimension. UNCTAD’s Investment Policy Framework, which
represents a new generation of investment policies, has been widely used
as a main reference in the above processes.


New IIAs factor in safeguards for the right to regulate in the public
interest


Most of the agreements reviewed include at least one provision geared
towards safeguarding the right to regulate for the public interest, including
sustainable development objectives, as contained in UNCTAD’s Investment
Policy Framework. This includes general exceptions, clarifications to key
protection standards, clauses that explicitly recognize that the parties
should not relax health, safety or environmental standards in order to attract
investment; limits on treaty scope; and more detailed ISDS provisions.


IIAs with pre-establishment commitments are on the rise


Although relatively few in number (228), IIAs with “pre-establishment”
commitments, extending the national treatment and MFN obligations
to the “establishment, acquisition and expansion” of investments, are
on the rise. Most involve a developed economy: the United States,
Canada, Finland, Japan, and the EU. Also, a few developing countries
in Asia and Latin America have been concluding pre-establishment IIAs,
including Chile, Costa Rica, the Republic of Korea, Peru and Singapore.




World Investment Report 2015: Reforming International Investment Governance26


When including pre-establishment commitments in IIAs, safeguarding the
right to regulate calls for the use of reservations and safety valves.


There were fewer new ISDS cases, with a continued high share of cases
against developed States


In 2014, investors initiated 42 known ISDS cases pursuant to IIAs.
Last year’s developments brought the overall number of known ISDS claims
to 608 (figure 11), lodged against 99 governments worldwide. Some 40 per
cent of new cases were lodged against developed countries. In 2014, the
number of concluded cases reached 405. States won 36 per cent of cases
(144), and investors 27 per cent (111). The remainder was either settled or
discontinued.


Source: UNCTAD, ISDS database.


Figure 11. Known ISDS cases, annual and cumulative, 1987−2014


0


100


200


300


400


500


600


700


0


10


20


30


40


50


60


70


1987 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


Cumulative
number of cases


Annual
number of cases ICSID Non-ICSID All cases cumulative




OVERVIEW 27


REFORMING THE INTERNATIONAL INVESTMENT REGIME:
AN ACTION MENU


The IIA regime is at a crossroads; there is a pressing need for reform


Growing unease with the current functioning of the global IIA regime,
together with today’s sustainable development imperative, the greater role of
governments in the economy and the evolution of the investment landscape,
have triggered a move towards reforming international investment rule
making to make it better suited to today’s policy challenges. As a result, the
IIA regime is going through a period of reflection, review and revision.


As evident from UNCTAD’s October 2014 World Investment Forum (WIF),
from the heated public debate taking place in many countries, and from
various parliamentary hearing processes, including at the regional level, a
shared view is emerging on the need for reform of the IIA regime to make
it work for all stakeholders. The question is not about whether to reform or
not, but about the what, how and extent of such reform.


This WIR offers an action menu for such reform


WIR15 responds to this call for reform by offering an action menu. Based
on lessons learned, it identifies reform challenges, analyses policy options,
and offers guidelines and suggestions for action at different levels of
policymaking.


IIA reform can benefit from six decades of experience with IIA rule making.
Key lessons learned include (i) IIAs “bite” and may have unforeseen risks,
therefore safeguards need to be put in place; (ii) IIAs have limitations as an
investment promotion and facilitation tool, but also underused potential;
and (iii) IIAs have wider implications for policy and systemic coherence, as
well as for capacity-building.




World Investment Report 2015: Reforming International Investment Governance28


IIA reform should address five main challenges:


• Safeguarding the right to regulate for pursuing sustainable development
objectives. IIAs can limit contracting parties’ sovereignty in domestic
policymaking. IIA reform therefore needs to ensure that such limits do
not unduly constrain legitimate public policymaking and the pursuit of
sustainable development objectives. IIA reform options include refining
and circumscribing IIA standards of protection (e.g. FET, indirect
expropriation, MFN treatment) and strengthening “safety valves”
(e.g. exceptions for public policies, national security, balance-of-
payments crises).


• Reforming investment dispute settlement. Today’s system of investor-
State arbitration suffers from a legitimacy crisis. Reform options include
improving the existing system of investment arbitration (refining the
arbitral process, circumscribing access to ISDS), adding new elements
to the existing system (e.g. an appeals facility, dispute prevention
mechanism) or replacing it (e.g. with a permanent international court,
State-State dispute settlement, and/or domestic judicial proceedings).


• Promoting and facilitating investment. The majority of IIAs lack
effective investment promotion and facilitation provisions and promote
investment only indirectly, through the protection they offer. IIA reform
options include expanding the investment promotion and facilitation
dimension of IIAs together with domestic policy tools, and targeting
promotion measures towards sustainable development objectives.
These options address home- and host-country measures, cooperation
between them, and regional initiatives.


• Ensuring responsible investment. Foreign investment can make a range
of positive contributions to a host country’s development, but it can also
negatively impact the environment, health, labour rights, human rights
or other public interests. Typically, IIAs do not set out responsibilities
on the part of investors in return for the protection that they receive.




OVERVIEW 29


IIA reform options include adding clauses that prevent the lowering
of environmental or social standards, that stipulate that investors
must comply with domestic laws and that strengthen corporate social
responsibility.


• Enhancing systemic consistency. In the absence of multilateral rules for
investment, the atomised, multifaceted and multilayered nature of the
IIA regime gives rise to gaps, overlaps and inconsistencies between
IIAs, between IIAs and other international law instruments, and
between IIAs and domestic policies. IIA reform options aim at better
managing interactions between IIAs and other bodies of law as well
as interactions within the IIA regime, with a view to consolidating and
streamlining it. They also aim at linking IIA reform to the domestic policy
agenda and implementation.


This WIR offers a number of policy options to address these challenges.
These policy options relate to different areas of IIA reform (substantive IIA
clauses, investment dispute settlement) and to different levels of reform-
oriented policymaking (national, bilateral, regional and multilateral).
By and large, these policy options for reform address the standard elements
covered in an IIA and match the typical clauses found in an IIA.


A number of strategic choices precede any action on IIA reform.
This includes whether to conclude new IIAs; whether to disengage from
existing IIAs; or whether to engage in IIA reform. Strategic choices are also
required for determining the nature of IIA reform, notably the substance
of reform and the reform process. Regarding the substance of IIA reform,
questions arise about the extent and depth of the reform agenda; the
balance between investment protection and the need to safeguard the right
to regulate; the reflection of home and host countries’ strategic interests;
and how to synchronize IIA reform with domestic investment policy
adjustments. Regarding the reform process, questions arise about whether
to consolidate the IIA network instead of continuing its fragmentation and
where to set priorities as regards the reform of individual IIAs.




World Investment Report 2015: Reforming International Investment Governance30


When implementing IIA reform and choosing the best possible options
for designing treaty elements, policymakers have to consider the
compound effect of these options. Some combinations of reform options
may “overshoot” and result in a treaty that is largely deprived of its basic
investment protection raison d’être. For each of the reform actions, as well
as their combinations, policymakers need to determine the best possible
way to safeguard the right to regulate while providing protection and
facilitation of investment.


Reform calls for a global approach to synchronize actions at national,
bilateral and regional levels


In terms of process, IIA reform actions need to be undertaken at the national,
bilateral, regional and multilateral levels. In each case, the reform process
includes (1) taking stock and identifying the problems, (2) developing a
strategic approach and an action plan for reform, and (3) implementing
actions and achieving the outcomes.


While reform steps at the national level (e.g. new model IIAs) or bilateral level
(e.g. renegotiation of “old” IIAs) can play an important role in countries’ reform
strategies, they risk perpetuating, if not exacerbating, the fragmentation and
incoherence of the global IIA regime. Reform initiatives at the multilateral
or regional level, although more challenging and time-consuming, offer a
means to consolidate IIA reform by finding common solutions to widely
shared concerns. Regional reform processes could span from a collective
review of the underlying regional (and bilateral) treaty network to its
consolidation. At the multilateral level, a global review and identification of
the systemic risks and emerging issues could lead to consensus-building
on key IIA reform issues that ultimately could feed into more coordinated
approaches, including for future international investment rule making.
Such efforts would be in the interest of consolidating and streamlining the
IIA network and making it work for sustainable development.




OVERVIEW 31


By presenting reform approaches, guidelines, tools, solutions, and a road
map for the reform process, this WIR offers an action menu for IIA reform.
It pulls together a variety of contributions that have been put forward in
recent years, by UNCTAD and many others, on aspects of IIA reform.
It invites countries to use this action menu and define their own road maps
for IIA reform: countries can pick and choose the respective reform actions
and options to formulate their own reform packages, in line with their
individual reform objectives.


Table 4. Guidelines for IIA Reform


Description


1. Harness IIAs
for sustainable
development


The ultimate objective of IIA reform is to ensure that the IIA
regime is better geared towards sustainable development
objectives while protecting and promoting investment.


2. Focus on critical
reform areas


The key areas for reform are (i) safeguarding the right to
regulate for public interest, (ii) reforming investment dispute
settlement, (iii) strengthening the investment promotion
and facilitation function of IIAs, (iv) ensuring investor
responsibility, and (v) enhancing systemic coherence.


3. Act at all levels The reform process should follow a multilevel approach
and take place at the national, bilateral, regional,
and multilateral levels, with appropriate and mutually
supportive action at each level.


4. Sequence properly for
concrete solutions


At each level, the reform process should follow a gradual,
step-by-step approach, with appropriately sequenced
and timed actions based on identifying the facts and
problems, formulating a strategic plan, and working
towards concrete outcomes that embody the reform
effort.


5. Ensure an inclusive
and transparent reform
process


The reform process should be transparent and inclusive,
allowing all stakeholders to voice their opinion and to
propose contributions.


6. Strengthen the
multilateral supportive
structure


The reform process should be supported by universal and
inclusive structures that help coordinate reform actions at
different levels by offering backstopping, including through
policy analysis, technical cooperation, and a platform for
exchange of experiences and consensus-building.


Source: UNCTAD.




World Investment Report 2015: Reforming International Investment Governance32


All of this should be guided by the goals of harnessing IIAs for sustainable
and inclusive growth, and determining the most effective means to
safeguard the right to regulate while providing protection and facilitation
of investment. The reform should focus on critical areas, include actions at
all levels, take a systematic and sequential approach, ensure inclusiveness
and transparency, and make use of multilateral support structures (table 4).


In the absence of a multilateral system and given the huge number of existing
IIAs, the best way to make the IIA regime work for sustainable development
is to collectively reform it with a global support structure. Such a global
support structure can provide the necessary backstopping for IIA reform,
through policy analysis, coordination, management of the interaction with
other bodies of law, technical assistance and consensus-building. UNCTAD
plays a key role in this regard. Only a common approach will deliver an IIA
regime in which stability, clarity and predictability help achieve the objectives
of all stakeholders: effectively harnessing international investment relations
for the pursuit of sustainable development.




OVERVIEW 33


INTERNATIONAL TAX AND INVESTMENT POLICY COHERENCE


Intense debate and concrete policy work is ongoing in the international
community on the fiscal contribution of MNEs. The focus is predominantly
on tax avoidance – notably in the G20 project on base erosion and profit
shifting (BEPS). At the same time, sustained investment is needed for global
economic growth and development, especially in light of financing needs for
the Sustainable Development Goals (SDGs). The policy imperative is to take
action against tax avoidance to support domestic resource mobilization and
continue to facilitate productive investment for sustainable development.


Foreign affiliates contribute about 10 per cent of government revenues
in developing countries


Policymakers and experts at work in the BEPS process have so far not
arrived at an overall quantification of the value at stake for government
revenues. Various research institutes and NGOs have put forward estimates
for the amount of taxes avoided by MNEs. To date, however, there is no
consensus estimate, in no small part because of the absence of a baseline
establishing the actual fiscal contribution of MNEs.


UNCTAD estimates the contribution of MNE foreign affiliates to government
budgets in developing countries at about $730 billion annually (figure 12).
This represents, on average, some 23 per cent of total corporate
contributions and 10 per cent of total government revenues. The relative
size (and composition) of this contribution varies by country and region. It
is higher in developing countries than in developed countries, underlining
the exposure and dependence of developing countries on corporate
contributions. (On average, the governments of African countries depend
on foreign corporate payments for 14 per cent of their budget funding.)


Furthermore, the lower a country is on the development ladder, the greater
is its dependence on non-tax revenue streams contributed by firms.
In developing countries, foreign affiliates, on average, contribute more




World Investment Report 2015: Reforming International Investment Governance34


than twice as much to government revenues through royalties on natural
resources, tariffs, payroll taxes and social contributions, and other types of
taxes and levies, than through corporate income taxes.


Some 30 per cent of global cross-border investment passes through
offshore hubs


Notwithstanding their overall role as contributors to government revenues,
MNEs, like all firms, aim to minimize taxes. MNEs build their corporate
structures through cross-border investment. They do so in the most tax-


Figure 12.


Government revenues contributed by foreign
affiliates of MNEs
Share of government revenues, developing countries,
reference year 2012 (Per cent and billions of dollars)


100%


47%
(100%)


10%
(23%)


6%


Corporate
income tax


International
trade taxes


Labor
and social
contributions


Other taxes


50%


10%


10%


30%


CONTRIBUTION METHOD


36%
(77%)


4%


53%


Absolute values,
Billion of dollars6,900 3,200 725 295 430


Total
government
revenues


Non-corporate
contribution


Corporate
contribution


Contribution
by domestic
firms


Contribution
by foreign
affiliates


Foreign
affiliates,
other
revenues


Foreign affiliates,
taxes and social
contributions


Source: UNCTAD.




OVERVIEW 35


efficient manner possible, within the constraints of their business and
operational needs. The size and direction of FDI flows are thus often
influenced by MNE tax considerations, because the structure and modality
of initial investments enable tax avoidance opportunities on subsequent
investment income. The attention of policymakers in tackling tax avoidance,
most notably in the BEPS approach, focuses naturally on tax rules and
transparency principles – i.e. on accounting for income. The fundamental
role of cross-border investment as the enabler of tax avoidance warrants a
complementary perspective.


An investment perspective on tax avoidance puts the spotlight on the role
of offshore investment hubs (tax havens and special purpose entities in
other countries) as major players in global investment. UNCTAD’s Offshore
Investment Matrix shows the pervasive role of offshore investment hubs in
the international investment structures of MNEs (figure 13). In 2012, of an
estimated $21 trillion of international corporate investment stock in non-
offshore recipient countries (coloured area in the figure), more than 30 per
cent, or some $6.5 trillion, was channeled through offshore hubs (orange
area). The largest offshore investment players are jurisdictions facilitating
so-called special purpose entities (SPEs).


A mirror view of the matrix reveals that 28 per cent of the total amount
of cross-border corporate investment stock from non-offshore investor
countries is invested into intermediary entities based in hubs (dark grey area).
In some cases these entities may undertake some economic activity on
behalf of related companies in higher tax jurisdictions, such as management
services, asset administration or financial services. Often they are equivalent
to letterbox companies, legal constructions conceived for tax optimization
purposes. The prominent transit role of these entities in financing MNE
operations causes a degree of double-counting in global corporate
investment figures. In UNCTAD FDI statistics, this double-counting effect is
removed by subtracting the SPE component from reported FDI data.


MNEs employ a range of tax avoidance levers, enabled by tax rate
differentials between jurisdictions, legislative mismatches and tax treaties.




World Investment Report 2015: Reforming International Investment Governance36


MNE tax planning involves complex multilayered corporate structures.
Two archetypal categories stand out: (i) intangibles-based transfer pricing
schemes and (ii) financing schemes. Both schemes, which are representative
of a relevant part of tax avoidance practices, make use of investment
structures involving entities in offshore investment hubs – financing schemes
especially rely on direct investment links through hubs.


Figure 13. Non-OFC inward investment stocks, by type of investor
Vertical view of the Offshore Investment Matrix (Per cent)


Recipients (reporting)


No
n-


OF
Cs


SP
Es


Non-OFCs SPEs


Ta
x


ha
ve


ns


Tax
havens


In
ve


st
or


s
(c


ou
nt


er
pa


rts
)


30%


70%


Source: UNCTAD.




OVERVIEW 37


Revenue losses for developing countries from tax avoidance through
offshore investment hubs amount to about $100 billion


Tax avoidance practices by MNEs are a global issue relevant to all countries:
the exposure to investments from offshore hubs is broadly similar for
developing and developed countries (figure 14). However, profit shifting
out of developing countries can have a significant negative impact on their
sustainable development prospects. Developing countries are often less
equipped to deal with highly complex tax avoidance practices because of
resource constraints or lack of technical expertise.


Figure 14.
Exposure to investments from offshore investment hubs,
by region, 2012
Share of corporate investment stock from offshore hubs (Per cent)


Transition economies


Latin America and
the Caribbean


Developing Asia


Africa


Developing economies


North America


Europe


Developed economies


Global


Investment recipient
by region


41


8


25


12


21


2


3


3


11


19


19


6


12


9


16


32


26


19


60%


27%


31%


24%


30%


18%


35%


29%


30%


Corporate investment
from SPEs


Corporate investment
from tax havens


Source: UNCTAD.




World Investment Report 2015: Reforming International Investment Governance38


Tax avoidance practices are responsible for a significant leakage of
development financing resources. An estimated $100 billion of annual tax
revenue losses for developing countries is related to inward investment
stocks directly linked to offshore hubs. There is a clear relationship between
the share of offshore-hub investment in host countries’ inward FDI stock and
the reported (taxable) rate of return on FDI. The more investment is routed
through off-shore hubs, the less taxable profits accrue. On average, across
developing economies, every 10 percentage points of offshore investment
is associated with a 1 percentage point lower rate of return. (The average
effects disguise country-specific impacts.)


These results do not necessarily capture the full extent of MNE tax avoidance
– they capture only schemes that exploit direct investment links through
offshore hubs. Leaving aside the estimates for overall government revenue
losses, the Offshore Indicator developed by UNCTAD provides intrinsic
value to policymakers as a “signal indicator” for BEPS, and as a rule-of-
thumb method for country-level BEPS impact.


Tax avoidance practices by MNEs and international investors lead to a
substantial loss of government revenue in developing countries. The basic
issues of fairness in the distribution of tax revenues between jurisdictions that
this implies must be addressed. At a particular disadvantage are countries
with limited tax collection capabilities, greater reliance on tax revenues from
corporate investors and growing exposure to offshore investments.


Therefore, action must be taken to tackle tax avoidance, carefully considering
the effects on international investment.


National and international tax and investment policies should work in
synergy


Currently, offshore investment hubs play a systemic role in international
investment flows: they are part of the global FDI financing infrastructure.




OVERVIEW 39


Any measures at the international level that might affect the investment
facilitation role of these hubs or that might affect key investment facilitation
levers (such as tax treaties) must include an investment policy perspective.


Ongoing anti-avoidance discussions in the international community pay
limited attention to investment policy.


The role of cross-border investment in building the corporate structures that
enable tax avoidance is fundamental. Therefore, investment policy should
form an integral part of any solution.


Source: UNCTAD.


Mechanisms


Promote
sustainable


development by…
Policy principles


Guidelines


National tax and
investment policymakers


International tax and
investment policy instruments


Multilateral coordination


…tackling tax
avoidance…


Adopt investment policy measures
to prevent tax avoidance


Leverage investment promotion tools to
tackle tax avoidance


Manage interdependencies with
IIAs of tax policy actions


Align DTTs and IIAs as part of countries’
investment facilitation toolkit


Clarify shared
responsibility for global


tax avoidance impact


Take an inclusive approach with
full participation of developing


economies and development
stakeholders


Address investment and
tax avoidance specifics
of developing economies


Create enablers/tools to
tackle tax avoidance and
assess investment impacts


…while
facilitating
productive
investment


Mitigate the impact
on investment of
anti-avoidance
measures


Ban tolerance or
facilitation of tax


avoidance as a means to
attract investment


1 2


3


6


7 8 9 10


4


5


Figure 15. Guidelines for Coherent International Tax and Investment Policies




World Investment Report 2015: Reforming International Investment Governance40


A set of guidelines for coherent international tax and investment policies
may help realize the synergies between investment policy and initiatives
to counter tax avoidance (figure 15). Key objectives of the 10 guidelines
proposed for discussion in this Report include removing aggressive tax
planning opportunities as investment promotion levers; considering the
potential impact on investment of anti-avoidance measures; taking a
partnership approach in recognition of shared responsibilities between
investor host, home and transit countries; managing the interaction between
international investment and tax agreements; and strengthening the role of
both investment and fiscal revenues in sustainable development as well as
the capabilities of developing countries to address tax avoidance issues.




OVERVIEW 41


EPILOGUE


WIR14 showed the massive worldwide financing needs for sustainable
development and the important role that FDI must play in bridging
the investment gap, especially in developing countries. In this light,
strengthening the global investment policy environment, including both
the IIA and international tax regimes, must be a priority. The two regimes
are interrelated. They have the same ultimate objective: promoting and
facilitating cross-border investment. They have a similar architecture, with
each made up of a “spaghetti bowl” of over 3,000 bilateral agreements.
The two regimes face similar challenges. They interact. And both are the
object of reform efforts.


Each regime has its own specific reform priorities. But there is merit in
considering a joint agenda, which could aim for more inclusiveness, better
governance and greater coherence to manage the interaction between
international tax and investment policies, not only avoiding conflict between
the regimes but making them mutually supportive.


Reforming international investment governance is fundamental to building
and maintaining an enabling environment for investment, maximizing the
chances of reaching financing for development targets (to be discussed
at the third international conference on financing for development in
Addis Ababa, in mid-July 2015), and supporting the integration in the
global economy of developing countries. The international investment and
development community should, and can, eventually build a common
framework for global investment cooperation for the benefit of all.






OVERVIEW 43


WORLD INVESTMENT REPORT


PAST ISSUES


WIR 2014: Investing in the SDGs: An Action Plan


WIR 2013: Global Value Chains: Investment and Trade for Development


WIR 2012: Towards a New Generation of Investment Policies


WIR 2011: Non-Equity Modes of International Production and Development


WIR 2010: Investing in a Low-carbon Economy


WIR 2009: Transnational Corporations, Agricultural Production and Development


WIR 2008: Transnational Corporations and the Infrastructure Challenge


WIR 2007: Transnational Corporations, Extractive Industries and Development


WIR 2006: FDI from Developing and Transition Economies: Implications for Development


WIR 2005: Transnational Corporations and the Internationalization of R&D


WIR 2004: The Shift Towards Services


WIR 2003: FDI Policies for Development: National and International Perspectives


WIR 2002: Transnational Corporations and Export Competitiveness


WIR 2001: Promoting Linkages


WIR 2000: Cross-border Mergers and Acquisitions and Development


WIR 1999: Foreign Direct Investment and the Challenge of Development


WIR 1998: Trends and Determinants


WIR 1997: Transnational Corporations, Market Structure and Competition Policy


WIR 1996: Investment, Trade and International Policy Arrangements


WIR 1995: Transnational Corporations and Competitiveness


WIR 1994: Transnational Corporations, Employment and the Workplace


WIR 1993: Transnational Corporations and Integrated International Production


WIR 1992: Transnational Corporations as Engines of Growth


WIR 1991: The Triad in Foreign Direct Investment


All downloadable at www.unctad.org/wir




World Investment Report 2015: Reforming International Investment Governance44


SELECTED UNCTAD PUBLICATION SERIES ON TNCS AND FDI


World Investment Report
www.unctad.org/wir


FDI Statistics
www.unctad.org/fdistatistics


Global Investment Trends Monitor
www.unctad.org/diae


Investment Policy Hub
http://investmentpolicyhub.unctad.org/


Investment Policy Monitor
www.unctad.org/iia


Issues in International Investment Agreements: I and II (Sequels)
www.unctad.org/iia


International Investment Policies for Development
www.unctad.org/iia


Investment Advisory Series A and B
www.unctad.org/diae


Investment Policy Reviews
www.unctad.org/ipr


Current Series on FDI and Development
www.unctad.org/diae


Transnational Corporations Journal
www.unctad.org/tnc


The sales publications may be purchased from
distributors of United Nations publications


throughout the world.
They may also be obtained by contacting:


United Nations Publications Customer Service
c/o National Book Network


15200 NBN Way
PO Box 190


Blue Ridge Summit, PA 17214
email: unpublications@nbnbooks.com


https://unp.un.org/


For further information on the work on foreign
direct investment and transnational corporations,


please address inquiries to:


Division on Investment and Enterprise
United Nations Conference on Trade and


Development
Palais des Nations, Room E-10052
CH-1211 Geneva 10 Switzerland


Telephone: +41 22 917 4533
Fax: +41 22 917 0498
www.unctad.org/diae


HOW TO OBTAIN THE PUBLICATIONS




Printed at United Nations, Geneva – 1510426 (E) – May 2015 – 3,517 – UNCTAD/WIR/2015 (Overview)




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