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World Investment Report 2011: Non-equity Modes of International Production and Development - Overview

Summary by UNCTAD, 2011

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Global foreign direct investment (FDI) has not yet bounced back to pre-crisis levels, though some regions show better recovery than others. The reason is not financing constraints, but perceived risks and regulatory uncertainty in a fragile world economy. The World Investment Report 2011 forecasts that, barring any economic shocks, FDI flows will recover to pre-crisis levels over the next two years. The challenge for the development community is to make this anticipated investment have greater impact on our efforts to achieve the Millennium Development Goals.

EMBARGO
The contents of this Report must not be


quoted or summarized in the print,
broadcast or electronic media before


26 July 2011, 17:00 hours GMT


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


NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT


2011
OVERVIEW


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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


NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT


2011
OVERVIEW


New York and Geneva, 2011




World Investment Report 2011ii


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
three and a half decades of experience and international expertise in research and policy analysis,
intergovernmental consensus-building, and provides technical assistance to developing 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. These are:


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, Cyprus, Latvia, Lithuania, Malta and Romania), plus Andorra, Bermuda, Liechtenstein,
Monaco and San Marino.


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


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.


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., 1994/95, indicates a financial year;
• Use of a dash (–) between dates representing years, e.g., 1994–1995, 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.




iiiPreface


New York, June 2011 Secretary-General of the United Nations


PREFACE


Global foreign direct investment (FDI) has not yet bounced back to pre-crisis
levels, though some regions show better recovery than others. The reason is not
financing constraints, but perceived risks and regulatory uncertainty in a fragile
world economy.


The World Investment Report 2011 forecasts that, barring any economic shocks,
FDI flows will recover to pre-crisis levels over the next two years. The challenge for
the development community is to make this anticipated investment have greater
impact on our efforts to achieve the Millennium Development Goals.


In 2010 – for the first time – developing economies absorbed close to half of global
FDI inflows. They also generated record levels of FDI outflows, much of it directed
to other countries in the South. This further demonstrates the growing importance
of developing economies to the world economy, and of South-South cooperation
and investment for sustainable development.


Increasingly, transnational corporations are engaging with developing and transition
economies through a broadening array of production and investment models,
such as contract manufacturing and farming, service outsourcing, franchising and
licensing. These relatively new phenomena present opportunities for developing
and transition economies to deepen their integration into the rapidly evolving global
economy, to strengthen the potential of their home-grown productive capacity, and
to improve their international competitiveness.


Unlocking the full potential of these new developments wiIl depend on wise poli-
cymaking and institution building by governments and international organizations.
Entrepreneurs and businesses in developing and transition economies need frame-
works in which they can benefit fully from integrated international production and
trade. I commend this report, with its wealth of research and analysis, to policy-
makers and businesses pursuing development success in a fast-changing world.


BAN Ki-moon




World Investment Report 2011iv


ACKNOWLEDGEMENTS


The World Investment Report 2011(WIR11) was prepared by a team led by James
Zhan. The team members included Richard Bolwijn, Quentin Dupriez, Masataka
Fujita, Thomas van Giffen, Michael Hanni, Kalman Kalotay, Joachim Karl, Ralf
Krüger, Guoyong Liang, Anthony Miller, Hafiz Mirza, Nicole Moussa, Shin Ohinata,
Astrit Sulstarova, Elisabeth Tuerk, Jörg Weber and Kee Hwee Wee. Wolfgang
Alschner, Amare Bekele, Federico Di Biasio, Hamed El Kady, Ariel Ivanier, Lizzie
Medrano, Cai Mengqi, Abraham Negash, Sergey Ripinski, Claudia Salgado,
Christoph Spennemann, Katharina Wortmann and Youngjun Yoo also contributed
to the Report.


Peter Buckley served as principal consultant. WIR11 also benefited from the advice
of Ilan Alon, Mark Casson, Lorraine Eden, Pierre Guislain, Justin Lin, Sarianna
Lundan, Ted Moran, Rajneesh Narula and Pierre Sauvé.


Research and statistical assistance was provided by Bradley Boicourt, Lizanne
Martinez and Tadelle Taye as well as interns Hasso Anwer, Hector Dip, Riham
Ahmed Marii, Eleni Piteli, John Sasuya and Ninel Seniuk.


Production and dissemination of WIR11 was supported by Tserenpuntsag Batbold,
Elisabeth Anodeau-Mareschal, Séverine Excoffier, Rosalina Goyena, Natalia
Meramo-Bachayani, Chantal Rakotondrainibe and Katia Vieu.


The manuscript was edited by Christopher Long and typeset by Laurence Duchemin
and Tess Ventura. Sophie Combette designed the cover.


At various stages of preparation, in particular during the four seminars organized
to discuss earlier drafts of the Report, the team benefited from comments and
inputs received from Rolf Adlung, Marie-Claude Allard, Yukiko Arai, Rashmi Banga,
Diana Barrowclough, Francis Bartels, Sven Behrendt, Jem Bendell, Nathalie
Bernasconi, Nils Bhinda, Francesco Ciabuschi, Simon Collier, Denise Dunlap-
Hinkler, Kevin Gallagher, Patrick Genin, Simona Gentile-Lüdecke, David Hallam,
Geoffrey Hamilton, Fabrice Hatem, Xiaoming He, Toh Mun Heng, Paul Hohnen,
Anna Joubin-Bret, Christopher Kip, Pascal Liu, Celso Manangan, Arvind Mayaram,
Ronaldo Mota, Jean-François Outreville, Peter Muchlinski, Ram Mudambi, Sam
Muradzikwa, Peter Nunnenkamp, Offah Obale, Joost Pauwelyn, Carlo Pietrobelli,
Jaya Prakash Pradhan, Hassan Qaqaya, Githa Roelans, Ulla Schwager, Emily
Sims, Brian Smart, Jagjit Singh Srai, Brad Stillwell, Roger Strange, Timothy J.




vAcknowledgements


Sturgeon, Dennis Tachiki, Ana Teresa Tavares-Lehmann, Silke Trumm, Frederico
Araujo Turolla, Peter Utting, Kernaghan Webb, Jacques de Werra, Lulu Zhang and
Zbigniew Zimny.


Numerous officials of central banks, government agencies, international
organizations and non-governmental organizations also contributed to WIR11.


The financial support of the Governments of Finland and Sweden is gratefully
acknowledged.






viiContents


TABLE OF CONTENTS


Page


KEY MESSAGES .................................................................... viii


OVERVIEW


FDI TRENDS AND PROSPECTS ...........................................................1


INVESTMENT POLICY TRENDS ..........................................................11


NON-EQUITY MODES OF INTERNATIONAL


PRODUCTION AND DEVELOPMENT ..................................................15




World Investment Report 2011viii


KEY MESSAGES


FDI trends and prospects


Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in
2010, but were still 15 per cent below their pre-crisis average. This is in contrast to
global industrial output and trade, which were back to pre-crisis levels. UNCTAD
estimates that global FDI will recover to its pre-crisis level in 2011, increasing to
$1.4–1.6 trillion, and approach its 2007 peak in 2013. This positive scenario holds,
barring any unexpected global economic shocks that may arise from a number of
risk factors still in play.


For the first time, developing and transition economies together attracted more
than half of global FDI flows. Outward FDI from those economies also reached
record highs, with most of their investment directed towards other countries in the
South. In contrast, FDI inflows to developed countries continued to decline.


Some of the poorest regions continued to see declines in FDI flows. Flows to
Africa, least developed countries, landlocked developing countries and small
island developing States all fell, as did flows to South Asia. At the same time,
major emerging regions, such as East and South-East Asia and Latin America
experienced strong growth in FDI inflows.


International production is expanding, with foreign sales, employment and assets
of transnational corporations (TNCs) all increasing. TNCs’ production worldwide
generated value-added of approximately $16 trillion in 2010, about a quarter of
global GDP. Foreign affiliates of TNCs accounted for more than 10 per cent of
global GDP and one-third of world exports.


State-owned TNCs are an important emerging source of FDI. There are at least
650 State-owned TNCs, with 8,500 foreign affiliates across the globe. While they
represent less than 1 per cent of TNCs, their outward investment accounted for
11 per cent of global FDI in 2010. The ownership and governance of State-owned
TNCs have raised concerns in some host countries regarding, among others,
the level playing field and national security, with regulatory implications for the
international expansion of these companies.




ixKey messages


Investment policy trends


Investment liberalization and promotion remained the dominant element of recent
investment policies. Nevertheless, the risk of investment protectionism has
increased as restrictive investment measures and administrative procedures have
accumulated over the past years.


The regime of international investment agreements (IIAs) is at the crossroads. With
close to 6,100 treaties, many ongoing negotiations and multiple dispute-settlement
mechanisms, it has come close to a point where it is too big and complex to handle
for governments and investors alike, yet remains inadequate to cover all possible
bilateral investment relationships (which would require a further 14,100 bilateral
treaties). The policy discourse about the future orientation of the IIA regime and its
development impact is intensifying.


FDI policies interact increasingly with industrial policies, nationally and internationally.
The challenge is to manage this interaction so that the two policies work together
for development. Striking a balance between building stronger domestic productive
capacity on the one hand and avoiding investment and trade protectionism on the
other is key, as is enhancing international coordination and cooperation.


The investment policy landscape is influenced more and more by a myriad of
voluntary corporate social responsibility (CSR) standards. Governments can
maximize development benefits deriving from these standards through appropriate
policies, such as harmonizing corporate reporting regulations, providing capacity-
building programmes, and integrating CSR standards into international investment
regimes.


Non-equity modes of international production and
development


In today’s world, policies aimed at improving the integration of developing economies
into global value chains must look beyond FDI and trade. Policymakers need to
consider non-equity modes (NEMs) of international production, such as contract
manufacturing, services outsourcing, contract farming, franchising, licensing,
management contracts, and other types of contractual relationship through which
TNCs coordinate the activities of host-country firms, without owning a stake in
those firms.




World Investment Report 2011x


Cross-border NEM activity worldwide is significant and particularly important in
developing countries. It is estimated to have generated over $2 trillion of sales in
2009. Contract manufacturing and services outsourcing accounted for $1.1–1.3
trillion, franchising $330–350 billion, licensing $340–360 billion, and management
contracts around $100 billion. In most cases, NEMs are growing more rapidly than
the industries in which they operate.


NEMs can yield significant development benefits. They employ an estimated 14–16
million workers in developing countries. Their value added represents up to 15
per cent of GDP in some economies. Their exports account for 70–80 per cent of
global exports in several industries. Overall, NEMs can support long-term industrial
development by building productive capacity, including through technology
dissemination and domestic enterprise development, and by helping developing
countries gain access to global value chains.


NEMs also pose risks for developing countries. Employment in contract
manufacturing can be highly cyclical and easily displaced. The value added
contribution of NEMs can appear low if assessed in terms of the value captured
out of the total global value chain. Concerns exist that TNCs may use NEMs to
circumvent social and environmental standards. And to ensure success in long-
term industrial development, developing countries need to mitigate the risk of
remaining locked into low-value-added activities and becoming overly dependent
on TNC-owned technologies and TNC-governed global value chains.


Policy matters. Maximizing development benefits from NEMs requires action in four
areas. First, NEM policies need to be embedded in overall national development
strategies, aligned with trade, investment and technology policies and addressing
dependency risks. Second, governments need to support efforts to build domestic
productive capacity to ensure the availability of attractive business partners that
can qualify as actors in global value chains. Third, promotion and facilitation of
NEMs requires a strong enabling legal and institutional framework, as well as the
involvement of investment promotion agencies in attracting TNC partners. Finally,
policies need to address the negative consequences and risks posed by NEMs
by strengthening the bargaining power of local NEM partners, safeguarding
competition, protecting labour rights and the environment.




OVERVIEW


FDI TRENDS AND PROSPECTS


FDI recovery to gain momentum in 2011


Global foreign direct investment (FDI) inflows rose modestly by 5 per cent, to reach
$1.24 trillion in 2010. While global industrial output and world trade are already
back to their pre-crisis levels, FDI flows in 2010 remained some 15 per cent below
their pre-crisis average, and nearly 37 per cent below their 2007 peak (figure 1).


Figure 1. Global FDI inflows, average 2005–2007 and 2007 to 2010
(Billions of dollars)


Source: UNCTAD, World Investment Report 2011.


1 472


1 971
1 744


1 185 1 244


2005-2007
average


2007 2008 2009 2010


~15%


~37%


UNCTAD predicts FDI flows will continue their recovery to reach $1.4–1.6 trillion, or
the pre-crisis level, in 2011. They are expected to rise further to $1.7 trillion in 2012
and reach $1.9 trillion in 2013, the peak achieved in 2007 (figure 2). The record
cash holdings of TNCs, ongoing corporate and industrial restructuring, rising stock
market valuations and gradual exits by States from financial and non-financial firms’
shareholdings, built up as supporting measures during the crisis, are creating new
investment opportunities for companies across the globe.


However, the post-crisis business environment is still beset by uncertainties. Risk
factors such as the unpredictability of global economic governance, a possible




World Investment Report 20112


widespread sovereign debt crisis and fiscal and financial sector imbalances in some
developed countries, as well as rising inflation and signs of overheating in major
emerging market economies, may yet derail the FDI recovery.


Figure 2. Global FDI flows, 2002–2010, and projection for
2011–2013


(Billions of dollars)


Source: UNCTAD, World Investment Report 2011.


500


1 000


1 500


2 000


2 500


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


Pessimistic scenario


Baseline


Emerging economies are the new FDI powerhouses


Developing economies increased further in importance in 2010, both as recipients
of FDI and as outward investors. As international production and, recently,
international consumption shift to developing and transition economies, TNCs
are increasingly investing in both efficiency- and market-seeking projects in those
countries. For the first time, they absorbed more than half of global FDI inflows in
2010 (table 1). Half of the top-20 host economies for FDI in 2010 were developing
or transition economies.


FDI outflows from developing and transition economies also increased strongly,
by 21 per cent. They now account for 29 per cent of global FDI outflows. In
2010, six developing and transition economies were among the top-20 investors.
The dynamism of emerging-market TNCs contrasts with the subdued pace of
investment from developed-country TNCs, especially those from Europe. Their
outward investment was still only about half of their 2007 peak.




3Overview


Table 1. FDI flows, by region, 2008-2010
(Billions of dollars and per cent)


Region FDI inflows FDI outflows2008 2009 2010 2008 2009 2010
World 1 744 1 185 1 244 1 911 1 171 1 323


Developed economies 965 603 602 1 541 851 935
Developing economies 658 511 574 309 271 328


Africa 73 60 55 10 6 7
Latin America and the Caribbean 207 141 159 81 46 76
West Asia 92 66 58 40 26 13
South, East and South-East Asia 284 242 300 178 193 232


South-East Europe and the CIS 121 72 68 60 49 61
Structurally weak, vulnerable and small economies 62.4 52.7 48.3 5.6 4.0 10.1
LDCs 33.0 26.5 26.4 3.0 0.4 1.8
LLDCs 25.4 26.2 23.0 1.7 3.8 8.4
SIDS 8.0 4.3 4.2 0.9 - 0.2


Memorandum: percentage share in world FDI flows
Developed economies 55.3 50.9 48.4 80.7 72.7 70.7
Developing economies 37.7 43.1 46.1 16.2 23.1 24.8


Africa 4.2 5.1 4.4 0.5 0.5 0.5
Latin America and the Caribbean 11.9 11.9 12.8 4.2 3.9 5.8
West Asia 5.2 5.6 4.7 2.1 2.2 1.0
South, East and South-East Asia 16.3 20.4 24.1 9.3 16.5 17.5


South-East Europe and the CIS 6.9 6.0 5.5 3.2 4.2 4.6
Structurally weak, vulnerable and small economies 3.6 4.4 3.9 0.3 0.3 0.8
LDCs 1.9 2.2 2.1 0.2 0.0 0.1
LLDCs 1.5 2.2 1.9 0.1 0.3 0.6
SIDS 0.5 0.4 0.3 - - -


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


Services FDI subdued, cross-border M&As rebound


Sectoral patterns. The moderate recovery of FDI inflows in 2010 masks major
sectoral differences. FDI in services, which accounted for the bulk of the decline
in FDI flows due to the crisis, continued on its downward path in 2010. All the
main service industries (business services, finance, transport and communications
and utilities) fell, although at different speeds. FDI flows in the financial industry
experienced one of the sharpest declines. The share of manufacturing rose to
almost half of all FDI projects. Within manufacturing, however, investments fell in
business-cycle-sensitive industries such as metal and electronics. The chemical
industry (including pharmaceuticals) remained resilient through the crisis, while
industries such as food, beverages and tobacco, textiles and garments, and
automobiles, recovered in 2010. FDI in extractive industries (which did not suffer
during the crisis) declined in 2010.


Modes of entry. The value of cross-border M&A deals increased by 36 per cent in
2010, but was still only around one-third of the previous peak in 2007. The value
of cross-border M&As into developing economies doubled. Greenfield investments




World Investment Report 20114


declined in 2010, but registered a significant rise in both value and number during
the first five months of 2011.


Components of FDI. Improved economic performance in many parts of the world
and increased profits of foreign affiliates lifted reinvested earnings to nearly double
their 2009 level. The other two FDI components – equity investment flows and
intra-company loans – fell in 2010.


Special funds. Private equity-sponsored FDI started to recover in 2010 and was
directed increasingly towards developing and transition economies. However, it
was still more than 70 per cent below the peak year of 2007. FDI by sovereign
wealth funds (SWFs) dropped to $10 billion in 2010, down from $26.5 billion in
2009. A more benign global economic environment may lead to increased FDI from
these special funds in 2011.


International production picks up


Indicators of international production, including foreign sales, employment and
assets of TNCs, showed gains in 2010 as economic conditions improved (table
2). UNCTAD estimates that sales and value added of foreign affiliates in the world
reached $33 trillion and $7 trillion, respectively. They also exported more than $6
trillion, about one-third of global exports. TNCs worldwide, in their operations both
at home and abroad, generated value added of approximately $16 trillion in 2010 –
about a quarter of total world GDP.


State-owned TNCs in the spotlight


State-owned TNCs are causing concerns in a number of host countries regarding
national security, the level playing field for competing firms, and governance
and transparency. From the perspective of home countries, there are concerns
regarding the openness to investment from their State-owned TNCs. Discussions
are underway in some international forums with a view to addressing these issues.


Today there are at least 650 State-owned TNCs, constituting an important emerging
source of FDI (table 3). Their more than 8,500 foreign affiliates are spread across
the globe, bringing them in contact with a large number of host economies. While
relatively small in number (less than 1 per cent of all TNCs), their FDI is substantial,
reaching roughly 11 per cent of global FDI flows in 2010. Reflecting this, State-
owned TNCs made up 19 of the world’s 100 largest TNCs.




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World Investment Report 20116


Table 3. Distribution of State-owned TNCs by home region/economy, 2010


Region/economy Number Share
World 653 100


Developed countries 286 43.8
European Union 223 34.2


Denmark 36 5.5
Finland 21 3.2
France 32 4.9
Germany 18 2.8
Poland 17 2.6
Sweden 18 2.8
Others 81 12.4


Other European countries 41 6.3
Norway 27 4.1
Switzerland 11 1.7
Others 3 0.5


United States 3 0.5
Other developed countries 18 2.8


Japan 4 0.6
Others 14 2.1


Developing economies 345 52.8
Africa 82 12.6


South Africa 54 8.3
Others 28 4.3


Latin America and the Caribbean 28 4.3
Brazil 9 1.4
Others 19 2.9


Asia 235 36.0
West Asia 70 10.7


Kuwait 19 2.9
United Arab Emirates 21 3.2
Others 30 4.6


South, East and South-East Asia 165 25.3
China 50 7.7
India 20 3.1
Iran, Islamic Republic of 10 1.5
Malaysia 45 6.9
Singapore 9 1.4
Others 31 4.7


South-East Europe and the CIS 23 3.5
Russian Federation 14 2.1
Others 9 1.4


Source: UNCTAD, Word Investment Report 2011.


State-owned TNCs constitute a varied group. Developing and transition economies
are home to more than half of these firms (56 per cent), though developed countries
continue to maintain a significant number of State-owned TNCs. In contrast to the
general view of State-owned TNCs as largely concentrated in the primary sector,
they are diversified and have a strong presence in the services sector.




7Overview


Uneven performance across regions


The rise of FDI to developing countries masks significant regional differences. Some
of the poorest regions continued to see declines in FDI flows. Flows to Africa, least
developed countries (LDCs), landlocked developing countries (LLDCs) and small
island developing States (SIDS) continued to fall, as did those to South Asia. At the
same time, major emerging regions, such as East and South-East Asia and Latin
America, experienced strong growth in FDI inflows (table 1).


FDI flows to Africa fell by 9 per cent in 2010. At $55 billon, the share of Africa
in total global FDI inflows was 4.4 per cent in 2010, down from 5.1 per cent in
2009 (table 1). FDI to the primary sector, especially in the oil industry, continued to
dominate FDI flows to the continent. It accounted for the rise of Ghana as a major
host country, as well as for the declines of inflows to Angola and Nigeria. Although
the continuing pursuit of natural resources, in particular by Asian TNCs, is likely to
sustain FDI flows to sub-Saharan Africa, political uncertainty in North Africa is likely
to make 2011 another challenging year for the continent as a whole.


Although there is some evidence that intraregional FDI is beginning to emerge in
non-natural resource related industries, intraregional FDI flows in Africa are still
limited in terms of volume and industry diversity. Harmonization of Africa’s regional
trade agreements and inclusion of FDI regimes could help Africa achieve more of
its intraregional FDI potential.


Inflows to East Asia, South-East Asia and South Asia as a whole rose by 24 per
cent in 2010, reaching $300 billion. However, the three subregions experienced
very different trends: inflows to ASEAN more than doubled; those to East Asia saw
a 17 per cent rise; FDI to South Asia declined by one-fourth.


Inflows to China, the largest recipient of FDI in the developing world, climbed
by 11 per cent, to $106 billion. With continuously rising wages and production
costs, however, offshoring of labour-intensive manufacturing to the country has
slowed down, and FDI inflows continue to shift towards high-tech industries and
services. In contrast, some ASEAN member States, such as Indonesia and Viet
Nam, have gained ground as low-cost production locations, especially for low-end
manufacturing.


The decline of FDI to South Asia reflects a 31 per cent slide in inflows to India
and a 14 per cent drop in Pakistan. In India, the setback in attracting FDI was
partly due to macroeconomic concerns. At the same time, inflows to Bangladesh,




World Investment Report 20118


an increasingly important low-cost production location in South Asia, jumped by
30 per cent to $913 million.


FDI outflows from South, East and South-East Asia grew by 20 per cent to about
$232 billion in 2010. In recent years, rising FDI outflows from developing Asia
demonstrate new and diversified industrial patterns. In extractive industries, new
investors have emerged, including conglomerates such as CITIC (China) and
Reliance Group (India), and sovereign wealth funds, such as China Investment
Corporation and Temasek Holdings (Singapore). Metal companies in the region
have been particularly active in ensuring access to overseas mineral assets, such
as iron ore and copper. In manufacturing, Asian companies have been actively
taking over large companies in the developed world, but face increasing political
obstacles. FDI outflows in the services sector have declined, but M&As in such
industries as telecommunications have been increasing.


FDI flows to West Asia in 2010 continued to be affected by the global economic
crisis, falling by 12 per cent, but they are expected to bottom out in 2011. However,
concerns about political instability in the region are likely to dampen the recovery.


FDI outflows from West Asia dropped by 51 per cent in 2010. Outward investment
from West Asia is mainly driven by government-controlled entities, which have been
redirecting some of their national oil surpluses to support their home economies.
The economic diversification policies of these countries has been pursued through
a dual strategy: investing in other Arab countries to bolster their small domestic
economies; and also investing in developed countries to seek strategic assets for
the development and diversification of the industrial capabilities back at home.
Increasingly this policy has been pursued with a view to creating productive
capabilities that are missing at home, such as motor vehicles, alternative energies,
electronics and aerospace. This approach differs from that of other countries,
which have generally sought to develop a certain level of capacity at home, before
engaging in outward direct investment.


FDI flows to Latin America and the Caribbean increased by 13 per cent in 2010.
The strongest increase was registered in South America, where the growth rate
was 56 per cent, with Brazil particularly buoyant. FDI outflows from Latin America
and the Caribbean increased by 67 per cent in 2010, mostly due to large cross-
border M&A purchases by Brazilian and Mexican TNCs.


Latin America and the Caribbean also witnessed a surge of investments by
developing Asian TNCs particularly in resource-seeking projects. In 2010,




9Overview


acquisitions by Asian TNCs jumped to $20 billion, accounting for more than 60 per
cent of total FDI to the region. This has raised concerns in some countries in the
region about the trade patterns, with South America exporting mostly commodities
and importing manufactured goods.


FDI flows to transition economies declined slightly in 2010. Flows to the
Commonwealth of Independent States (CIS) rose marginally by 0.4 per cent.
Foreign investors continue to be attracted to the fast-growing local consumer
market, especially in the Russian Federation where flows rose by 13 per cent to
$41 billion. In contrast, FDI flows to South-East Europe dropped sharply for the
third consecutive year, due partly to sluggish investment from EU countries.


South–East interregional FDI is growing rapidly. TNCs based in transition econo-
mies and in developing economies have increasingly ventured into each other’s
markets. For example, the share of developing host countries in greenfield invest-
ment projects by TNCs from transition economies rose to 60 per cent in 2010 (up
from only 28 per cent in 2004), while developing-country outward FDI in transition
economies increased more than five times over the past decade. Kazakhstan and
the Russian Federation are the most important targets of developing-country inves-
tors, whereas China and Turkey are the most popular destinations for FDI from tran-
sition economies. Such South–East interregional FDI has benefited from outward
FDI support from governments through, among others, regional cooperation (e.g.
the Shanghai Cooperation Organization) and bilateral partnerships.


FDI flows to the poorest regions continue to fall


In contrast to the FDI boom in developing countries as a whole, FDI inflows to the 48
LDCs declined overall by a further 0.6 per cent in 2010 – a matter of grave concern.
The distribution of FDI flows among LDCs also remains highly uneven, with over 80
per cent of LDC FDI flows going to resource-rich economies in Africa. However, this
picture is distorted by the highly capital-intensive nature of resource projects. Some
40 per cent of investments, by number, were in the form of greenfield projects in the
manufacturing sector and 16 per cent in services.


On the occasion of the 2011 Fourth United Nations Conference on the Least
Developed Countries, UNCTAD proposed a plan of action for investment in
LDCs. The emphasis is on an integrated policy approach to investment, technical
capacity-building and enterprise development, with five areas of action: public-
private infrastructure development; aid for productive capacity; building on LDC




World Investment Report 201110


investment opportunities; local business development and access to finance; and
regulatory and institutional reform.


Landlocked developing countries (LLDCs) saw their FDI inflows fall by 12 per cent
to $23 billion in 2010. These countries are traditionally marginal FDI destinations,
and they accounted for only 4 per cent of total FDI flows to the developing world.
With intensified South–South economic cooperation and increasing capital flows
from emerging markets, prospects for FDI flows to the group may improve.


FDI inflows to small island developing States (SIDS) as a whole declined slightly by
1 per cent in 2010, to $4.2 billion. As these countries are particularly vulnerable to
the effects of climate change, SIDS are looking to attract investment from TNCs
that can make a contribution to climate change adaptation, by mobilizing financial
and technological resources, implementing adaptation initiatives, and enhancing
local adaptive capacities.


FDI to developed countries remains well below pre-crisis
levels


In 2010, FDI inflows in developed countries declined marginally. The pattern of
FDI inflows was uneven among subregions. Europe suffered a sharp fall. Declining
FDI flows were also registered in Japan. A gloomier economic outlook, austerity
measures and possible sovereign debt crisis, as well as regulatory concerns, were
among the factors hampering the recovery of FDI flows. Inflows to the United States,
however, showed a strong turnaround, with an increase of more than 40 per cent.


In developed countries, the restructuring of the banking industry, driven by
regulatory authorities, has resulted in a series of significant divestments of foreign
assets. At the same time, it has also generated new FDI as assets changed hands
among major players. The global efforts towards the reform of the financial system
and the exit strategy of governments are likely to have a large bearing on FDI flows
in the financial industry in coming years.


The downward trend in outward FDI from developed countries reversed, with a 10
per cent increase over 2009. However, this took it to only half the level of its 2007
peak. The reversal was largely due to higher M&A values, facilitated by stronger
balance sheets of TNCs and historic low rates of debt financing.




11Overview


INVESTMENT POLICY TRENDS


National policies: mixed messages


More than two-thirds of reported investment policy measures in 2010 were in the
area of FDI liberalization and promotion. This was the case for Asia in particular,
where a relatively high number of measures eased entry and establishment
conditions for foreign investment. Most promotion and facilitation measures
were adopted by governments in Africa and Asia. These measures included the
streamlining of admission procedures and the opening of new, or the expansion of
existing, special economic zones.


On the other hand, almost one-third of all new measures in 2010 fell into the
category of investment-related regulation and restrictions, continuing its upward
trend since 2003 (figure 3). The recent restrictive measures were mainly in a few
industries, in particular natural resource-based industries and financial services.
The accumulation of restrictive measures over the past years and their continued
upward trend, as well as stricter review procedures for FDI entry, has increased the
risk of investment protectionism.


Figure 3. National regulatory changes, 2000–2010
(Per cent)


0
20
40
60
80


100


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Liberalization/promotion


Regulations/restrictions


98%


2%


68%


32%


Source: UNCTAD, Word Investment Report 2011.


Although numerous countries continue to implement emergency measures or
hold considerable assets following bail-out operations, the unwinding of support
schemes and liabilities resulting from emergency measures has started. The
process advances relatively slowly. As of April 2011, governments are estimated to
hold legacy assets and liabilities in financial and non-financial firms valued at over




World Investment Report 201112


$2 trillion. By far the largest share relates to several hundred firms in the financial
sector. All this indicates a potential wave of privatizations in the years to come.


The international investment regime: too much and too little


With a total of 178 new IIAs in 2010 – more than three new treaties per week –
the IIA universe reached 6,092 agreements at the end of the year (figure 4). This
trend of treaty expansion is expected to continue in 2011, the first five months
of which saw 48 new IIAs, with more than 100 IIAs currently under negotiation.
How the FDI-related competence shift from EU member States to the European
level will affect the overall IIA regime is still unclear (EU member States currently
have more than 1,300 BITs with non-EU countries). At least 25 new treaty-based
investor–State dispute settlement cases were initiated in 2010 and 47 decisions
rendered, bringing the total of known cases to 390, and those closed to 197. The
overwhelming majority of these cases were initiated by investors from developed
countries, with developing countries most often on the receiving end. The 2010
awards further tilted the overall balance in favour of the State, with 78 cases won
against 59 lost.


As countries continue concluding IIAs, sometimes with novel provisions aimed
at rebalancing the rights and obligations between States and firms, and ensuring
coherence between IIAs and other public policies, the policy discourse about
the future orientation of the IIA regime and how to make IIAs better contribute to
sustainable development is intensifying. Nationally, this manifests itself in a growing
dialogue among a broad set of investment stakeholders, including civil society,
business and parliamentarians. Internationally, inter-governmental debates in
UNCTAD’s 2010 World Investment Forum, UNCTAD’s Investment Commission and
the joint OECD-UNCTAD investment meetings serve as examples.


With thousands of treaties, many ongoing negotiations and multiple dispute-
settlement mechanisms, today’s IIA regime has come close to a point where it is
too big and complex to handle for governments and investors alike. Yet it offers
protection to only two-thirds of global FDI stock and covers only one-fifth of possible
bilateral investment relationships. To provide full coverage a further 14,100 bilateral
treaties would be required. This raises questions not only about the efforts needed
to complete the global IIA network, but also about the impact of the IIA regime and
its effectiveness for promoting and protecting investment, and about how to ensure
that IIAs deliver on their development potential.




13Overview


Intensifying interaction between FDI policies and industrial
policies


FDI policies increasingly interact with industrial policies, nationally and internationally.
At the national level, this interface manifests itself in specific national investment
guidelines; the targeting of types of investment or specific categories of foreign
investors for industrial development purposes; investment incentives related
to certain industries, activities or regions; and investment facilitation in line with
industrial development strategies. Countries also use selective FDI restrictions for
industrial policy purposes connected to the protection of infant industries, national
champions, strategic enterprises or ailing domestic industries in times of crisis.


At the international level, industrial policies are supported by FDI promotion through
IIAs, in particular when the respective IIA has sector-specific elements. At the same
time, IIA provisions can limit regulatory space for industrial policies. To avoid undue
policy constraints, a number of flexibility mechanism have been developed in IIAs,
such as exclusions and reservations for certain industries, general exceptions or
national security exceptions. According to UNCTAD case studies of reservations in
IIAs, countries are more inclined to preserve policy space for the services sector,


Figure 4. Number of new BITs, DTTs and other IIAs,
annual and cumulative, 2000–2010


0


1 000


2 000


3 000


4 000


5 000


6 000


7 000


0
20
40
60
80


100
120
140
160
180
200


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


DTTs BITs Other IIAs All IIAs cumulative


An
nu


al
n


u
m


be
r o


f I
IA


s


Cu
m


ul
at


ive
n


u
m


be
r o


f I
IA


s


Source: UNCTAD, Word Investment Report 2011.




World Investment Report 201114


compared to the primary and manufacturing sectors. Within the services sector,
most reservations exist in transportation, finance and communication.


The overall challenge is to manage the interaction between FDI policies and
industrial policies, so as to make the two policies work for development. There is a
need to strike a balance between building stronger domestic productive capacity
on the one hand and preventing investment and trade protectionism on the other.
Better international coordination can contribute to avoiding “beggar thy neighbour”
policies and creating synergies for global cooperation.


CSR standards increasingly influence investment policies


Over the past years, corporate social responsibility (CSR) standards have emerged
as a unique dimension of “soft law”. These CSR standards typically focus on the
operations of TNCs and, as such, are increasingly significant for international
investment as efforts to rebalance the rights and obligations of the State and the
investor intensify. TNCs in turn, through their foreign investments and global value
chains, can influence the social and environmental practices of business worldwide.
The current landscape of CSR standards is multilayered, multifaceted, and
interconnected. The standards of the United Nations, the ILO and the OECD serve
to define and provide guidance on fundamental CSR. In addition there are dozens
of international multi-stakeholder initiatives (MSIs), hundreds of industry association
initiatives and thousands of individual company codes providing standards for the
social and environmental practices of firms at home and abroad.


CSR standards pose a number of systemic challenges. A fundamental challenge
affecting most CSR standards is ensuring that companies actually comply with
their content. Moreover, there are gaps, overlaps and inconsistencies between
standards in terms of global reach, subjects covered, industry focus and uptake
among companies. Voluntary CSR standards can complement government
regulatory efforts, but they can also undermine, substitute or distract from these.
Finally, corporate reporting on performance relative to CSR standards continues to
lack standardization and comparability.


Governments can play an important role in creating a coherent policy and institutional
framework to address the challenges and opportunities presented by the universe
of CSR standards. Policy options for promoting CSR standards include supporting
the development of new CSR standards; applying CSR standards to government
procurement; building capacity in developing countries to adopt CSR standards;




15Overview


promoting the uptake of CSR reporting and responsible investment; adopting CSR
standards as part of regulatory initiatives; strengthening the compliance promotion
mechanisms of existing international standards; and factoring CSR standards into
IIAs. The various approaches already underway increasingly mix regulatory and
voluntary instruments to promote responsible business practices.


While CSR standards generally aim to promote sustainable development goals,
in the context of international production care needs to be taken to avoid them
becoming barriers to trade and investment. The objective of promoting investment
can be rhymed with CSR standards. Discussions on responsible investment
are ongoing in the international community. For example, in 2010, G-20 leaders
encouraged countries and companies to uphold the Principles for Responsible
Agricultural Investment (PRAI) that were developed by UNCTAD, the World Bank,
IFAD and FAO, requesting these organizations to develop options for promoting
responsible investment in agriculture.


NON-EQUITY MODES OF INTERNATIONAL
PRODUCTION AND DEVELOPMENT


International production, today, is no longer exclusively about FDI on the one
hand and trade on the other (figure 5). Non-equity modes (NEMs) of international
production are of growing importance, generating over $2 trillion in sales in 2010,
much of it in developing countries. NEMs include contract manufacturing, services
outsourcing, contract farming, franchising, licensing, management contracts and
other types of contractual relationships through which TNCs coordinate activities


Figure 5. A “middle ground” between FDI and trade has evolved in
international production, with significant development implications


Source: UNCTAD, Word Investment Report 2011.


Foreign
direct
investment


Trade
Non-equity
modes of


international
production


WIR 2011 aims to bridge the gap in policy analysis




World Investment Report 201116


in their global value chains (GVCs) and influence the management of host-country
firms without owning an equity stake in those firms.


From a development perspective, both NEM partnerships and foreign affiliates
(i.e. FDI) can enable host countries to integrate into GVCs. A key advantage of
NEMs is that they are flexible arrangements with local firms, with a built-in motive for
TNCs to invest in the viability of their partners through dissemination of knowledge,
technology and skills. This offers host economies considerable potential for long-
term industrial capacity building through a number of key channels of development
impact such as employment, value added, export generation and technology
acquisition (table 4). On the other hand, by establishing a local affiliate through FDI,
a TNC signals its long-term commitment to a host economy. Attracting FDI is also
the better option for economies with limited existing productive capacity.


NEMs may be more appropriate than FDI in sensitive situations. In agriculture, for
example, contract farming is more likely to address responsible investment issues
– respect for local rights, livelihoods of farmers and sustainable use of resources –
than large-scale land acquisition.


For developing country policymakers, the rise of NEMs not only creates new
opportunities for productive capacity building and integration into GVCs, there are
also new challenges, as each NEM mode comes with its own set of development
impacts and policy implications.


The TNC “make or buy” decision and NEMs as the “middle-
ground” option


Foremost among the core competencies of a TNC is its ability to coordinate
activities within a global value chain. TNCs can decide to conduct such activities
in-house (internalization) or they can entrust them to other firms (externalization)
– a choice analogous to a “make or buy” decision. Internalization, where it has a
cross-border dimension, results in FDI, whereby the international flows of goods,
services, information and other assets are intra-firm and under full control of the
TNC. Externalization results in either arm’s-length trade, where the TNC exercises
no control over other firms or, as an intermediate “middle-ground” option, in
non-equity inter-firm arrangements in which contractual agreements and relative
bargaining power condition the operations and behaviour of host-country firms.
Such “conditioning” can have a material impact on the conduct of the business,
requiring the host-country firm to, for example, invest in equipment, change




17Overview


processes, adopt new procedures, improve working conditions, or use specified
suppliers.


The ultimate ownership and control configuration of a GVC is the outcome of a set of
strategic choices by the TNC. In a typical value chain, a TNC oversees a sequence
of activities from procurement of inputs, through manufacturing operations to
distribution, sales and aftersales services (figure 6). In addition, firms undertake
activities – such as IT functions or R&D – which support all parts of the value chain
(upper parts of figure 6).


In a fully integrated company, activities in all these segments of the value chain are
carried out in-house (internalized), resulting in FDI if the activity takes place overseas.
However, in all segments of the value chain TNCs can opt to externalize activities
through various NEM types. For example, instead of establishing a manufacturing
affiliate (i.e. FDI) in a host country, a TNC can outsource production to a contract
manufacturer or permit a local firm to produce under licence.


Figure 6. Selected examples of NEM-types along the value chain


Source: UNCTAD, Word Investment Report 2011.


• Contract
manufacturing
(assembly/final
product)


• Out-licensing


• Contract logistics • Franchising
• Management


contracts
• Concessions
• Brand-licensing


• After sales services
outsourcing


• Call centres


• Business process outsourcing
Corporate services and support processes


Technology/Intelectual property development


• Contract R&D, Contract design, In-licensing


Operations/
manufacturing


Out-bound logistics/
distribution


Sales, service
provision, marketing


Aftersales and
services


• Contract farming
• Procurement hubs
• Contract


manufacturing
(intermediates)


Procurement/ in-bound
logistics


The TNC’s ultimate choice between FDI and NEMs (or trade) in any segment of the
value chain is based on its strategy, the relative costs and benefits, the associated
risks, and the feasibility of available options. In some parts of the value chain NEMs
can be substitutes for FDI, in others the two may be complementary.




World Investment Report 201118


Table 4. Main development impacts of NEMs


Impact category Highlights of findings


Employment
generation and
working conditions


• NEMs have significant job-creation potential: especially contract manufacturing,
services outsourcing and franchising account for large shares of total
employment in countries where they are prevalent


• Working conditions have been a source of concern in the case of contract
manufacturing based on low-cost labour in a number of countries with relatively
weak regulatory environments


• Stability of employment is a concern, principally in the case of contract
manufacturing and outsourcing, as contract-based work is more susceptible to
economic cycles


Local value added
and linkages


• NEMs can generate significant direct value added, making an important
contribution to GDP in developing countries where individual modes achieve
scale


• Concerns exist that contract manufacturing value added is often limited where
contracted processes are only a small part of the overall value chain or end-
product


• NEMs could also generate additional value added through local sourcing,
sometimes through “second-tier” non-equity relationships


Export generation


• NEMs imply access to TNCs’ international networks for local NEM partners;
in the case of those modes relying on foreign markets (e.g. contract
manufacturing, outsourcing, management contracts in tourism) this leads to
significant export generation and to more stable export sales


• In the case of contract manufacturing this is partly counterbalanced by
increased imports of goods for processing


• In the case of market-seeking NEMs (e.g. franchising, brand-licensing,
management contracts) NEMs can lead to increased imports


Technology
and skills transfer


• NEM relationships are in essence a form of intellectual property transfer to a
local NEM partner, protected by the contract


• NEM forms such as franchising, licensing, management contracts, involve
transfer of technology, business model and/or skills and are often accompanied
by training of local staff and management


• In contract manufacturing, local partners engaging in NEM relationships have
been shown to gain in productivity, particularly in the electronics industry


• NEM partners can evolve into important technology developers in their own
right (e.g. in contract manufacturing and services outsourcing)


• They can also remain locked into low-technology activities
• NEMs, by their nature, foster local entrepreneurship; positive effects on


entrepreneurship skills development are especially marked in franchising
(Cont. p19)




19Overview


Table 4. Main development impacts of NEMs (concluded)


Impact category Highlights of findings


Social and
environmental
impacts


• NEMs can serve as a mechanism to transfer international best social and
environmental practices


• They equally raise concerns that they may serve as mechanisms for TNCs to
circumvent such practices


Long-term industrial
capacity building


• Through the sum of the above impacts, NEMs can support or accelerate the
development of modern local productive capacities in developing countries


• In particular, NEMs encourage domestic enterprise development and domestic
investment in productive assets and integration of such domestic economic
activity into global value chains


• Concerns need to be addressed especially in issues such as long-term
dependence on foreign sources of technology; over-reliance on TNC-governed
GVCs for limited-value-added activities; and “footlooseness”.


Source: UNCTAD, Word Investment Report 2011.


NEMs are worth more than $2 trillion, mostly in developing
countries


Cross-border NEM activity worldwide is estimated to have generated over $2 trillion
of sales in 2010. Of this amount, contract manufacturing and services outsourcing
accounted for $1.1–1.3 trillion, franchising for $330–350 billion, licensing for
$340–360 billion, and management contracts for around $100 billion. Some of the
industry breakdowns by mode are given in table 5.


These estimates are incomplete, including only the most important industries in
which each NEM type is prevalent. The total also excludes other non-equity modes
such as contract farming and concessions, which are significant in developing
countries. For example, contract farming activities by TNCs are spread worldwide,
covering over 110 developing and transition economies, spanning a wide range of
agricultural commodities and accounting for a high share of output.


There are large variations in relative size. In the automotive industry, contract
manufacturing accounts for 30 per cent of global exports of automotive
components and a quarter of employment. In contrast, in electronics, contract
manufacturing represents a significant share of trade and employment. In labour-
intensive industries such as garments, footwear and toys, contract manufacturing
is even more important.




World Investment Report 201120
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21Overview


Putting different modes of international production in perspective, cross-border
activity related to selected NEMs of $2 trillion compares with exports of foreign
affiliates of TNCs of some $6 trillion in 2010. However, NEMs are particularly
important in developing countries. In many industries, developing countries account
for almost all NEM-related employment and exports, compared with their share in
global FDI stocks of 30 per cent and in world trade of less than 40 per cent.


NEMs are also growing rapidly. In most cases, the growth of NEMs outpaces that
of the industries in which they operate. This growth is driven by a number of key
advantages of NEMs for TNCs: (1) the relatively low upfront capital expenditures
required and the limited working capital needed for operation; (2) reduced risk
exposure; (3) flexibility in adapting to changes in the business cycle and in demand;
and (4) as a basis for externalizing non-core activities that can often be carried out
at lower cost by other operators.


NEMs generate significant formal employment in developing
countries


UNCTAD estimates that worldwide some 18–21 million workers are directly em-
ployed in firms operating under NEM arrangements, most of whom are in contract
manufacturing, services outsourcing and franchising activities (figure 7). Around 80
per cent of NEM-generated employment is in developing and transition economies.
Employment in contract manufacturing and, to a lesser extent, services outsourcing,
is predominantly based in developing countries. The same applies in other NEMs,
although global figures are not available; in Mozambique, for instance, contract
farming has led to some 400,000 smallholders participating in global value chains.


Working conditions in NEMs based on low-cost labour are often a concern, and
vary considerably depending on the mode and the legal, social and economic
structures of the countries in which NEM firms are operating. The factors that
influence working conditions in non-equity modes are the role of governments
in defining, communicating and enforcing labour standards and the sourcing
practices of TNCs. The social responsibility of TNCs has extended beyond their
own legal boundaries and has pushed many to increase their influence over the
activities of value chain partners. It is increasingly common for TNCs, in order to
manage risks and protect their brand and image, to influence their NEM partners
through codes of conduct, to promote international labour standards and good
management practices.




World Investment Report 201122


An additional concern relates to the relative “footlooseness” of NEMs. The
seasonality of industries, fluctuating demand patterns of TNCs, and the ease with
which they can shift NEM production to other locations can have a strong impact
on working conditions in NEM firms and on stability of employment.


Figure 7. Estimated global employment in contract
manufacturing, selected industries, 2010


(Millions of employees)


Source: UNCTAD, Word Investment Report 2011.


0 2 4 6 8 10 12 14 16


Garments


Automotive
components


Electronics


Footwear


Toys


NEM-related
employment


Global industry
employment


NEMs often make an important contribution to GDP


The impact of NEMs on local value added can be significant. It depends on how
NEM arrangements fit into TNC-governed GVCs and, therefore, on how much
value is retained in the host economy. It also depends on the potential for linkages
with other firms and on their underlying capabilities.


In efficiency seeking NEMs, such as contract manufacturing or services outsourcing,
it is possible for value capture in the host economy to be relatively small compared
to the overall value creation in a GVC, when the scope for local sourcing is limited
and goods are imported, processed and subsequently exported, as is often the
case in the electronics industry, for example. Although value captured as a share of
final-product sales price may be limited, it can nevertheless represent a significant




23Overview


Figure 8. World and NEM-related exports,
selected industries, 2010


(Billions of dollars)


Source: UNCTAD, Word Investment Report 2011.


0 50 100 150 200 250 300 350 400 450


Electronics


Garments


Automotive
components


Footwear


Toys


World exports
NEM exports


contribution to the local economy, adding up to 10–15 per cent of GDP in some
countries.


Local sourcing and the overall impact on host-country value added increases if
the emergence of contract manufacturing leads to a concentration of production
and export activities (e.g. in clusters or industrial parks). The greater the number
of plants and the more numerous the linkages with TNCs, the greater will be the
spillover effects and local value added. In addition, clustering can reduce the risk of
TNCs shifting production to other locations by increasing switching costs.


NEMs can generate export gains


NEMs are inextricably linked with international trade, shaping global patterns of
trade in many industries. In toys, footwear, garments, and electronics, contract
manufacturing represents more than 50 per cent of global trade (figure 8). NEMs
can thus be an important “route-to-market” for countries aiming at export-led
growth, and an important initial point of access to TNC governed global value
chains, before gradually building independent exporting capabilities. Export gains
can be partially offset by higher imports, reducing net export gains, where local
value added is limited, especially in early stages of NEM development.




World Investment Report 201124


NEMs are an important avenue for technology and skills
building


NEMs are in essence a transfer of intellectual property to a host-country firm under
the protection of a contract. Licensing involves a TNC granting an NEM partner
access to intellectual property, usually with contractual conditions attached, but
often with some training or skills transfer. International franchising transfers a
business model, and extensive training and support are normally offered to local
partners in order to properly set up the new franchise with wide-ranging implications
for technology dissemination.


In some East and South-East Asian economies in particular, but also in Eastern
Europe, Latin America and South Asia, technology and skills acquisition and
assimilation by NEM companies in electronics, garments, pharmaceuticals, IT-
services and business process outsourcing (BPO) have led to their transformation
into TNCs and technology leaders in their own right.


Although technology acquisition and assimilation through NEMs is a widespread
phenomenon, this is not a foregone conclusion, especially at the level of second
and third tier suppliers, where linkages may be insufficient or of low quality. A key
factor is the absorptive capacity of local NEM partners, in the form of their existing
skills base, the availability of workers that can be trained to learn new skills, and the
basic prerequisites to turn acquired skills into new business ventures, including the
regulatory framework, the business environment and access to finance. Another
important factor is the relative bargaining power of TNCs and local NEM partners.
Both factors can be influenced by appropriate policies.


Social and environmental pros and cons of NEMs


Concerns exist that cross-border NEMs in some industries may be a mechanism
for TNCs to circumvent high social and environmental standards in their production
network. Pressure from the international community has pushed TNCs to take
greater responsibility for such standards throughout their global value chains. There
is now a significant body of evidence to suggest that TNCs are likely to use more
environmentally friendly practices than domestic companies in equivalent activities.
The extent to which TNCs guide NEM operations on social and environmental
practices depends, first, on their perception of and exposure to legal liability risks
(e.g. reparations in the case of environmental damages) and business risks (e.g
damage to their brand and lower sales); and, secondly, on the extent to which




25Overview


they can control NEMs. TNCs employ a number of mechanisms to influence NEM
partners, including codes of conduct, factory inspections and audits, and third-
party certification schemes.


NEMs can help countries integrate in GVCs and build
productive capacity


The immediate contributions to employment, to GDP, to exports and to the local
technology base that NEMs can bring help to provide the resources, skills and
access to global value chains that are prerequisites for long-term industrial capacity
building.


A major part of the contribution of NEMs to the build-up of local productive
capacity and long-term prospects for industrial development is through the impact
on enterprise development, as NEMs require local entrepreneurs and domestic
investment. Such domestic investment, and access to local or international
financing, is often facilitated by NEMs, either through explicit measures by TNCs
providing support to local NEM partners, or through the implicit guarantees
stemming from the partnership with a major TNC itself.


While the potential contributions of NEMs to long-term development are clear,
concerns are often raised (especially with regard to contract manufacturing and
licensing), that countries relying to a significant extent on NEMs for industrial
development risk remaining locked-in to low-value-added segments of TNC-
governed global value chains and remaining technology dependent. In such cases,
developing economies would run a further risk of becoming vulnerable to TNCs
shifting productive activity to other locations, as NEMs are more “footloose” than
equivalent FDI operations. The related risks of “dependency” and “footlooseness”
must be addressed by embedding NEMs in the overall development strategies of
countries.


The right policies can help maximize NEM development
benefits


Policies are instrumental for countries to maximize development benefits and
minimize the risks associated with the integration of domestic firms into NEM
networks of TNCs (table 6). There are four key challenges for policymakers: first,
how to integrate NEM policies into the overall context of national development




World Investment Report 201126


strategies; second, how to support the building of domestic productive capacity to
ensure the availability of attractive business partners that can qualify as actors in
global value chains; third, how to promote and facilitate NEMs; and fourth, how to
address negative effects of NEMs.


Table 6. Maximizing development benefits from NEMs


Policy areas Key actions


Embedding NEM policies in overall
development strategies


• Integrating NEM policies into industrial development
strategies


• Ensuring coherence with trade, investment, and technology
policies


• Mitigating dependency risks and supporting upgrading
efforts


Building domestic productive capacity


• Developing entrepreneurship
• Improving education
• Providing access to finance
• Enhancing technological capacities


Facilitating and promoting NEMs


• Setting up an enabling legal framework
• Promoting NEMs through IPAs
• Securing home-country support measures
• Making international policies conducive to NEMs


Addressing negative effects
• Strengthening the bargaining power of domestic firms
• Safeguarding competition
• Protecting labour rights and the environment


Source: UNCTAD, Word Investment Report 2011.


NEM policies appropriately embedded in industrial development strategies will:


(a) ensure that efforts to attract NEMs through building domestic productive
capacity and through facilitation and promotion initiatives are directed at the
right industries, value chains and specific activities or segments within value
chains;


(b) support industrial upgrading in line with a country’s development stage, ensuring
that firms move to higher value-added stages in the value chain, helping local
NEM partners reduce their technology dependency, develop their own brands,
or become NEM originators in their own right.


An important element of industrial development strategies that incorporate NEMs




27Overview


are measures to prevent and mitigate impacts deriving from the “footlooseness”
of some NEM types, by balancing diversification and specialization. Diversification
ensures that domestic companies are engaged in multiple NEM activities, both
within and across different value chains, and are connected to a broad range of
NEM partners. Specialization in particular value chains improves the competitive
edge of local NEM partners within those chains and can facilitate, in the longer
term, upgrading to segments with greater value capture. In general, measures
should aim at maintaining and increasing the attractiveness of the host country for
TNCs and improve the “stickiness” of NEMs by building up local mass, clusters of
suppliers, and the local technology base. Continuous learning and skills upgrading
of domestic entrepreneurs and employees are also important to ensure domestic
firms can move to higher value-added activities should foreign companies move
“low end” production processes to cheaper locations.


Improving the capacity of locals to engage in NEMs has several policy aspects. Pro-
active entrepreneurship policies can strengthen the competitiveness of domestic
NEM partners and range from fostering start-ups to promoting business networks.
Embedding entrepreneurship knowledge into formal education systems, combined
with vocational training and the development of specialized NEM-related skills is
also important. A mix of national technology policies can improve local absorptive
capacity and create technology clusters and partnerships. Access to finance for
domestic NEM partners can be improved through policies reducing borrowing
costs and the risks associated with lending to SMEs, or by offering alternatives
to traditional bank credits. Facilitation efforts can also include initiatives to support
respect for core labour standards and CSR.


Promoting and facilitating NEM arrangements depends, first, on clear and stable
rules governing the contractual relationships between NEM partners, including
transparency and coherence. This is important, as NEM arrangements are often
governed by multiple laws and regulations. Conducive NEM-specific laws (e.g.
franchising laws, rules on contract farming) and appropriate intellectual property (IP)
protection (particularly relevant for IP-intensive NEMs such as licensing, franchising
and often contract manufacturing) can also help. While the current involvement
of investment promotion agencies in NEM-specific promotion is still limited, they
could expand their remit beyond FDI to promote awareness of NEM opportunities,
engage in matchmaking services, and provide incentives to start-ups.


To address any negative impacts of NEMs, it is important to strengthen the
bargaining power of local NEM partners vis-à-vis TNCs to ensure that contracts are




World Investment Report 201128


based on a fair sharing of risks and benefits. The development of industry-specific
NEM model contracts or negotiation guidelines can contribute to achieving this
objective. If TNCs engaged in NEMs acquire dominant positions, they may be able
to abuse their market power to the detriment of their competitors (domestic and
foreign) and their own trading partners. Therefore, policies to promote NEMs need
to go hand in hand with policies to safeguard competition. Other public interest
criteria may require attention as well. Protection of indigenous capacities and
traditional activities, that may be crowded out by a rapid increase in market shares
of successful NEMs, is essential.


In the case of contract farming for instance, policies such as these would result in
model contracts or guidelines supporting smallholders in negotiations with TNCs;
training on sustainable farming methods; provision of appropriate technologies
and government-led extension services to improve capacities of contract farmers;
and infrastructure development for improving business opportunities for contract
farmers in remote areas. If contract farming was given more pride of place in
government policies, direct investment in large-scale land acquisitions by TNCs
would be less of an issue.


Finally, home-country initiatives and the international community can also play a
positive role. Home-country policies that specifically promote overseas NEMs include
the expansion of national export insurance schemes and political risk insurance to
also cover some types of NEMs. Internationally, while there is no comprehensive
legal and policy framework for fostering NEMs and their development contribution,
supportive international policies range from relevant WTO agreements and – to
a limited extent – IIAs, to soft-law initiatives contributing to harmonizing the rules
governing the relationship between private NEM parties or guiding them in the
crafting of NEM contracts.


* * *


Foreign direct investment is a key component of the world’s growth engine. However,
the post-crisis recovery in FDI has been slow to take off and is unevenly spread,
with especially the poorest countries still in “FDI recession”. Many uncertainties
still haunt investors in the global economy. National and international policy
developments are sending mixed messages to the investment community. And




29Overview


investment policymaking is becoming more complex, with international production
evolving and with blurring boundaries between FDI, non-equity modes and trade.
The growth of NEMs poses new challenges but also creates new opportunities for
the further integration of developing economies into the global economy. The World
Investment Report 2011 aims to help developing-country policymakers and the
international development community navigate those challenges and capitalize on
the opportunities for their development gains.


Geneva, June 2011 Supachai Panitchpakdi
Secretary-General of the UNCTAD




World Investment Report 201130


World Investment Report Past Issues


World Investment Report 2010: Investing in a Low-carbon Economy.
World Investment Report 2009: Transnational Corporations, Agricultural Production and
Development.
World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge.
World Investment Report 2007: Transnational Corporations, Extractive Industries and Development.
World Investment Report 2006: FDI from Developing and Transition Economies: Implications for
Development.
World Investment Report 2005: Transnational Corporations and the Internationalization of R&D.
World Investment Report 2004: The Shift Towards Services
World Investment Report 2003: FDI Policies for Development: National and International
Perspectives
World Investment Report 2002: Transnational Corporations and Export Competitiveness
World Investment Report 2001: Promoting Linkages
World Investment Report 2000: Cross-border Mergers and Acquisitions and Development
World Investment Report 1999: Foreign Direct Investment and the Challenge of Development
World Investment Report 1998: Trends and Determinants
World Investment Report 1997: Transnational Corporations, Market Structure and Competition
Policy
World Investment Report 1996: Investment, Trade and International Policy Arrangements
World Investment Report 1995: Transnational Corporations and Competitiveness
World Investment Report 1994: Transnational Corporations, Employment and the Workplace
World Investment Report 1993: Transnational Corporations and Integrated International Production
World Investment Report 1992: Transnational Corporations as Engines of Growth
World Investment Report 1991: The Triad in Foreign Direct Investment


All downloadable at www.unctad.org/wir


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


web: www.unctad.org/diae


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HelveticaNeueLTStd-Lt Type1 / Custom / Sous-groupe incorporé
HelveticaNeueLTStd-LtCn Type1 (CID) / Identity-H / Sous-groupe incorporé
HelveticaNeueLTStd-LtCn Type1 / Custom / Sous-groupe incorporé
HelveticaNeueLTStd-LtCnO Type1 / WinAnsi / Sous-groupe incorporé
HelveticaNeueLTStd-LtIt Type1 / Custom / Sous-groupe incorporé
HelveticaNeueLTStd-Md Type1 / Custom / Sous-groupe incorporé
HelveticaNeueLTStd-MdCn Type1 / WinAnsi / Sous-groupe incorporé
HelveticaNeueLTStd-MdEx Type1 / WinAnsi / Sous-groupe incorporé
HelveticaNeueLTStd-Roman Type1 / WinAnsi / Sous-groupe incorporé




Prinect PDF Report 3.0.87 - 3 - 05.07.2011 13:33:49


MyriadPro-Regular Type1 / WinAnsi / Sous-groupe incorporé
SymbolMT TrueType (CID) / Identity-H / Sous-groupe incorporé
TimesNewRoman TrueType (CID) / Identity-H / Sous-groupe incorporé
TimesNewRomanPSMT TrueType / WinAnsi / Sous-groupe incorporé




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