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World Investment Report 2013 : Global Value Chains, Investment and Trade for Development - Overview

Summary by UNCTAD, 2013

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The WIR 2013 puts forward the latest trends in foreign direct investment and in-depth analysis of policy developments, investment prospects, and key emerging issues of investment -- including offshore financial flows and divestments. This year’s edition focuses on strategic development options to maximize the benefits and minimize the risks of global value chains.

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


REPORT2013


New York and Geneva, 2013


GLOBAL VALUE CHAINS: INVESTMENT AND TRADE FOR DEVELOPMENT




World Investment Report 2013ii


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,
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. 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, 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, China; Macao, China; 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:
tTwo 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.




iii




Preface


New York, June 2013
BAN Ki-moon


Secretary-General of the United Nations


PREFACE


The 2013 World Investment Report comes at an important moment.
The international community is making a final push to achieve the Millennium
Development Goals by the target date of 2015. At the same time, the United
Nations is working to forge a vision for the post-2015 development agenda.
Credible and objective information on foreign direct investment (FDI) can
contribute to success in these twin endeavours.


Global FDI declined in 2012, mainly due to continued macroeconomic fragility
and policy uncertainty for investors, and it is forecast to rise only moderately over
the next two years.


Yet as this report reveals, the global picture masks a number of major dynamic
developments. In 2012 – for the first time ever – developing economies
absorbed more FDI than developed countries, with four developing economies
ranked among the five largest recipients in the world. Developing countries also
generated almost one third of global FDI outflows, continuing an upward trend
that looks set to continue.


This year’s World Investment Report provides an in-depth analysis, strategic
development options and practical advice for policymakers and others on how to
maximize the benefits and minimize the risks associated with global value chains.
This is essential to ensure more inclusive growth and sustainable development.


I commend the World Investment Report 2013 to the international investment
and development community as a source of reflection and inspiration for meeting
today’s development challenges.




World Investment Report 2013iv


ACKNOWLEDGEMENTS
The World Investment Report 2013 (WIR13) was prepared by a team led by James
Zhan. The team members included Richard Bolwijn, Bruno Casella, Joseph Clements,
Hamed El Kady, Kumi Endo, Masataka Fujita, Noelia Garcia Nebra, Thomas van
Giffen, Axèle Giroud, Ariel Ivanier, Joachim Karl, Guoyong Liang, Anthony Miller, Hafiz
Mirza, Nicole Moussa, Shin Ohinata, Davide Rigo, Sergey Ripinsky, William Speller,
Astrit Sulstarova, Claudia Trentini, Elisabeth Tuerk, Jörg Weber and Kee Hwee Wee.


WIR13 benefited from the advice of Carlo Altomonte, Richard Baldwin, Carlos Braga,
Peter Buckley, Lorraine Eden, Gary Gereffi, John Humphrey, Bart Los and Pierre
Sauvé.


Research and statistical assistance was provided by Bradley Boicourt and Lizanne
Martinez. Contributions were also made by Wolfgang Alschner, Amare Bekele, Hector
Dip, Ventzislav Kotetzov, Mathabo Le Roux, Kendra Magraw, Abraham Negash,
Naomi Rosenthal, Diana Rosert, John Sasuya, Teerawat Wongkaew and Youngjun
Yoo, as well as interns Alexandre Genest, Jessica Mullins and Thomas Turner.


The manuscript was copy-edited by Lise Lingo and typeset by Laurence Duchemin
and Teresita Ventura. Sophie Combette designed the cover.


Production and dissemination of WIR13 was supported by Elisabeth Anodeau-
Mareschal, Evelyn Benitez, Nathalie Eulaerts, Severine Excoffier, Rosalina Goyena,
Natalia Meramo-Bachayani and Katia Vieu.


At various stages of preparation, in particular during the review meetings organized
to discuss drafts of WIR13, the team benefited from comments and inputs received
from external experts: Rolf Adlung, Michael Bratt, Tomer Broude, Jeremy Clegg,
Lorenzo Cotula, Michael Ewing-Chow, Masuma Farooki, Karina Fernandez-Stark,
Stephen Gelb, Stine Haakonsson, Inge Ivarsson, Keiichiro Kanemoto, Lise Johnson,
Raphie Kaplinsky, Nagesh Kumar, Sarianna Lundan, Bo Meng, Daniel Moran, Michael
Mortimore, Ram Mudambi, Rajneesh Narula, Lizbeth Navas-Aleman, Christos Pitelis,
William Powers, Zhengzheng Qu, Alexander Raabe, Rajah Rasiah, Arianna Rossi,
Armando Rungi, Emily Sims, Gabriele Suder, Tim Sturgeon, Fan Wenjie, Deborah
Winkler and Robert Yuskavage. Comments and inputs were also received from
many UNCTAD colleagues, including Alfredo Calcagno, Torbjorn Fredriksson, Marco
Fugazza, Ebru Gokce, Kalman Kalotay, Joerg Mayer, Alessandro Nicita, Victor
Ognivtsev, Celia Ortega Sotes, Yongfu Ouyang, Ralf Peters, Miho Shirotori, Guillermo
Valles and Paul Wessendorp.


UNCTAD wishes to thank the Eora project team members for their kind collaboration.


Numerous officials of central banks, government agencies, international organizations
and non-governmental organizations also contributed to WIR13. The financial support
of the Governments of Finland, Norway and Sweden is gratefully acknowledged.




vTable of Contents


TABLE OF CONTENTS
Page


KEY MESSAGES ................................................................... vii


OVERVIEW


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


REGIONAL TRENDS IN FDI ................................................................ 9


INVESTMENT POLICY TRENDS ....................................................... 13


GLOBAL VALUE CHAINS AND DEVELOPMENT .............................. 19




World Investment Report 2013vi




viiKey messages


KEY MESSAGES


Global and regional investment trends


The road to foreign direct investment (FDI) recovery is bumpy. Global FDI fell
by 18 per cent to $1.35 trillion in 2012. The recovery will take longer than
expected, mostly because of global economic fragility and policy uncertainty.
UNCTAD forecasts FDI in 2013 to remain close to the 2012 level, with an
upper range of $1.45 trillion. As investors regain confidence in the medium
term, flows are expected to reach levels of $1.6 trillion in 2014 and $1.8
trillion in 2015. However, significant risks to this growth scenario remain.


Developing countries take the lead. In 2012 – for the first time ever – developing
economies absorbed more FDI than developed countries, accounting for 52
per cent of global FDI flows. This is partly because the biggest fall in FDI
inflows occurred in developed countries, which now account for only 42 per
cent of global flows. Developing economies also generated almost one third
of global FDI outflows, continuing a steady upward trend.


FDI outflows from developed countries dropped to a level close to the trough
of 2009. The uncertain economic outlook led transnational corporations
(TNCs) in developed countries to maintain their wait-and-see approach
towards new investments or to divest foreign assets, rather than undertake
major international expansion. In 2012, 22 of the 38 developed countries
experienced a decline in outward FDI, leading to a 23 per cent overall decline.


Investments through offshore financial centres (OFCs) and special purpose
entities (SPEs) remain a concern. Financial flows to OFCs are still close to
their peak level of 2007. Although most international efforts to combat tax
evasion have focused on OFCs, financial flows through SPEs were almost
seven times more important in 2011. The number of countries offering
favourable tax conditions for SPEs is also increasing.


Reinvested earnings can be an important source of finance for long-term
investment. FDI income amounted to $1.5 trillion in 2011 on a stock of
$21 trillion. The rates of return on FDI are 7 per cent globally, and higher in
both developing (8 per cent) and transition economies (13 per cent) than




World Investment Report 2013viii


in developed ones (5 per cent). Nearly one third of global FDI income was
retained in host economies, and two thirds were repatriated (representing
on average 3.4 per cent of the current account payments). The share of
retained earnings is highest in developing countries; at about 40 per cent of
FDI income it represents an important source of financing.


FDI flows to developing regions witnessed a small overall decline in 2012,
but there were some bright spots. Africa bucked the trend with a 5 per cent
increase in FDI inflows to $50 billion. This growth was driven partly by FDI
in extractive industries, but investment in consumer-oriented manufacturing
and service industries is also expanding. FDI flows to developing Asia fell 7
per cent, to $407 billion, but remained at a high level. Driven by continued
intraregional restructuring, lower-income countries such as Cambodia,
Myanmar and Viet Nam are bright spots for labour-intensive FDI. In Latin
America and the Caribbean, FDI inflows decreased 2 per cent to $244 billion
due to a decline in Central America and the Caribbean. This decline was
masked by an increase of 12 per cent in South America, where FDI inflows
were a mix of natural-resource-seeking and market-seeking activity.


FDI is on the rise in structurally weak economies. FDI inflows to least developed
countries (LDCs) hit a record high, an increase led by developing-country
TNCs, especially from India. A modest increase in FDI flows to landlocked
developing countries (LLDCs) occurred, thanks to rising flows to African and
Latin American LLDCs and several economies in Central Asia. FDI flows into
small island developing States (SIDS) continued to recover for the second
consecutive year, driven by investments in natural-resource-rich countries.


FDI flows to developed economies plummeted. In developed countries, FDI
inflows fell drastically, by 32 per cent, to $561 billion – a level last seen almost
10 years ago. The majority of developed countries saw significant drops of
FDI inflows, in particular the European Union, which alone accounted for two
thirds of the global FDI decline.


Transition economies saw a relatively small decline. A slump in cross-border
mergers and acquisitions (M&As) sales caused inward FDI flows to transition
economies to fall by 9 per cent to $87 billion; $51 billion of this went to the
Russian Federation, but a large part of it was “round-tripping”.




ix


Investment policy trends


National investment policymaking is increasingly geared towards new
development strategies. Most governments are keen to attract and facilitate
foreign investment as a means for productive capacity-building and sustainable
development. At the same time, numerous countries are reinforcing the
regulatory environment for foreign investment, making more use of industrial
policies in strategic sectors, tightening screening and monitoring procedures,
and closely scrutinizing cross-border M&As. There is an ongoing risk that
some of these measures are undertaken for protectionist purposes.


International investment policymaking is in transition. By the end of 2012,
the regime of international investment agreements (IIAs) consisted of 3,196
treaties. Today, countries increasingly favour a regional over a bilateral
approach to IIA rule making and take into account sustainable development
elements. More than 1,300 of today’s 2,857 bilateral investment treaties
(BITs) will have reached their “anytime termination phase” by the end of
2013, opening a window of opportunity to address inconsistencies and
overlaps in the multi-faceted and multi-layered IIA regime, and to strengthen
its development dimension.


UNCTAD proposes five broad paths for reforming international investment
arbitration. This responds to the debate about the pros and cons of the
investment arbitration regime, spurred by an increasing number of cases
and persistent concerns about the regime’s systemic deficiencies. The five
options for reform are: promoting alternative dispute resolution, modifying
the existing ISDS system through individual IIAs, limiting investors’ access
to ISDS, introducing an appeals facility and creating a standing international
investment court. Collective efforts at the multilateral level can help develop a
consensus on the preferred course of action.


Global value chains: investment and trade for development


Today’s global economy is characterized by global value chains (GVCs),
in which intermediate goods and services are traded in fragmented
and internationally dispersed production processes. GVCs are typically
coordinated by TNCs, with cross-border trade of inputs and outputs taking




World Investment Report 2013x


place within their networks of affiliates, contractual partners and arm’s-length
suppliers. TNC-coordinated GVCs account for some 80 per cent of global
trade.


GVCs lead to a significant amount of double counting in trade – about 28 per
cent or $5 trillion of the $19 trillion in global gross exports in 2010 – because
intermediates are counted several times in world exports, but should be
counted only once as “value added in trade”. Patterns of value added trade in
GVCs determine the distribution of actual economic gains from trade between
individual economies and are shaped to a significant extent by the investment
decisions of TNCs. Countries with a greater presence of FDI relative to the
size of their economies tend to have a higher level of participation in GVCs
and to generate relatively more domestic value added from trade.


The development contribution of GVCs can be significant. In developing
countries, value added trade contributes nearly 30 per cent to countries’ GDP
on average, as compared with 18 per cent in developed countries. And there
is a positive correlation between participation in GVCs and growth rates of
GDP per capita. GVCs have a direct economic impact on value added, jobs
and income. They can also be an important avenue for developing countries
to build productive capacity, including through technology dissemination
and skill building, thus opening up opportunities for longer-term industrial
upgrading.


However, participation in GVCs also involves risks. The GDP contribution of
GVCs can be limited if countries capture only a small share of the value
added created in the chain. Also, technology dissemination, skill building and
upgrading are not automatic. Developing countries face the risk of remaining
locked into relatively low value added activities. In addition, environmental
impacts and social effects, including on working conditions, occupational
safety and health, and job security, can be negative. The potential
“footlooseness” of GVC activities and increased vulnerability to external
shocks pose further risks.


Countries need to make a strategic choice to promote or not to promote
participation in GVCs. They need to carefully weigh the pros and cons of GVC
participation and the costs and benefits of proactive policies to promote
GVCs or GVC-led development strategies, in line with their specific situation




xiKey messages


and factor endowments. Some countries may decide not to promote it;
others may not have a choice. In reality, most are already involved in GVCs
to a degree. Promoting GVC participation implies targeting specific GVC
segments; i.e. GVC promotion can be selective. Moreover, GVC participation
is only one aspect of a country’s overall development strategy.


Policy matters to make GVCs work for development. If countries decide
to actively promote GVC participation, policymakers should first determine
where their countries’ trade profiles and industrial capabilities stand and then
evaluate realistic GVC development paths for strategic positioning. Gaining
access to GVCs and realizing upgrading opportunities requires a structured
approach that includes embedding GVCs in industrial development policies
(e.g. targeting GVC tasks and activities); enabling GVC growth by creating
a conducive environment for trade and investment and by putting in place
infrastructural prerequisites; and building productive capacities in local
firms and skills in the local workforce. To mitigate the risks involved in GVC
participation, these efforts should take place within a strong environmental,
social and governance framework, with strengthened regulation and
enforcement and capacity-building support to local firms for compliance.


UNCTAD further proposes three specific initiatives:


t Synergistic trade and investment policies and institutions. Trade and
investment policies often work in silos. In the context of GVCs they can
have unintended and counterproductive reciprocal effects. To avoid
this, policymakers – where necessary, with the help of international
organizations – should carefully review those policy instruments
that simultaneously affect investment and trade in GVCs; i.e. trade
measures affecting investment and investment measures affecting
trade. Furthermore, at the institutional level, the trade and investment
links in GVCs call for closer coordination and collaboration between
trade and investment promotion agencies.


t “Regional industrial development compacts”. The relevance of regional
value chains underscores the importance of regional cooperation.
Regional industrial development compacts could encompass
integrated regional trade and investment agreements focusing
on liberalization and facilitation, and establishing joint trade and




World Investment Report 2013xii


investment promotion mechanisms and institutions. They could also
aim to create cross-border industrial clusters through joint financing
for GVC-enabling infrastructure and joint productive capacity-building.
Establishing such compacts requires working in partnership between
governments in the region, between governments and international
organizations, and between the public and private sectors.


t Sustainable export processing zones (EPZs). Sustainability is
becoming an important factor for attracting GVC activities. EPZs
have become significant GVC hubs by offering benefits to TNCs and
suppliers in GVCs. They could also offer – in addition to or in lieu
of some existing benefits – expanded support services for corporate
social responsibility (CSR) efforts to become catalysts for CSR
implementation. Policymakers could consider setting up relevant
services, including technical assistance for certification and reporting,
support on occupational safety and health issues, and recycling
or alternative energy facilities, transforming EPZs into centres of
excellence for sustainable business. International organizations can
help through the establishment of benchmarks, exchanges of best
practices and capacity-building programmes.




1Overview


OVERVIEW


GLOBAL INVESTMENT TRENDS


FDI recovery unravels in 2012


Global foreign direct investment (FDI) fell by 18 per cent to $1.35 trillion
in 2012. This sharp decline was in stark contrast to other key economic
indicators such as GDP, international trade and employment, which all
registered positive growth at the global level. Economic fragility and policy
uncertainty in a number of major economies gave rise to caution among
investors. Furthermore, many transnational corporations (TNCs) reprofiled
their investments overseas, including through restructuring of assets,
divestment and relocation. The road to FDI recovery is thus proving bumpy
and may take longer than expected.


UNCTAD forecasts FDI in 2013 to remain close to the 2012 level, with an
upper range of $1.45 trillion – a level comparable to the pre-crisis average of
2005–2007 (figure 1). As macroeconomic conditions improve and investors
regain confidence in the medium term, TNCs may convert their record levels
of cash holdings into new investments. FDI flows may then reach the level
of $1.6 trillion in 2014 and $1.8 trillion in 2015. However, significant risks
to this growth scenario remain. Factors such as structural weaknesses in
the global financial system, the possible deterioration of the macroeconomic
environment, and significant policy uncertainty in areas crucial for investor
confidence might lead to a further decline in FDI flows.


Developing economies surpass developed economies as
recipients of FDI


FDI flows to developing economies proved to be much more resilient than
flows to developed countries, recording their second highest level – even
though they declined slightly (by 4 per cent) to $703 billion in 2012 (table 1).
They accounted for a record 52 per cent of global FDI inflows, exceeding
flows to developed economies for the first time ever, by $142 billion. The




World Investment Report 20132


global rankings of the largest recipients of FDI also reflect changing patterns
of investment flows: 9 of the 20 largest recipients were developing countries
(figure 2). Among regions, flows to developing Asia and Latin America
remained at historically high levels, but their growth momentum weakened.
Africa saw a year-on-year increase in FDI inflows in 2012 (table 1).


Developing economies’ outflows reached $426 billion, a record 31 per cent
of the world total. Despite the global downturn, TNCs from developing
countries continued their expansion abroad. Asian countries remained the
largest source of FDI, accounting for three quarters of the developing-country
total. FDI outflows from Africa tripled while flows from developing Asia and
from Latin America and the Caribbean remained at the 2011 level.


The BRICS countries (Brazil, the Russian Federation, India, China and South
Africa) continued to be the leading sources of FDI among emerging investor
countries. Flows from these five economies rose from $7 billion in 2000 to
$145 billion in 2012, accounting for 10 per cent of the world total. Their
TNCs are becoming increasingly active, including in Africa. In the ranks of top
investors, China moved up from the sixth to the third largest investor in 2012,
after the United States and Japan (figure 3).


Figure 1. Global FDI flows, 2004–2012, and projections, 2013–2015
(Billions of dollars)


Source: UNCTAD, World Investment Report 2013.


500


1 000


1 500


2 000


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015




3Overview


Table 1. FDI flows by region, 2010–2012
(Billions of dollars and per cent)


Region FDI inflows FDI outflows
2010 2011 2012 2010 2011 2012


World 1 409 1 652 1 351 1 505 1 678 1 391
Developed economies 696 820 561 1 030 1 183 909
Developing economies 637 735 703 413 422 426


Africa 44 48 50 9 5 14
Asia 401 436 407 284 311 308


East and South-East Asia 313 343 326 254 271 275
South Asia 29 44 34 16 13 9
West Asia 59 49 47 13 26 24


Latin America and the Caribbean 190 249 244 119 105 103
Oceania 3 2 2 1 1 1


Transition economies 75 96 87 62 73 55
Structurally weak, vulnerable and small
economies


45 56 60 12 10 10


Least developed countries 19 21 26 3.0 3.0 5.0
Landlocked developing countries 27 34 35 9.3 5.5 3.1
Small island developing States 4.7 5.6 6.2 0.3 1.8 1.8
Memorandum: percentage share in world FDI flows


Developed economies 49.4 49.7 41.5 68.4 70.5 65.4
Developing economies 45.2 44.5 52.0 27.5 25.2 30.6


Africa 3.1 2.9 3.7 0.6 0.3 1.0
Asia 28.4 26.4 30.1 18.9 18.5 22.2


East and South-East Asia 22.2 20.8 24.1 16.9 16.2 19.8
South Asia 2.0 2.7 2.5 1.1 0.8 0.7
West Asia 4.2 3.0 3.5 0.9 1.6 1.7


Latin America and the Caribbean 13.5 15.1 18.1 7.9 6.3 7.4
Oceania 0.2 0.1 0.2 0.0 0.1 0.0


Transition economies 5.3 5.8 6.5 4.1 4.3 4.0
Structurally weak, vulnerable and small
economies


3.2 3.4 4.4 0.8 0.6 0.7


Least developed countries 1.3 1.3 1.9 0.2 0.2 0.4
Landlocked developing countries 1.9 2.1 2.6 0.6 0.3 0.2
Small island developing States 0.3 0.3 0.5 0.0 0.1 0.1


Source: UNCTAD, World Investment Report 2013.


FDI flows to and from developed countries plummet


FDI inflows to developed economies declined by 32 per cent to $561 billion
– a level last seen almost 10 years ago. Both Europe and North America, as
groups, saw their inflows fall, as did Australia and New Zealand. The European
Union alone accounted for almost two thirds of the global FDI decline. However,
inflows to Japan turned positive after two successive years of net divestments.




World Investment Report 20134


Developing economies


Developed economies


Transition economies


14
14
16
20


25
26
28
28
29
30


45
51


57
57


62
65
65


75
121


168


20 Sweden (38)
19 Kazakhstan (27)


18 Colombia (28)
17 Indonesia (21)


16 France (13)
15 India (14)


14 Spain (16)
13 Luxembourg (18)


12 Ireland (32)
11 Chile (17)


10 Canada (12)
9 Russian Federation (9)


8 Singapore (8)
7 Australia (6)


6 United Kingdom (10)
5 British Virgin Islands (7)


4 Brazil (5)
3 Hong Kong, China (4)


2 China (2)
1 United States (1)


(x) = 2011 ranking


Figure 2. Top 20 host economies, 2012
(Billions of dollars)


Source: UNCTAD, World Investment Report 2013.


Outflows from developed economies, which had led the recovery of FDI
over 2010–2011, fell by 23 per cent to $909 billion – close to the trough of
2009. Both Europe and North America saw large declines in their outflows,
although Japan bucked the trend, keeping its position as the second largest
investor country in the world.


Internationalization of SOEs and SWFs maintains pace


The number of State-owned TNCs increased from 650 in 2010 to 845 in
2012. Their FDI flows amounted to $145 billion, reaching almost 11 per
cent of global FDI. The majority of the State-owned enterprises (SOEs) that




5Overview


Figure 3. Top 20 investor economies, 2012
(Billions of dollars)


Source: UNCTAD, World Investment Report 2013.


20 Luxembourg (30)
19 Ireland (167)
18 Norway (19)


17 Chile (21)
16 Singapore (18)


15 Mexico (28)
14 Italy (9)


13 Republic of Korea (16)
12 Sweden (17)


11 France (8)
10 British Virgin Islands (10)


9 Switzerland (13)
8 Russian Federation (7)


7 Canada (12)
6 Germany (11)


5 United Kingdom (3)
4 Hong Kong, China (4)


3 China (6)
2 Japan (2)


1 United States (1)


(x) = 2011 ranking


329


17


19
21


21


23
26


30


33


37


42


44
51


54
67


71


84
84


123


33


Developing economies


Developed economies


Transition economies


acquired foreign assets in 2012 were from developing countries; many of
those acquisitions were motivated by the pursuit of strategic assets (e.g.
technology, intellectual property, brand names) and natural resources.


FDI by sovereign wealth funds (SWFs) in 2012 was only $20 billion, though
it doubled from the year before. Cumulative FDI by SWFs is estimated at
$127 billion, most of it in finance, real estate, construction and utilities. In
terms of geographical distribution, more than 70 per cent of SWFs’ FDI in
2012 was targeted at developed economies. The combined assets of the 73
recognized SWFs around the world were valued at an estimated $5.3 trillion
in 2012 – a huge reservoir to tap for development financing.




World Investment Report 20136


Growing offshore finance FDI raises concerns about tax
evasion


Offshore finance mechanisms in FDI include mainly (i) offshore financial
centres (OFCs) or tax havens and (ii) special purpose entities (SPEs). SPEs
are foreign affiliates that are established for a specific purpose or that have a
specific legal structure; they tend to be established in countries that provide
specific tax benefits for SPEs. Both OFCs and SPEs are used to channel
funds to and from third countries.


Investment in OFCs remains at historically high levels. Flows to OFCs
amounted to almost $80 billion in 2012, down $10 billion from 2011, but well
above the $15 billion average of the pre-2007 period. OFCs account for an
increasing share of global FDI flows, at about 6 per cent.


SPEs play an even larger role relative to FDI flows and stocks in a number of
important investor countries, acting as a channel for more than $600 billion
of investment flows. Over the past decade, in most economies that host
SPEs, these entities have gained importance in investment flows. In addition,
the number of countries offering favourable tax treatment to SPEs is on the
increase.


Tax avoidance and transparency in international financial transactions
are issues of global concern that require a multilateral approach. To date,
international efforts on these issues have focused mostly on OFCs, but
SPEs are a far larger phenomenon. Moreover, FDI flows to OFCs remain
at high levels. Addressing the growing concerns about tax evasion requires
refocusing international efforts. A first step could be establishing a closed
list of “benign” uses of SPEs and OFCs. This would help focus any future
measures on combating the malign aspects of tax avoidance and lack of
transparency.


International production growing at a steady pace


In 2012, the international production of TNCs continued to expand at a
steady rate because FDI flows, even at lower levels, add to the existing FDI
stock. FDI stocks rose by 9 per cent in 2012, to $23 trillion. Foreign affiliates




7Overview


of TNCs generated sales worth $26 trillion (of which $7.5 trillion were for
exports), increasing by 7.4 per cent from 2011 (table 2). They contributed
value added worth $6.6 trillion, up 5.5 per cent, which compares well with
global GDP growth of 2.3 per cent. Their employment numbered 72 million,
up 5.7 per cent from 2011.


The growth of international production by the top 100 TNCs, which are mostly
from developed economies, stagnated in 2012. However, the 100 largest
TNCs domiciled in developing and transition economies increased their
foreign assets by 22 per cent, continuing the expansion of their international
production networks.


Table 2. Selected indicators of FDI and international production, 1990–2012


Value at current prices
(Billions of dollars)


Item 1990
2005–2007
pre-crisis
average


2010 2011 2012


FDI inflows 207 1 491 1 409 1 652 1 351


FDI outflows 241 1 534 1 505 1 678 1 391


FDI inward stock 2 078 14 706 20 380 20 873 22 813


FDI outward stock 2 091 15 895 21 130 21 442 23 593
Income on inward FDI 75 1 076 1 377 1 500 1 507


Rate of return on inward FDI (per cent) 4 7 6.8 7.2 6.6
Income on outward FDI 122 1 148 1 387 1 548 1 461


Rate of return on outward FDI (per cent) 6 7 6.6 7.2 6.2
Cross-border M&As 99 703 344 555 308


Sales of foreign affiliates 5 102 19 579 22 574 24 198 25 980


Value added (product) of foreign affiliates 1 018 4 124 5 735 6 260 6 607


Total assets of foreign affiliates 4 599 43 836 78 631 83 043 86 574


Exports of foreign affiliates 1 498 5 003 6 320 7 436 7 479


Employment by foreign affiliates (thousands) 21 458 51 795 63 043 67 852 71 695


Memorandum:
GDP 22 206 50 319 63 468 70 221 71 707
Gross fixed capital formation 5 109 11 208 13 940 15 770 16 278
Royalties and licence fee receipts 27 161 215 240 235


Exports of goods and services 4 382 15 008 18 956 22 303 22 432


Source: UNCTAD, World Investment Report 2013.




World Investment Report 20138


Reinvested earnings: a source of financing for long-term
investment


Global FDI income increased sharply in 2011, for the second consecutive
year, to $1.5 trillion, on a stock of $21 trillion, after declining in both 2008 and
2009 during the depths of the global financial crisis. FDI income increased
for each of the three major groups of economies – developed, developing
and transition – with the largest increases taking place in developing and
transition economies. The rates of return on FDI are 7 per cent globally,
and higher in both developing (8 per cent) and transition economies (13 per
cent) than in developed countries (5 per cent). Of total FDI income, about
$500 billion was retained in host countries, while $1 trillion was repatriated
to home or other countries (representing on average 3.4 per cent of the
current account payments). The share of FDI income retained is highest in
developing countries; at about 40 per cent it represents an important source
of FDI financing. However, not all of this is turned into capital expenditure;
the challenge for host governments is how to channel retained earnings into
productive investment.




9Overview


REGIONAL TRENDS IN FDI


Africa: a bright spot for FDI


FDI inflows to Africa rose for the second year running, up 5 per cent to $50
billion, making it one of the few regions that registered year-on-year growth
in 2012. FDI outflows from Africa almost tripled in 2012, to $14 billion. TNCs
from the South are increasingly active in Africa, building on a trend in recent
years of a higher share of FDI flows to the region coming from emerging
markets. In terms of FDI stock, Malaysia, South Africa, China and India (in
that order) are the largest developing-country investors in Africa.


FDI inflows in 2012 were driven partly by investments in the extractive sector
in countries such as the Democratic Republic of the Congo, Mauritania,
Mozambique and Uganda. At the same time, there was an increase in FDI
in consumer-oriented manufacturing and services, reflecting demographic
changes. Between 2008 and 2012, the share of such industries in the value
of greenfield investment projects grew from 7 per cent to 23 per cent of the
total.


FDI in and from developing Asia loses growth momentum


FDI flows to developing Asia decreased by 7 per cent to $407 billion in
2012. This decline was reflected across all subregions but was most severe
in South Asia, where FDI inflows fell by 24 per cent. China and Hong
Kong (China) were the second and third largest FDI recipients worldwide,
and Singapore, India and Indonesia were also among the top 20. Driven
by continued intraregional restructuring, lower-income countries such as
Cambodia, Myanmar, the Philippines and Viet Nam were attractive FDI
locations for labour-intensive manufacturing. In West Asia, FDI suffered from
a fourth consecutive year of decline. State-owned firms in the Gulf region are
taking over delayed projects that were originally planned as joint ventures
with foreign firms.


Total outward FDI from the region remained stable at $308 billion, accounting
for 22 per cent of global flows (a share similar to that of the European Union).




World Investment Report 201310


The moderate increase in East and South-East Asia was offset by a 29 per
cent decrease in outflows from South Asia. Outflows from China continued
to grow, reaching $84 billion in 2012 (a record level), while those from
Malaysia and Thailand also increased. In West Asia, Turkey has emerged as
a significant investor, with its outward investment growing by 73 per cent in
2012 to a record $4 billion.


FDI growth in South America offset by a decline in Central
America and the Caribbean


FDI to Latin America and the Caribbean in 2012 was $244 billion, maintaining
the high level reached in 2011. Significant growth in FDI to South America
($144 billion) was offset by a decline in Central America and the Caribbean
($99 billion). The main factors that preserved South America’s attractiveness
to FDI are its wealth in oil, gas and metal minerals and its rapidly expanding
middle class. Flows of FDI into natural resources are significant in some South
American countries. FDI in manufacturing (e.g. automotive) is increasing in
Brazil, driven by new industrial policy measures. Nearshoring to Mexico is on
the rise.


Outward FDI from Latin America and the Caribbean decreased moderately
in 2012 to $103 billion. Over half of these outflows originate from OFCs.
Cross-border acquisitions by Latin American TNCs jumped 74 per cent to
$33 billion, half of which was invested in other developing countries.


FDI flows to and from transition economies fall


Inward FDI flows in transition economies fell by 9 per cent in 2012 to $87
billion. In South-East Europe, FDI flows almost halved, mainly due to a
decline in investments from traditional European Union investors suffering
economic woes at home. In the Commonwealth of Independent States,
including the Russian Federation, FDI flows fell by 7 per cent, but foreign
investors continue to be attracted by the region’s growing consumer markets
and vast natural resources. A large part of FDI in the Russian Federation is
due to “round tripping”.




11Overview


Outward FDI flows from transition economies declined by 24 per cent in
2012 to $55 billion. The Russian Federation continued to dominate outward
FDI from the region, accounting for 92 per cent of the total. Although TNCs
based in natural-resource economies continued their expansion abroad, the
largest acquisitions in 2012 were in the financial industry.


A steep fall in FDI in 2012 reverses the recent recovery in
developed economies


The sharp decline in inflows reversed the FDI recovery during 2010–2011.
Inflows fell in 23 of 38 developed economies in 2012. The 32 per cent
nosedive was due to a 41 per cent decline in the European Union and a 26
per cent decline in the United States. Inflows to Australia and New Zealand
fell by 13 per cent and 33 per cent, respectively. In contrast, inflows to Japan
turned positive after two successive years of net divestment. Also, the United
Kingdom saw inflows increase. The overall decline was due to weaker growth
prospects and policy uncertainty, especially in Europe, and the cooling off of
investment in extractive industries. In addition, intracompany transactions –
e.g. intracompany loans, which by their nature tend to fluctuate more – had
the effect of reducing flows in 2012. While FDI flows are volatile, the level of
capital expenditures is relatively stable.


Outflows from developed countries declined by 23 per cent, with the
European Union down 40 per cent and the United States down 17 per
cent. This was largely due to divestments and the continued “wait and see”
attitude of developed-country TNCs. FDI flows from Japan, however, grew
by 14 per cent.


FDI flows to the structurally weak and vulnerable
economies rise further in 2012


FDI flows to structurally weak, vulnerable and small economies rose further
by 8 per cent to $60 billion in 2012, with particularly rapid growth in FDI to
LDCs and small island developing States (SIDS). The share of the group as a
whole rose to 4.4 per cent of global FDI.




World Investment Report 201312


FDI inflows to least developed countries (LDCs) grew robustly by 20 per cent
and hit a record high of $26 billion, led by strong gains in Cambodia, the
Democratic Republic of the Congo, Liberia, Mauritania, Mozambique and
Uganda. The concentration of inflows to a few resource-rich LDCs remained
high. Financial services continued to attract the largest number of greenfield
projects. With greenfield investments from developed countries shrinking
almost by half, nearly 60 per cent of greenfield investment in LDCs was from
developing economies, led by India.


FDI to landlocked developing countries (LLDCs) reached $35 billion, a new
high. The “Silk Road” economies of Central Asia attracted about 54 per cent
of LLDC FDI inflows. Developing economies became the largest investors in
LLDCs, with particular interest by TNCs from West Asia and the Republic of
Korea; the latter was the largest single investor in LLDCs last year.


FDI flows into small island developing States (SIDS) continued to recover for
the second consecutive year, increasing by 10 per cent to $6.2 billion, with
two natural-resources-rich countries – Papua New Guinea, and Trinidad and
Tobago – explaining much of the rise.




13Overview


INVESTMENT POLICY TRENDS


Many new investment policies have an industry-specific
angle


At least 53 countries and economies around the globe adopted 86 policy
measures affecting foreign investment in 2012. The bulk of these measures
(75 per cent) related to investment liberalization, facilitation and promotion,
targeted to numerous industries, especially in the service sector. Privatization
policies were an important component of this move. Other policy measures
include the establishment of special economic zones (SEZs).


At the same time, the share of FDI-related regulations and restrictions in-
creased to 25 per cent, confirming a longer-term trend after a temporary
reverse development in 2011 (figure 4). Governments made more use of
industrial policies, adjusted
previous investment liber-
alization efforts, tightened
screening and monitoring
procedures, and closely
scrutinized cross-border
M&As. Restrictive investment
policies were applied particu-
larly to strategic industries,
such as extractive industries.
In general, governments be-
came more selective about
the degree of FDI involve-
ment in different industries of
their economies.


Screening mechanisms significantly affect cross-border
M&As


One important example of how governments have recently become more
selective in their admission procedures concerns cross-border M&As. This


Figure 4. Changes in national investment
policies, 2000−2012


(Per cent)


Source: UNCTAD, World Investment Report 2013.


0


25


50


75


100 94%


Liberalization/promotion 75%


6%
Restriction/regulation 25%


2000


2001


2002


2003
2004


2005


2006
2007


2008


2009


2010


2011


2012




World Investment Report 201314


report analysed 211 of the largest cross-border M&As withdrawn between
2008 and 2012, those with a transaction value of $500 million or more. In
most cases M&A plans were aborted for business reasons, but a significant
number were also withdrawn because of regulatory concerns, such as
competition issues, economic benefit tests and national security screening,
or political opposition. These deals had an approximate total gross value of
$265 billion. Their share among all withdrawn cross-border M&As stood at
about 22 per cent in 2012, with a peak of over 30 per cent in 2010. The main
target industry from which M&As were withdrawn for regulatory concerns or
political opposition was the extractive industry.


Risk of investment protectionism persists


As countries make more use of industrial policies, tighten screening and
monitoring procedures, closely scrutinize cross-border M&As and become
more restrictive with regard to the degree of FDI involvement in strategic
industries, the risk grows that some of these measures are taken for
protectionist purposes. With the emergence and rapid expansion of global
and regional value chains, protectionist policies can backfire on all actors,
domestic and foreign.


In the absence of a commonly recognized definition of “investment
protectionism”, it is difficult to clearly identify among investment regulations
or restrictions those measures that are of a protectionist nature. Efforts
should be undertaken at the international level to clarify this term, with a view
to establishing a set of criteria for identifying protectionist measures against
foreign investment. At the national level, technical assistance by international
organizations can help promote quality regulation rather than overregulation.
It would also be helpful to consider extending the G-20’s commitment to
refrain from protectionism – and perhaps also expanding the coverage of
monitoring to the world.


The number of newly signed BITs continues to decline


By the end of 2012, the IIA regime consisted of 3,196 agreements, which
included 2,857 BITs and 339 “other IIAs”, such as integration or cooperation




15Overview


agreements with an investment dimension (figure 5). The year saw the
conclusion of 30 IIAs (20 BITs and 10 “other IIAs”). The 20 BITs signed in 2012
represent the lowest annual number of concluded treaties in a quarter century.


Rise of regionalism brings challenges and opportunities


Investment regionalism is gaining ground: 8 of the 10 “other IIAs” concluded
in 2012 were regional ones. Furthermore, this year, at least 110 countries are
involved in 22 regional negotiations. Regionalism can provide an opportunity
for rationalization. If parties to nine such negotiations (i.e. those where BITs-
type provisions are on the agenda) opted to replace their respective BITs
with an investment chapter in the regional agreement, this would consolidate
today’s global BIT network by more than 270 BITs, or close to 10 per cent.


New IIAs tend to include sustainable–development–
friendly provisions


IIAs concluded in 2012 show an increased inclination to include sustainable-
development-oriented features, including references to the protection of
health and safety, labour rights and the environment. These sustainable
development features are supplemented by treaty elements that more
broadly aim to preserve regulatory space for public policies in general or
to minimize exposure to investment litigation in particular. Many of these
provisions correspond to policy options featured in UNCTAD’s Investment
Policy Framework for Sustainable Development (IPFSD).


Opportunities for improving the IIA regime


Countries have several avenues for improving the IIA regime, depending on
the depth of change they wish to achieve. These include the contracting
States’ right to clarify the meaning of treaty provisions (e.g. through
authoritative interpretations), the revision of IIAs (e.g. through amendments),
the replacement of older IIAs (e.g. through renegotiation), or the termination
of IIAs (either unilaterally or by mutual consent). Treaty expiration can support
several of the above options. By the end of 2013, more than 1,300 BITs




World Investment Report 201316
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17Overview


will be at the stage where
they could be terminated
or renegotiated at any
time, creating a window
of opportunity to address
inconsistencies and overlaps
in the multi-faceted and multi-
layered IIA regime, and to
strengthen its development
dimension (figure 6). In taking
such actions, countries
need to weigh the pros
and cons in the context of
their investment climate and
their overall development
strategies.


Investor–State arbitration: highest number of new cases
ever


In 2012, 58 new known investor–State dispute settlement (ISDS) cases were
initiated. This brings the total number of known cases to 514 and the total
number of countries that have responded to one or more ISDS cases to 95.
The 58 cases constitute the highest number of known ISDS claims ever filed
in one year and confirm foreign investors’ increased inclination to resort to
investor–State arbitration. In light of the increasing number of ISDS cases
and persistent concerns about the ISDS system’s deficiencies, the debate
about the pros and cons of the ISDS mechanism has gained momentum,
especially in those countries and regions where ISDS is on the agenda of IIA
negotiations.


Investor–State arbitration: sketching paths towards reform


The functioning of ISDS has revealed systemic deficiencies. Concerns relate
to legitimacy, transparency, lack of consistency and erroneous decisions,
the system for arbitrator appointment and financial stakes. As a response,


Figure 6. Cumulative number of BITs that can
be terminated or renegotiated


Before
2014


2014 2015 2016 2017 2018 By end
2018


1,325 75


57
54


47
40


1,598


Source: UNCTAD, World Investment Report 2013.




World Investment Report 201318


UNCTAD has identified five broad paths for reform: promoting alternative
dispute resolution, modifying the existing ISDS system through individual IIAs,
limiting investors’ access to ISDS, introducing an appeals facility and creating
a standing international investment court. IIA stakeholders are prompted
to assess the current system, weigh the available options and embark on
concrete steps for reform. Collective efforts at the multilateral level can help
develop a consensus about the preferred course of reform and ways to put
it into action.




19Overview


GLOBAL VALUE CHAINS
AND DEVELOPMENT


Trade is increasingly driven by global value chains


About 60 per cent of global trade, which today amounts to more than
$20 trillion, consists of trade in intermediate goods and services that are
incorporated at various stages in the production process of goods and
services for final consumption. The fragmentation of production processes
and the international dispersion of tasks and activities within them have led to
the emergence of borderless production systems. These can be sequential
chains or complex networks, their scope can be global or regional, and they
are commonly referred to as global value chains (GVCs).


GVCs lead to a significant amount of double counting in trade, as intermediates
are counted several times in world exports but should be counted only once
as “value added in trade”. Today, some 28 per cent of gross exports consist
of value added that is first imported by countries only to be incorporated in
products or services that are then exported again. Some $5 trillion of the $19
trillion in global gross exports (in 2010 figures) is double counted (figure 7).
Patterns of value added trade in GVCs determine the distribution of actual
economic gains from trade to individual economies.


The spread of GVCs is greater in some industries where activities can be
more easily separated, such as electronics, automotive or garments, but
GVCs increasingly involve activities across all sectors, including services.
While the share of services in gross exports worldwide is only about 20 per
cent, almost half (46 per cent) of value added in exports is contributed by
services-sector activities, as most manufacturing exports require services for
their production.


The majority of developing countries are increasingly participating in GVCs.
The developing-country share in global value added trade increased from 20
per cent in 1990 to 30 per cent in 2000 to over 40 per cent today. However,
many poorer developing countries are still struggling to gain access to GVCs
beyond natural resource exports.




World Investment Report 201320


Figure 7. Value added in global exports, 2010


Source: UNCTAD, World Investment Report 2013.


$ Trillions ESTIMATES


“Double counting”
(foreign value


added in exports)


Global gross exports Value added in trade


~19 ~5


~14
28%


Regional value chain links are often more important than global ones,
especially in North America, Europe, and East and South-East Asia. In the
transition economies, Latin America and Africa, regional value chains are
relatively less developed.


GVCs are typically coordinated by TNCs


GVCs are typically coordinated by TNCs, with cross-border trade of inputs and
outputs taking place within their networks of affiliates, contractual partners
and arm’s-length suppliers. TNC-coordinated GVCs account for some 80
per cent of global trade. Patterns of value added trade in GVCs are shaped
to a significant extent by the investment decisions of TNCs. Countries with a
higher presence of FDI relative to the size of their economies tend to have a
higher level of participation in GVCs and to generate relatively more domestic
value added from trade (figure 8).




21Overview
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World Investment Report 201322


TNCs coordinate GVCs through complex webs of supplier relationships and
various governance modes, from direct ownership of foreign affiliates to
contractual relationships (in non-equity modes of international production, or
NEMs), to arm’s-length dealings. These governance modes and the resulting
power structures in GVCs have a significant bearing on the distribution of
economic gains from trade in GVCs and on their long-term development
implications.


TNC decisions on where to invest and with whom to partner are driven by
GVC locational determinants that depend on the GVC segment, task or
activity. Locational determinants for GVC segments are often different, and
fewer, than those for vertically integrated industries – i.e. the determinants
for electronics assembly activities are fewer than those for investment in the
electronics industry as a whole. For many GVC segments, there are relatively
few “make or break” locational determinants that act as preconditions for
countries’ access to GVCs.


GVCs can make an important contribution to development,
but GVC participation is not without risks


GVCs spread value added and employment to more locations, rather than
hoarding them only in those locations that are capable of carrying out the most
complex tasks. As such, they can accelerate the “catch-up” of developing
countries’ GDP and income levels and lead to greater convergence between
economies. At the global level, that is the essential development contribution
of GVCs.


At the country level, domestic value added created from GVC trade can be
very significant relative to the size of local economies. In developing countries,
value added trade contributes nearly 30 per cent to countries’ GDP on
average, as compared with 18 per cent for developed countries. There is
a positive correlation between participation in GVCs and GDP per capita
growth rates. Economies with the fastest growing GVC participation have
GDP per capita growth rates some 2 percentage points above the average.
Furthermore, GVC participation tends to lead to job creation in developing
countries and to higher employment growth, even if GVC participation
depends on imported contents in exports.




23Overview


But the experience of individual economies is more heterogeneous. The value
added contribution of GVCs can be relatively small where imported contents
of exports are high and where GVC participation is limited to lower-value parts
of the chain. Also, a large part of GVC value added in developing economies
is generated by affiliates of TNCs, which can lead to relatively low “value
capture”, e.g. as a result of transfer pricing or income repatriation. However,
even where exports are driven by TNCs, the value added contribution of
local firms in GVCs is often very significant. And reinvestment of earnings by
foreign affiliates is, on average, almost as significant as repatriation.


As to employment gains, pressures on costs from global buyers often mean
that GVC-related employment can be insecure and involve poor working
conditions, with occupational safety and health a particular concern. Also,
stability of employment in GVCs can be low as oscillations in demand are
reinforced along value chains and GVC operations of TNCs can be footloose.
However, GVCs can serve as a mechanism to transfer international best
practices in social and environmental issues, e.g. through the use of CSR
standards, although implementation of standards below the first tier of the
supply chain remains a challenge.


Longer-term, GVCs can be an important avenue for developing countries to
build productive capacity, including through technology dissemination and
skill building, opening up opportunities for industrial upgrading. However, the
potential long-term development benefits of GVCs are not automatic. GVC
participation can cause a degree of dependency on a narrow technology
base and on access to TNC-coordinated value chains for limited value added
activities.


At the firm level, the opportunities for local firms to increase productivity and
upgrade to higher value added activities in GVCs depend on the nature of
the GVCs in which they operate, the governance and power relationships
in the chain, their absorptive capacities, and the business and institutional
environment in the economy. At the country level, successful GVC upgrading
paths involve not only growing participation in GVCs but also higher domestic
value added creation. At the same time, it involves gradual expansion of
participation in GVCs of increasing technological sophistication, moving from




World Investment Report 201324


resource-based exports to exports of manufactures and services of gradually
increasing degrees of complexity.


Countries need to make a strategic choice whether to
promote or not to promote GVC participation


Countries need to carefully weigh the pros and cons of GVC participation,
and the costs and benefits of proactive policies to promote GVCs or GVC-
led development strategies, in line with their specific situation and factor
endowments. Some countries may decide not to promote GVC participation.
Others may not have a choice: for the majority of smaller developing
economies with limited resource endowments there is often little alternative
to development strategies that incorporate a degree of participation in GVCs.
The question for those countries is not so much whether to participate in
GVCs, but how. In reality, most are already involved in GVCs one way or
another. Promoting GVC participation requires targeting specific GVC
segments, i.e. GVC promotion can be selective. Moreover, GVC participation
is one aspect of a country’s overall development strategy.


Policies matter to make GVCs work for development


If countries decide to actively promote GVC participation, policymakers
should first determine where their countries’ trade profiles and industrial
capabilities stand and evaluate realistic GVC development paths for strategic
positioning.


Gaining access to GVCs, benefiting from GVC participation and realizing
upgrading opportunities in GVCs requires a structured approach that
includes (i) embedding GVCs in overall development strategies and industrial
development policies, (ii) enabling GVC growth by creating and maintaining
a conducive investment and trade environment, and by providing supportive
infrastructure and (iii) building productive capacities in local firms. Mitigating
the risks involved in GVC participation calls for (iv) a strong environmental,
social and governance framework. And aligning trade and investment policies
implies the identification of (v) synergies between the two policy areas and in
relevant institutions (table 3).




25Overview


Table 3. Building a policy framework for GVCs and development


Key elements Principal policy actions


Embedding GVCs in
development strategy


Incorporating GVCs in industrial development policies
Setting policy objectives along GVC development paths


Enabling participation in
GVCs


Creating and maintaining a conducive environment for trade
and investment


Putting in place the infrastructural prerequisites for GVC
participation


Building domestic
productive capacity


Supporting enterprise development and enhancing the
bargaining power of local firms


Strengthening skills of the workforce


Providing a strong
environmental, social and
governance framework


Minimizing risks associated with GVC participation through
regulation, and public and private standards


Supporting local enterprise in complying with international
standards


Synergizing trade and
investment policies and
institutions


Ensuring coherence between trade and investment policies
Synergizing trade and investment promotion and facilitation
Creating “Regional Industrial Development Compacts”


Source: UNCTAD, World Investment Report 2013.


Embedding GVCs in development strategy. Industrial development policies
focused on final goods and services are less effective in a global economy
characterized by GVCs:


t GVC-related development strategies require more targeted policies
focusing on fine-sliced activities in GVCs. They also increase the need
for policies dealing with the risk of the middle-income trap, as the
fragmentation of industries increases the risk that a country will enter
an industry only at its low-value and low-skill level.


t GVCs require a new approach to trade policies in industrial development
strategies, because protective trade policies can backfire if imports are




World Investment Report 201326


crucial for export competitiveness. Trade policies should also be seen
in light of the increased importance of regional production networks as
GVC-based industrialization relies on stronger ties with the supply base
in neighbouring developing economies.


t The need to upgrade in GVCs and move into higher value added
activities strengthens the rationale for building partnerships with
lead firms for industrial development. At the same time, GVCs call
for a regulatory framework to ensure joint economic and social and
environmental upgrading to achieve sustainable development gains.


t Finally, GVCs require a more dynamic view of industrial development.
Development strategy and industrial development policies should
focus on determinants that can be acquired or improved in the short
term and selectively invest in creating others for medium- and long-
term investment attractiveness, building competitive advantages along
GVCs, including through partnerships with business.


For policymakers, a starting point for the incorporation of GVCs in
development strategy is an understanding of where their countries and
their industrial structures stand in relation to GVCs. That should underpin
an evaluation of realistic GVC development paths, exploiting both
GVC participation and upgrading opportunities. UNCTAD’s GVC Policy
Development Tool can help policymakers do this.


Enabling participation in GVCs. Enabling the participation of local firms
in GVCs implies creating and maintaining a conducive environment for
investment and trade, and putting in place the infrastructural prerequisites for
GVC participation. A conducive environment for trade and investment refers
to the overall policy environment for business, including trade and investment
policies, but also tax, competition policy, labour market regulation, intellectual
property, access to land and a range of other policy areas (see UNCTAD’s
Investment Policy Framework for Sustainable Development, IPFSD, which
addresses relevant trade and other policy areas). Trade and investment
facilitation is particularly important for GVCs in which goods now cross
borders multiple times and where there is a need to build up productive
capacity for exports.




27Overview


Providing reliable physical and “soft” infrastructure (notably logistics and
telecommunications) is crucial for attracting GVC activities. Developing good
communication and transport links can also contribute to the “stickiness” of
GVC operations. As value chains are often regional in nature, international
partnerships for infrastructure development can be particularly beneficial.


Building domestic productive capacity. A number of policy areas are important
for proactive enterprise development policies in support of GVC participation
and upgrading: First, enterprise clustering may enhance overall productivity
and performance. Second, linkages development between domestic and
foreign firms and inter-institution linkages can provide local SMEs with the
necessary externalities to cope with the dual challenges of knowledge creation
and internationalization, needed for successful participation in GVCs. Third,
domestic capacity-building calls for science and technology support and an
effective intellectual property rights framework. Fourth, a range of business
development and support services can facilitate capacity-building of SMEs so
they can comply with technical standards and increase their understanding
of investment and trade rules. Fifth, there is a case for entrepreneurship
development policy, including managerial and entrepreneurial training and
venture capital support. Sixth, access to finance for SMEs helps to direct
development efforts at the upstream end of value chains where they most
directly benefit local firms.


Furthermore, an effective skills development strategy is key to engagement
and upgrading in GVCs, and to assist SMEs in meeting the demands of
their clients with regard to compliance with certain CSR standards. It can
also facilitate any adjustment processes and help displaced workers find new
jobs.


Policymakers should also consider options to strengthen the bargaining
power of domestic producers vis-à-vis their foreign GVC partners, to help
them obtain a fair distribution of rents and risks and to facilitate gaining
access to higher value added activities in GVCs (WIR 11).


Providing a strong environmental, social and governance framework. A
strong environmental, social and governance framework and policies
are essential to maximizing the sustainable development impact of GVC




World Investment Report 201328


activities and minimizing risks. Host countries have to ensure that GVC
partners observe international core labour standards. Equally important
are the establishment and enforcement of occupational safety, health and
environmental standards in GVC production sites, as well as capacity-building
for compliance. Buyers of GVC products and their home countries can make
an important contribution to safer production by working with suppliers to
boost their capacity to comply with host country regulations and international
standards, and avoiding suppliers that disrespect such rules.


Suppliers are increasingly under pressure to adapt to CSR policies in order
to ensure their continuing role in GVCs. EPZs are an important hub in
GVCs and present an opportunity for policymakers to address CSR issues
on a manageable scale. Policymakers could consider adopting improved
CSR policies, support services and infrastructure in EPZs (e.g. technical
assistance for certification and reporting, support on occupational safety and
health issues, recycling or alternative energy facilities), transforming them into
centres of excellence for sustainable business and making them catalysts
for the implementation of CSR. Governments or zone authorities could
opt to offer such benefits in addition to or instead of some of the existing
benefits offered to firms in EPZs. Benefits for firms could include cost sharing,
harmonization of practices, reduced site inspections and others. International
organizations can help through the establishment of benchmarks, facilitation
of exchanges of best practices, and capacity-building programmes.


A host of other concerns and corporate governance issues should be
addressed to minimize risks associated with GVCs. These include transfer
pricing, where GVCs have the duplicate effect of increasing the scope for
transfer price manipulation and making it harder to combat, to the detriment
of raising fiscal revenues for development. In addition, to safeguard industrial
development processes, governments should seek to foster resilient supply
chains that are prepared for and can withstand shocks, and recover quickly
from disruption.


Synergizing trade and investment policies and institutions. As investment
and trade are inextricably linked in GVCs, it is crucial to ensure coherence
between investment and trade policies. Avoiding inconsistent or even




29Overview


self-defeating approaches requires paying close attention to those policy
instruments that may simultaneously affect investment and trade in GVCs,
i.e. (i) trade measures affecting investment and (ii) investment measures
affecting trade.


At the institutional level, the intense trade and investment links in GVCs call
for closer coordination between domestic trade and investment promotion
agencies, as well as better targeting of specific segments of GVCs in line
with host countries’ dynamic locational advantages. A number of objective
criteria, based on a country’s GVC participation and positioning, can help


Figure 9. Regional Industrial Development Compacts for regional value chains


Source: UNCTAD, World Investment Report 2013.














Partnerships between governments
in regions


Partnerships
between the
public and


private sectors


Partnerships
between


governments and
international
organizations


Partnerships between trade and
investment promotion agencies


Integrated trade and investment
agreements (liberalization


and facilitation)


Joint trade and investment
promotion mechanisms


and institutions


Joint GVC
enabling


infrastructure
development


projects


Joint GVC
programmes


to build
productive
capacity for


regional
value chains


Regional
Industrial


Development
Compacts




World Investment Report 201330


Geneva, June 2013 Supachai Panitchpakdi
Secretary-General of the UNCTAD


determine the most appropriate institutional set-up for trade and investment
promotion.


Synergies should be sought also through integrated treatment of international
investment and trade agreements. Regional trade and investment agreements
are particularly relevant from a value chain perspective, as regional liberalization
efforts are shaping regional value chains and the distribution of value added.


In fact, the relevance of regional value chains shows the potential impact
of evolving regional trade and investment agreements towards “Regional
Industrial Development Compacts”. Such Compacts could focus on
liberalization and facilitation of trade and investment and establish joint
investment promotion mechanisms and institutions. They could extend to
other policy areas important for enabling GVC development, such as the
harmonization of regulatory standards and consolidation of private standards
on environmental, social and governance issues. And they could aim to
create cross-border industrial clusters through joint investments in GVC-
enabling infrastructure and productive capacity building. Establishing such
compacts implies working in partnership – between governments in the
region to harmonize trade and investment regulations and jointly promotion
trade and investment, between governments and international organizations
for technical assistance and capacity-building, and between the public and
private sectors for investment in regional value chain infrastructure and
productive capacity (figure 9).




31Overview


World Investment Report Past Issues


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 201332


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


world. They may also be obtained by contacting:


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c/o National Book Network


15200 NBN Way
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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


HOW TO OBTAIN THE PUBLICATIONS


SELECTED UNCTAD PUBLICATION SERIES
ON TNCs AND FDI


World Investment Report
www.unctad.org/wir


World Investment Prospects Survey
www.unctad.org/diae


Global Investment Trends Monitor
www.unctad.org/iia


Investment Policy Monitor
www.unctad.org/iia


Issues in International Investment Agreements
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




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