CHAPTER 4
TRENDS AND PATTERNS OF FDI
INFLOWS
4.0 INTRODUCTION
One of the most striking developments during the last two decades is the spectacular
growth of FDI in the global economic landscape. The liberalization of trade, capital
markets, breaking of business barriers, technological advancements, and the growing
internationalization of goods, services, or ideas over the past two decades makes the
world economies the globalised one. Consequently, with large domestic market, low
labour costs, cheap and skilled labour, high returns to investment, developing
countries now have a significant impact on the global economy, particularly in the
economics of the industrialized states.
The unprecedented growth of global FDI around the world has made FDI an
important and vital component of development strategy in both developed and
developing nations and policies are designed in order to stimulate inward flows.
Infact, FDI provides a win-win situation to the host and the home countries. Both
countries are directly interested in inviting FDI, because they benefit a lot from such
type of investment. The home countries want to take the advantage of the vast
markets opened by industrial growth. On the other hand the host countries want to
acquire technological and managerial skills and supplement domestic savings and
foreign exchange. Moreover, the paucity of all types of resources viz. financial,
capital, entrepreneurship, technological know-how, skills and practices, access to
markets abroad in their economic development, developing nations accepted FDI as a
sole visible panacea for all their scarcities. Further, the integration of global financial
markets paves ways to this explosive growth of FDI around the globe.
This chapter covers the trends and patterns of FDI inflows at World, developed and
developing countries particularly Asian countries during pre and post 1990s up to 2008.
4.1 TRENDS AND PATTERNS OF FDI: PRE- 1990S EXPERIENCE
While international business, as a discipline is relatively new, as a business practice, it
is not. However, the pattern of International business keeps on changing. Mira
Wilkins has called attention to its antecedents far back in history, from the period of
the earliest known civilization in 2500 B.C., Sumerian merchants found that in their
foreign commerce they needed men stationed abroad to receive, to store, and to sell
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their goods. Later, the Roman trader made contacts at distant points. International
business in the form of trade existed between Egypt and the Phoenician City of
Bybols, as revealed by the recent excavations in Greece.
Hundreds of years have passed since British and Dutch firms began contracting
production to local business in Asia and elsewhere. British firms dominated real
investment across borders. For example, in 1600, The East India Company, a
newly formed trading firm, had established branches overseas, and not dissolved
until almost three centuries later. In 1847, it emerged as one of the world’s first
international corporations and an example of the direct investment, resource–
seeking phase. At about the same time, a number of Dutch companies, which had
organized in 1590 to open shipping routes to the East, joined together to form the
Dutch East India Company and also opened branch offices in Asia. American
colonial traders began operating in a similar fashion in the 1700s. The first
successful American venture into foreign production was the factory built in
Scotland by Singer Sewing Machine in 1868. By 1880, Singer emerged as the
world's first modern MNCs and was one of the largest firms in the world. It
established several overseas manufacturing plants. Other firms soon followed, and
by 1914 at least 37 American companies had production facilities in two or more
overseas locations.
By 1864 the value of world foreign long-term investment rose from under $4 billion
to $44 billion in 1913. Among the all creditor countries, UK was the most important,
accounting for about three-quarters of all international capital movements up to 1900.
Thereafter, its share of new investment fell as the US and Continental Europe became
important lenders. At this time, France and Germany the two other important
investors held foreign assets worth $9 and $5.8 billion respectively. United State
owned credits valued at $3.5 billion.
After First World War the process of industrial distribution speeded up, War reshaped the
pattern of international capital transfer and heralded an era through which ultimately had
a crucial effect on the whole climate of international capital movement. Technological
improvement in transport and communication and the need of European countries and
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Japan for US capital to finance reconstruction following the damage inflicted by the war
gave rise to a reversal of the trend towards growth in FDI.
The World in 1970s, witnessed rapid growth of a number of very large industrial groups
with extensive international ramifications. While most of the largest MNCs had been in
existence for a good number of years, they grew rapidly in this period, both in size and in
international scope of their operations. In this period, the total value of world FDI inflows
increased from $12,586 to $43,440 million. The share of developed countries increased
from total FDI inflow of $9,812 to $32,826 million, while the share of DCs rose
moderately from total FDI inflow of $2,774 to $10,584 million.
The 1980s saw a major developments in international economies as firms from
many nations expanded their international operations. Since second half of 1980s
by growing integration of markets and financial institutions, firms began a new
wave of FDI. In this period by the strong recovery of the world economy, from the
recession of the early 1980s, and the ensuing high growth rates in both developed
and DCs world-wide FDI flows grew faster than world-wide domestic investment
and domestic output. In the second half of the 1980s the number of developed
countries, which became significant outward investors increased and Japan
emerged as one of the most important outward investors. The growth of number of
cross-border M&As, driven by technological and competitive forces, also
promoted the surge in FDI.
Total world-wide FDI inflows rose from $61 billion in 1982-1986 to $200 billion in
1989. In this period FDI inflows to DCs grew by an annual rate of 22% and reached to
about $29 billion in 1989 from $19 billion during first half of 1980s. Developed
countries share of FDI inflow grew by an annual rate of 24% and rose from $43
billion in 1982-86 to a value of $172 billion in 1989 (Table 4.1). Five major creditor
countries were among the largest recipient countries and received 57% of the world
inflows during 1980s, while outflows from these countries grew by 38% annually and
reached to $202 billion in 1989. During the 1980-1989 UK, Japan and USA were the
largest creditor countries.
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Table 4.1
FDI inflows and outflows, 1982-1994
(In US $ Billions)
Year
Developed countries
Developing countries
All countries
1982-1986
43
53
19
4
61
57
1989
172
202
29
15
200
218
1990
176
226
35
17
211
243
1991
115
188
41
11
158
199
1992
111
171
55
19
170
191
1993
129
193
73
29
208
222
1994
135
189
84
33
226
222
Source: World Investment Report 1995: Transnational Corporations and Competitiveness
Among the all DCs, FDI became increasingly important for East, South and South-East
Asia in the latter half of 1980s as the newly industrializing economies emerged as important
investors, seeking new low-cost production locations in neighboring countries in order to
maintain their competitiveness in export markets. This region experienced the highest
growth of inflow with 37% per annum or in other word recipient of over half of all FDI
flows to DCs during the 1985-1989. This sustained increase can partly attributed to the
continuous attractiveness of the newly industrializing economies, to the growth of
investment opportunities in several ASEAN member countries and to the emergence of
China as an important host country in the region.
4.2 POST-1990S EXPERIECNE
The year 1990s led the world into a new era, by bringing fundamental changes. It is
the decade of globalization, liberalization and acceptance of privatization with
participation of foreign investors particularly in DCs.
106
Global FDI flows, which had increased in the second half of 1980s, due to countries
welcoming stance on FDI continued to rise systematically in 1990s. FDI grew by 22%
in the first half of 1990s and 40% in the second half, faster than other economic
aggregates like world production, capital formation and trade. World economic
growth and the response of MNCs to technological development, international
competition and liberalization propelled global FDI flows to unprecedented levels
from $225 million in 1990-1995 to a record of $1.5 trillion in 2000. Inward FDI flows
as a percentage of GFCF increased from 4.1% in 1990-95 to 22% in 2000. And GDP
increased from 8.9% in 1990 to 20% in 2000.
Industrial countries accounted for much of upsurge in FDI flows. Their share in the world
FDI rose from a low of $145 billion in 1990-1995 to $1 trillion in 2000. Inward FDI
flows to developed countries as percentage of GFCF increased from 3.6% in 1990-95 to
25% in 2000 and as percentage of GDP from 8.1% in 1990 to 17.1% in 2000.
Within the developed world, the share of Triad (the European Union, Japan and the
United States) in total world FDI inflow and stocks fluctuated at around 60-70%. The
share of EU in FDI inflows into Triad was 40.3% in 1990 as compared to 46% in
2000. The United States remained the world’s largest FDI recipient country as inflows
reached $300 billion in 2000 as compared to $40 billion in the first half on 1990s.
Inflows to Japan grew moderately, total FDI inflows increased from $1 billion in
1990-95 to $8.3 billion in 2000.
During 1990s, the number of DCs receiving sizeable amount of inflows increased
significantly and FDI became the single largest source of foreign capital for many
DCs. Their share in world FDI inflows rose from 17.5% in 1990 to 21.7% in 2000.
Developing countries share in FDI inflow grew from $74 billion in 1990-1995 to
the highest amount of $237 billion in 2000. Inward FDI flows as percentage of
GFCF rose from 5.7% in 1990-95 to 13.4% in 2000 and as percentage of GDP
from 13% to 30.9% of the same period. The boom in investment flows to DCs was
a reflection of sustained economic growth and continuing liberalization and
privatization in these countries, as well as the increasing integration of the DCs
into the investment plans of MNCs.
107
The growth of FDI flows to DCs unevenly distributed among regions and groups.
Most FDI inflows concentrated in 10 to 15 host countries overwhelmingly in Latin
America and Asia. FDI flows into Latin America and the Caribbean was $22 billion
in the first half of 1990s and tripled in second half and reached to $95 billion in 2000.
In developing Asia, FDI inflows rose from $ 47 billion in 1990-1995 and to a record
level of $133 billion in 2000 (Table 4.2). Investment flows to these countries was due
to strengthening the position of certain DCs in the region, emergence of regional
corporations and efforts of almost all those countries to open up their economies to
FDI and liberalizing their policies.
108
Table 4.2
FDI Inflows in Selected Asian Developing Countries
During 1990-2008
(Million Dollars)
Host Region/ Economy
1990-1995
1996
1997
1998
1999
2000
World
225321
386140
478082
694457
1 088263
1 491 934
Developed economies
145019
219908
267947
484239
837761
1 227476
European Union
84165
110376
127919
262216
487898
808519
United States
40 829
84 455
103 398
174 434
283 376
300 912
1 144
228
3 224
3 193
12 741
8 32
Developing economies
74 288
152685
191022
187 611
225 140
237 894
Latin America and the Caribbean
22 259
52 856
74 299
82 203
109 311
95 405
Asia and the Pacific
47 710
93 994
105 978
96 386
103 008
133 795
Asia
47 321
93 331
105 828
96 109
102 779
133 707
2 096
2 898
5 645
6 705
324
688
-17
26
53
24
35
39
South, East and South-East Asia
44 564
87 843
96 338
86 252
99 990
131 123
China
19 360
40 180
44 237
43 751
40 319
40 772
4 859
10 460
11 368
14 770
24 596
61 938
703
2 525
3 619
2 633
2 168
2 319
Japan
West Asia
Iran, Islamic Republic of
Hong Kong, China
India
109
109
Host Region/ Economy
2001
2002
2003
2004
2005
2006
2007
2008
World
735 146
716 128
632 599
742 143
945 795
1 461 074
1 978 838
1 697 353
547 778
442 157
418 855
590 311
972 762
1 358 628
962 259
Developed economies
503 144
European Union
322 954
420 433
338 678
204 245
486 409
590 305
842 311
503 453
United States
124 435
71 331
56 834
135 826
101 025
237 136
271 176
316 112
Japan
6 202
9 239
6 324
7 816
2 775
-6 506
22 549
24 426
Developing economies
204 801
155 528
166 337
283 030
314 316
433 764
529 344
620 733
Latin America and the Caribbean
85 373
50 492
46 908
94 290
93 303
127 491
144 377
Asia and the Pacific
102 264
92 042
101 424
170 722
209 127
283 402
332 682
388 709
Asia
102 066
92 009
101 278
169 999
208 744
282 127
331 425
387 828
West Asia
4 133
5 691
6 522
20 839
41 554
67 633
77 609
90 255
Iran, Islamic Republic of
33
548
482
282
360
1626
1658
1492
South, East and South-East Asia
94 365
86 318
94 755
149 160
167 190
214 495
253 816
297 573
China
46 846
52 743
53 505
60 630
72 406
72 715
83 521
108 982
Hong Kong, China
22 834
9 682
13 624
34 032
33 618
45 054
54 365
63 003
India
3 403
3 449
4 269
5 771
6 676
20 336
25 127
41 554
Source: Compiled from the various issues of WIR, UNCTAD
110
110
541
Some newly industrializing economies, for example, Hong Kong (China), Singapore and
Taiwan province of China emerged as important hosts and home economies of FDI.
At regional level, South, East and South-East Asia received the highest amount of FDI from
$44 billion in 1990-1995 to its highest level of $131 billion in 2000. The greatest increase
took place in Hong Kong (China) in particular, experienced an unprecedented FDI boom,
with inflows amounting $4 billion in the first half of 1990s to $62 billion in 2000 and
making it the top FDI recipient in Asia as well as among DCs. FDI flows to China rose
from $19 billion in first half of 1990s and at $41 billion remained fairly stable during
second half (1995 to 2000) and became the largest host country for FDI among the DCs
and the second largest host country in the world. The world's leading manufactures of
computer, electronics, telecommunication equipment pharmaceuticals, petrochemicals and
power generating equipment extended their production networks to this country.
The inflow of FDI to South Asia increased moderately. India, the largest recipient in
the subcontinent received $703 million during 1990 to 1995. After India's economic
reforms FDI inflows started growing in this country and raised to $3 billion in 1997
the highest level after reforms. By 2000 India received $2 billion FDI which was
1.8% of FDI inflows into DCs and India occupied 12th rank.
In West Asia FDI inflows rose slowly, with some fluctuations, by 0.3% during 1990s.
Its share from total FDI Inflows during 1990-95 increased from $2 billion to $6
billion in 1998 but decreased to $688 million in 2000. Islamic Republic of Iran had
negative FDI (outflows) of $-17 million in 1990-1995. But after introducing of
economic reforms with particular consideration on foreign investment in 1997-98,
Iran received FDI worth at $39 million in 2000.
By entering to the third millennium global FDI flows declined sharply for three years
from 2001 to 2003. In 2001 FDI slowdown by 41% to $735 billion and fell by another
fifth in 2002 to $716 billion, just half the peak in 2000. In 2003 inflows fell again by
18% to $632 billion. This reversal after years of steady growth reflects few factors:
the slowing of economic activity in major industrial economies, sluggish growth in
the euro area, and a sharp decrease in their stock market activity. Developed countries
borne the brunt of declining FDI and DCs also suffered.
111
Developed countries affected significantly and FDI inflows fell by about half, from $1
trillion in 2000 to $503, $547 and $442 billion in 2001, 2002 and 2003 respectively.
Inflows to DCs decreased by much less from $237 billion in 2000 to $204 and $155
billion in 2001 and 2002. To the extent that the events of 11 September 2001
exacerbated this slowdown, they also contributed to the further decline in FDI.1
In 2003, FDI inflows to DCs rose by 9% to $166 billion. Inflows varied by regions
and top ten recipients accounted for almost three-fourths of total flows to DCs. FDI
inflows accounted for 72% of all resource flows to DCs and their share in global FDI
inflows rose from 8% to 31%.
On account of a strong increase in FDI flows to DCs, 2004 saw a slight rebound in global
FDI by 27% after three years of sluggish growth at $742 billion. Inflows to DCs rose by
40% to $283 billion. As a result, their share in world FDI inflows reached 36% the
highest since 1997. The developed countries share in FDI flows after a significant fall
during 2001-2003 reached to just 30% of their peak level in 2000 to $418 billion.
Many factors help to explain why the growth of FDI was particularly pronounced
in DCs in 2004. Intense competitive pressures in many industries are leading firms
to explore new ways of improving their competitiveness. Some of these ways are
by expanding operations in the fast-growing markets of emerging economies to
boost sales, and by rationalizing production activities with a view to reaping
1
- The effects of the 11 September 2001 on FDI flows are difficult to gauge. Company surveys suggest
that they were limited. In October/November 2001, a survey by UNCTAD, the Agence Française pour
les Investissements Internationaux and Andersen Consulting revisited a number of the firms they had
surveyed before 11 September (UNCTAD, 2001). The finding was that few expected to change their
investment plans in the light of the attacks. Similarly, a survey by the Japan External Trade Organization
(JETRO) found in October 2001 that nearly half the Japanese firms surveyed did not expect to change
their FDI plans. These findings are consistent with a survey by A.T. Kearney in September/October
2001: two-thirds of corporate executives of the world's 1,000 largest firms said that they intended to
invest abroad at more or less the levels already planned, 16 per cent said that their FDI in 2001 would
increase, and 20 per cent that it would decline. A survey of 643 firms by the Multilateral Investment
Guarantee Agency (MIGA) in October 2001 found that there was no effect on the expansion plans of 64
per cent of respondents (MIGA, 2002). Virtually none of the respondents intended to cancel their FDI
projects. On the other hand, the higher level of uncertainty created by the September 11 events, including
higher perceived political risk (associated with war and terrorism), may have induced some companies to
adopt a "wait-and-see" attitude. Firms may have placed planned investments on hold until they had a
clearer picture of economic developments and the longer-term impact of the events on the US. This was
reflected in the JETRO survey, according to which more than half the respondents were unable to make
an assessment. Some companies are reported to have cancelled planned investments after the September
11 events. (World Investment Report 2002, P.5)
112
economies of scale and lowering production costs. Higher prices for many
commodities have further stimulated FDI to countries that are rich in natural
resources such as oil and minerals.
By 2005 global FDI flows grew substantially by 29% to $945 billion, largely
reflecting a significant increase in cross-border M&As both in value and in number of
deals. While inward FDI inflows as percentage of GFCF since 2001 had been
decreased due to slow down of FDI flows, by 2005 rose again to 10.4% and FDI stock
as percentage of GDP reached to 22.7%.
FDI inflows in developed countries amounted to $590 billion an increase of 37% over
2004. The five largest host economies (UK, US, France, Netherlands and Canada)
accounted for 75% of total inflows to developed countries. FDI inflows as percentage
of GFCF to these countries increased to 9.3% and FDI Stock as a percentage of GDP
rose to 21.4%.
In DCs, FDI inflows rose by another 22% to the highest ever recorded of $314 billion,
despite record inflows into DCs, the gap in FDI inflows between developed and DCs
reached to over $200 billion. FDI inflows as percentage of GFCF rose to 12.8% and
FDI stock as percentage of GDP to 27%.
At the regional level, FDI inflows in Latin America and the Caribbean with some
fluctuations rose from $85 billion in 2001 to $94 billion in 2004 and again reduced to
$75 billion in 2005.
FDI inflows to Asia with some fluctuations reduced to $102 and $92 billion in 2001
and 2002 respectively. By 2003, it again recovered and in 2005 FDI inflows reached
to $208 billion. Inflows to the countries in South, East and South-East Asia decreased
to $94 billion in 2001 but in 2005 rose to $167 billion. FDI inflows to China increased
from $46 billion in 2001 to $72 billion in 2005.
In South Asia FDI inflows increased to $9 billion in 2005. The highest FDI flows
among the countries in South Asia took place in India where FDI inflows rose from
$3 billion in 2001 to its highest level of $6 in 2005.
113
In West Asia, FDI inflows had some fluctuations. Inflows increased to $4 billion in
2001 and $5 billion in 2002 but again rose to its highest level of $41 billion in 2005.
Islamic Republic of Iran out of total flows to this region received $33 million in 2001
and in 2005 total FDI inflows reached to $360 million.
Due to emergence of some new trends, FDI inflows soared to reach $1,461 billion a
growth of 38% in 2006 and 30% in 2007 to reach a high record of $1979 billion
(Figure 4.1). The rise in global FDI flows was partly driven by increasing corporate
profits worldwide and resulting higher stock prices that raised the value of crossborder M&As. M&As continued to account for a high share of FDI flows, but
greenfield investment also increased, especially in developing and transition
economies. Reinvested earnings became an important component of inward FDI, they
accounted almost for 50% of total inflows in DCs alone.
Figure 4.1
FDI inflows, global and by groups of economies, 1980–2008
(Billions of Dollars)
Source: World Investment Report 2009.
In 2008 global FDI flows severely affected worldwide by the economic and financial
crisis and FDI inflows reduced to $1,697 billion a decline of 14%. FDI flows as
114
percentage of GFCF also reduced to 12.3% from a high rate of 16% in 2007 but FDI
stock as percentage of GDP rose to 24.5%.
The crisis changed the FDI landscape and investments to developing and transition
economies surged. Their shares in global FDI inflows grew by 37% and 7%
respectively the combine share was 43%, close to the record share in 2004 (Figure
4.2). This was partly due to a concurrent large decline in FDI flows to developed
countries by 29%.
Figure 4.2
Shares of the three major groups of Economies in global FDI inflows 1990–2008
(Percent)
Source: World Investment Report 2009.
The decline in FDI inflows to developed countries was mostly due to cross-border
M&A sales that fell by 39% in value after a five-year boom ended in 2007. FDI
inflows amounted to $ 972 billion in 2006 and $962 billion in 2008 down from the
previous year 2007 a pick of $1358 billion. As a result FDI flows as percentage of
GFCF and FDI stock as percentage of GDP reduced to 11.4% and 24.7% respectively
as compare to previous year.
115
These declines occurred in all major host countries except the United States which
maintained its position as the largest host and home country in 2008 with inflow of
$316 billion. The United Kingdom lost its position as the largest source and recipient
country of FDI among European countries. The fall in inward FDI was more
pronounced in the manufacturing and services sectors. FDI policy environments in
developed countries in 2008 were influenced by the continuing public debate about
the cross-border investments and by concerns of new investment protectionism in
developed countries in reaction to the financial and economic crisis. Some developed
countries adopted or amended rules concerning the review of foreign investment on
national security grounds, while others adopted measures aimed at further
liberalization of their investment regimes. Japan faced negative FDI worth at $ - 6
billion but in the next two years it recovered at FDI inflow reached to $22 and $24
billion in 2007 and 2008 respectively.
Developing countries weathered the global financial crisis better than developed
countries, as their financial systems were less closely interlinked with the hard-hit
banking systems of the United States and Europe. Their economic growth remained
robust, supported by rising commodity prices. FDI inflows continued to grow but at a
much slower pace than in previous years, posting a 17% to $621 billion in 2008 as
compare to $433 in 2006 and $529 in 2007. FDI inflow as percentage of GFCF in
2008 slightly reduced to 12.8% from 13% in 2006 and 2007.
By region, FDI inflows increased considerably to Asia from $283 and $332 billion in
2006 and 2007 to $388 billion in 2008. South, East and South-East Asia continued to
register strong growth in FDI inflows in 2008 by 17% to reach a new high of $297
billion. Inflows into the major economies in the region varied significantly. They
surged in China with inflows of $108 billion and $63 billion in Hong Kong (China).
South Asia also received a highest amount of FDI inflows of $50 billion and India
ranked among the most attractive location with FDI inflows of $41 billion in 2008 as
compare to $20 and $25 billion in 2006 and 2007 respectively.
FDI inflows to West Asia continued to rise; they totalled $90 billion representing a
16% increase because of more liberal FDI related policies in a number of countries.
116
Examples include reductions in the rate of tax level on foreign companies,
Privatization of State-owned enterprises, liberalization of the exchange rate regime,
improved access to financing by investors and investment facilitation. FDI inflows to
Iran rose from $ 1626 million in 2006 to $1658 million in 2007 but slightly decreased
to $1492 million in 2008.
4.3 POLICY DEVELOPMENT OF FDI
During the last years several countries lowered existing obstacles to foreign
investment, thereby continuing the trend of more openness towards FDI. Measures in
this regard included raising FDI ceilings or the level of the general review threshold.
At the same time, various countries took new steps to regulate FDI. The trend of
scrutinizing foreign investments for national security reasons continued in several
countries. Some countries in Latin America took further steps to nationalize strategic
industries, particularly extractive industries.
In 2008, National Laws and Regulations related to FDI indicate that 110 new FDI
related measures were introduced by a total of 55 countries (table 4.3). Of these, 85
measures were more favourable to FDI. Compared to the previous year, the
percentage of less favourable measures for FDI has remained unchanged and stands at
23 per cent (table 4.3).
117
Table 4.3
National regulatory changes, 1992-2008
Item
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Number
of 43
countries that
introduced
changes
96
49
63
66
76
60
65
70
71
72
82
108
92
91
58
55
Number
of 77
regulatory
changes
100
110
112
114
150
145
139
150
207
246
242
270
208
177
98
110
More
favourable
77
99
108
106
98
134
136
130
147
193
234
218
234
162
142
74
85
Less
favourable
0
1
2
6
16
16
9
9
3
14
12
24
36
41
36
24
25
Source: World Investment Report 2009, UNCTAD
118
118
From a regional perspective, South, East and South-East Asia and Oceania had the
highest share of regulatory changes (25 per cent), followed by developed countries
(20 per cent) (figure 4.3).
Figure 4.3
Regional distribution of FDI related measures in 2008
Source: World Investment Report 2009, UNCTAD
In all regions, the number of changes more favourable to FDI clearly exceeded those
that were less favourable. They accounted for 75 per cent of the 16 measures adopted
in Africa, 79 per cent of the 28 measures adopted in South, East and South-East Asia
and Oceania, 80 per cent of the 15 measures adopted in the Commonwealth of
Independent States (CIS), 91 per cent of the 22 measures in the developed countries,
55 per cent of the 20 measures adopted in Latin America, and 89 per cent of the 9
measures taken in West Asia and the SEE countries combined.
Out of the 110 new measures adopted during the review period, 33% introduced more
favourable entry regulations, and another 44% of all measures improved the treatment
or operations. Only 13% and 10% were less favourable in entry and treatment or
operations, respectively (figure 4.4).
119
Figure 4.4
Nature of FDI related measures in 2008
Source: World Investment Report 2009, UNCTAD
4.4 SECTORAL AND INDUSTRIAL PATTERN OF FDI
The most striking feature of the sectoral distribution of the FDI during the last
decades is the decline of the share of the primary sector globally as well as in
developed and developing countries. The share of manufacturing in total FDI
remained stable, while services sector experienced a corresponding increase globally
as well as in both developed and developing countries.
FDI in service sector has been growing over the past years at a faster rate than FDI in
other sectors. In the early 1970s, this sector accounted for only one-quarter of the
world FDI stock; in 1990 this share was less than one-half; and by 2002, it had risen
to about 60% or an estimated $4 trillion. Over the same period, the share of the
primary sector in world FDI stock declined from 9% to 6%, and that of manufacturing
fell even more, from 42% to 34%.
In 2003 the share of the primary sector remained stable (at 5%) with oil and gas in
particular and the share of manufacturing fell from 57% in 2002 to 53% in 2003. The
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share of services rose in FDI inflows into many other economies, for instance Asia's
total FDI stock increased from 43% in 1995 to 50% in 2002. In 2003, within service
sector, more than half of FDI attracted by the finance, transport, telecommunications
and business services and in 2004 investment in services particularly financial
services, accounted for the bulk of the world FDI stock and 63% of the total value of
cross-border M&As with financial services responsible for one-third of the value of
cross-border M&As in this sector.
By 2005, service sector gained the most from the surge of FDI, particularly finance,
telecommunications and real estate. The predominance of services in cross border
investments is not new. What is new is the further and sharp decline in the share of
manufacturing sector and the steep rise of FDI into the primary sector (with a six fold
increase in cross-border M&A sales), primarily the petroleum industry. Thus, the primary
sector’s share in world FDI back to a level comparable to that of the late 1980s.
The growth of FDI in the primary sector, especially in mining activities, is very recent
if viewed over the past 25 years. FDI in mining (including oil and other mining),
which accounts for the bulk of the primary sector, has been largely responsible for the
recent growth of global FDI. Current FDI growth seems to be led primarily by a few
specific industries, rather than being broad-based sectorally. Specifically, in 2005, oil
and gas, utilities (e.g. telecommunications, energies), banking and real estate were the
leading industries in terms of inward FDI. For the first time since 1987, the petroleum
(includes oil and natural gas) industry became the largest FDI recipient, accounting
for 14% of all cross-border M&A sales, followed by finance and telecommunications,
the later two partly as a result of further liberalization in some countries. These three
activities accounted for more than one third of the total value of M&A deals. They
were closely followed by real estate, which has also become an important recipient of
FDI since 2004 following the liberalization of FDI entry by various countries. In
manufacturing, FDI in the industries related to primary products rose. For example,
cross-border M&As in oil refining doubled and those in rubber and plastic goods
quadrupled, while in metals industries they rose sixfold. Metals, telecommunications
and real estate also attracted more Greenfield FDI than in 2004.
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In 2006, the primary sector’s share of the estimated total world inward FDI stock
stood at 8%, and the sector accounted for 13% of world FDI inflows in the period
2004-2006. Manufacturing accounted for nearly one third of the estimated world
inward FDI stock in 2006, but for only a quarter of world FDI inflows in the period
2004–2006. Its share in world inward FDI stock has fallen noticeably since 1990 in
both developed and developing economies declining by more than 10 percentage
points. The services sector accounted for 62% of estimated world inward FDI stock in
2006, up from 49% in 1990. Within developed countries in 2006, service sector
continued to dominate FDI flows. Manufacturing sector gained in importance in terms
of both target and acquiring firms, while the importance of the primary sector
declined compared to 2005.
In 2007, there was a significant upsurge of cross-border M&As in manufacturing,
with cross-border M&A deals in that sector rising by over 86%, compared with
increases of 1% and 36% in the primary and services sectors respectively. The
increase in FDI in the primary sector in 2007 was more evident in Greenfield
investments. Their number rose from 463 in 2005 to 490 in 2006 and 605 in 2007.
By increasing of FDI inflow to service sector nearly all of the major service groups
have benefited from the shift of FDI towards services that began more than a quarter
century ago. In the case of some services, such as trade and financial services, the
increase began well before 1990, when they accounted for 12% and 20%,
respectively, of total inward FDI stock globally. While trade, financial services and
business activities continue to account for the lion’s share of FDI in the sector, other
services, including infrastructure, have begun to attract increasing shares of FDI since
the 1990s. For example, the value of cross-border M&As worldwide in electricity, gas
and water rose from $63 billion (about 6% of total sales) in 2006 to $130 billion
(nearly 8% of the total) in 2007. The slow but steady increase in the share of
infrastructure industries in FDI, including in developing countries, raises questions as
to how FDI can contribute to development in general and to progress towards meeting
the Millennium Development Goals (MDGs), in particular, through more and better
infrastructure services for the poor.
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By 2008, there was a relative decline in the share of services in global inward FDI
while the share of the manufacturing sector increased in all regions. The share of the
primary sector rose significantly in developed countries, while it fell in developing
countries and transition economies.
In 2008, there were a few exceptions, notably in the primary sector and in the food,
beverages and tobacco industry, where FDI transactions increased. Overall, there was
a decline in M&A activity in both manufacturing and services, but with a relative shift
to non-financial services, and to food, beverages and tobacco. The value of crossborder M&As in the primary sector increased by 17%. Rising prices of oil and other
commodities in the first half of 2008 triggered a further increase in the value of crossborder M&A investments in the mining, quarrying and petroleum industry group, to
$83 billion. The increase in FDI in the primary sector was also reflected in the
growing number of Greenfield investments, which reached 1,022 in 2008 compared
with 611 in 2007.
In manufacturing which accounts for nearly one third of estimated world inward FDI
stocks the value of cross-border M&A sales fell by 10% in 2008. The decline was
very uneven by industry. Textiles and clothing, rubber and plastic products, as well as
metals and metal products, saw an average fall of 80%, while in industries, such as
machinery and equipment, the decrease was much less dramatic.
At regional level, in 2008, FDI directed towards the services sector in South, East and
South-East Asia continued to increase, as also reflected in the rising value of crossborder M&A sales in that sector. In the NIEs, a major part of their cross-border
M&As continued to be in services, although in late 2008, and particularly in early
2009, they fell sharply in banking. This is because banks and private equity firms
based in the United States as well as Europe are not able to invest any more, and have
even started to divest due to the difficulties they face at home.
In China and India FDI growth was significant in such services as infrastructure
and retail. For example, following its global competitors such as Metro AG
(Germany), Wal-Mart Stores (United States) opened its first store in India in 2008.
In India in 2008, FDI in industries such as steel continued to increase, including
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from Western steelmakers, as well as from Chinese metal companies (Minmetals
and Xinxing for instance).
In west Asia sectoral data for Saudi Arabia and Turkey, which together attracted 63%
of total FDI inflows to the region in 2008, show an FDI boom in real estate
acquisitions. Inflows to this industry increased by 120%, to $10.9 billion. There was a
28% increase in the manufacturing sector mainly oil refining and petrochemicals as
well as food and beverages resulting in total investments of $17.8 billion. On the other
hand, the services sector with $20.3 billion worth of inflows registered a 3% decline,
and the primary sector saw an even larger decline of 13% with inflows amounting to
$4 billion. Within the services sector, FDI increased strongly in construction (104%)
and trade (154%), to $3.7 billion and $2.9 billion respectively, while it decreased by
36% in finance to $8.4 billion.
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