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World Investment Report 1993

Key Messages

Overview
THE UNIVERSE OF TRANSNATIONAL CORPORATIONS

The universe of transnational corporations is large, diverse and expanding. By the early 1990s, there were 37,000 transnational corporations in the world, with over 170,000 foreign affiliates (table 1). Of these, 24,000 transnational corporations were based in 14 major home developed economies, up from 7,000 in 1970. Even those figures understate the number of firms that operate as transnational corporations, both because of measurement difficulties, and because firms carry out their transnational activities and exert control over foreign productive assets through a variety of non-equity arrangements–subcontracting, franchising, licensing and the like–as well as through the formation of strategic alliances. These forms of international expansion occur with little or no foreign direct investment, and are therefore only partially captured by foreign-direct-investment data or by firm-level data defined by equity participation. More than 90 per cent of all transnational corporations are headquartered in the developed countries and less than 1 per cent are from Central and Eastern Europe. Those from developing countries account for approximately 8 per cent of all transnational corporations and 5 per cent of the global stock of foreign direct investment.

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THE GROWTH OF FOREIGN DIRECT INVESTMENT

The growing influence of transnational corporations can be seen in the increase in the stock of foreign direct investment and the growth in the number of transnational corporations and their foreign affiliates. During the 1980s, and especially after 1982, annual foreign-direct-investment flows grew rapidly. By 1992, the global stock of foreign direct investment had reached approximately $2 trillion, which generated about $5.5 trillion in sales by foreign affiliates (compared to world exports of goods and non-factor services of $4 trillion). The pace of growth slowed during 1991 and 1992, but that is probably a temporary phenomenon, largely due to recession in the biggest economies. The growth of foreign direct investment in the 1980s was increasingly concentrated within the Triad regions, as described in the World Investment Report 1991: The Triad in Foreign Direct Investment (United Nations publication, Sales No. E.91.II.A. 12). In the early 1990s, however, investment flows to developed countries declined, while those to developing countries increased, especially in Asia and Latin America and the Caribbean, in response to rapid economic growth and fewer restrictions. The decline of investment inflows to developed countries can be attributed, in part, to slow growth and recession in the European Community, Japan and North America (table 3).

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SHIFTS ACROSS SECTORS

The rapid increase in foreign direct investment throughout the world has been accompanied by a pronounced change in its sectoral composition, from the primary sector and resource-based manufacturing towards services and technology-intensive manufacturing (table 5). Although the growth in services foreign direct investment has followed advances in information technology, global expansion through foreign direct investment has been constrained by legislative obstacles. Consequently, the recent wave of liberalization has had a particularly marked effect on services foreign direct investment, which is likely to continue during the coming decade. Significant capital-intensive service industries (such as telecommunications and air transportation) have only recently opened up to foreign direct investment, providing new opportunities for transnational corporations. The stock of foreign direct investment in the primary sector is now dwarfed by that in other sectors. However, it still grew quite impressively during the 1980s. Indeed, in developed market economies, its inward stock grew faster than in any other sector and faster than the stock of primary sector inward foreign direct investment to developing countries.

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TRENDS AND CYCLES IN FOREIGN DIRECT INVESTMENT

The decline in world-wide investment flows in 1991 and 1992 has marked the end of a period of constantly and rapidly rising flows that began in 1982 (figure 1). This slow-down raises the question of the extent to which the surge in investment flows in the 1980s was the result of short-term factors-the strong growth of the world economy and the boom in mergers-and-acquisitions activity or whether the influence of long-term factors is also changing the underlying trend.

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RECENT POLICY DEVELOPMENTS

The continuing growth of foreign direct investment is being facilitated by developments in the policy framework. At the multilateral level, examples include the adoption of the World Bank Guidelines on the Treatment of Foreign Direct Investment. They propose general standards of fair and equitable treatment, national treatment and most-favoured-nation treatment. Those standards apply, in principle, to all activities of foreign investors, from setting up abroad to the ultimate disposal of an investment. Elsewhere, the United Nations Conference on Environment and Development (UNCED), held in Rio de Janeiro in June 1992, adopted the Agenda for the 21st Century. It considers generic management issues and recommends that corporations establish world-wide corporate policies on sustainable development.

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NEW STRATEGIES BY TRANSNATIONAL CORPORATIONS

The ability of transnational corporations to contribute to international economic integration is a result both of their attributes and of how they respond to the economic and policy environment in which they operate. The strategies of transnational corporations evolve, as firms respond to various pressures and opportunities, including improvements in information technologies, the convergence of demand patterns across countries, the intensification of competition and the opening of markets to international trade and foreign direct investment. The new strategies imply significant changes in how production is organized across borders; they have led firms to locate a wider range of their value-adding activities abroad. The strategies of transnational corporations increasingly involve more complex forms of crossborder integration (table 6). Under the simplest strategies–stand-alone affiliates or multi-domestic affiliates engaged in international production while serving a single host economy or host region–affiliates have a high degree of autonomy from the parent firm.

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ORGANIZATIONAL EVOLUTION

The strategies adopted by transnational corporations go together with changes in organizational structures. In particular, complex strategies have led to more complex mechanisms for organizing international production. Within firms, the decentralization of functional activities has led to a greater use of regional headquarters to manage regional activities, product headquarters located in host economies to manage the regional or global organization of particular products and functional headquarters in host economies to manage firm wide activities for a specific function. The dispersion of activities along the value chain leads to a dispersion of responsibility for those functions. In addition, the growth of strategic alliances has led to cross-firm linkages geared to specific activities frequently limited to well-defined periods of time. Strategic alliances usually involve shared functional responsibility and can blur the boundaries of the firm.

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TOWARDS AN INTEGRATED INTERNATIONAL PRODUCTION SYSTEM

Complex strategies, pursued with greater functional integration both within and across firms and over a wide geographical area, combined with network structures of organizing activities, describe integrated international production at the level of the firm. The aggregation of the activities of those transnational corporations that are involved in such production creates a system of integrated international production at the level of countries. For Japan and the United States, between a quarter and a third of private-sector productive assets are potentially under the common governance of transnational corporations pursuing integrated international production. For the world as a whole, this percentage may be one-third. Integration can occur at different levels. The reduction in tariff barriers throughout most of the past 45 years and the recent spread of regional integration agreements have stimulated the exchange of goods and services among countries. This “shallow” form of integration opens many areas of an economy to the influence of international economic developments.

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WILL A GLOBAL SYSTEM EMERGE?

Just how many countries will be affected by this new system remains unclear. Foreign direct investment has tended to be concentrated among the industrialized economies, particularly the Triad, with a clustering of developing countries and economies in transition around each Triad member (figure 3). To some extent, this is because foreign direct investment follows trade, which is itself regionally concentrated. However, trade is more concentrated than foreign direct investment within regions. This suggests that trade may have played a prominent role in intraregional integration, whereas foreign direct investment has a greater capacity for promoting global integration. The emergence of integrated international production, which is likely to be more widely dispersed, should further strengthen the potential of foreign direct investment as a force for global integration. If that happens, trade may also begin to show more cross-regional patterns, given the linkages between foreign direct investment and trade.

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EMERGING POLICY ISSUES

All these changes raise a wide range of policy issues, including corporate nationality, parent-affiliate relations and responsibilities, the international allocation of the taxable income of transnational corporations and policy options for host countries to maximize the benefits from integrated production. As regards the first three of these issues in particular, the more sophisticated forms of division of labour between foreign affiliates and their parent firms and among foreign affiliates located in a number of countries, a certain decline of economic autonomy of the constituent parts of integrated TNC systems and a certain dispersion of authority throughout those systems are beginning to strain some traditional concepts and approaches.

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AN INTEGRATED POLICY FRAMEWORK

Apart from these legal and policy issues, integrated international production has also implications for the national policy framework concerning transnational corporations. The rapid growth of foreign direct investment during the 1980s has made Governments more aware of the benefits that such investment can bring to an economy in terms of capital, technology, management and access to established distribution networks. In the resulting competition to attract transnational corporations, foreign-direct-investment regimes in many countries have become broadly similar. In particular, differences regarding right of establishment, fair and equitable treatment, national treatment, nationalization, compensation, dispute settlement and the repatriation of earnings become less effective as a means to capture foreign direct investment. Instead, the nature of the overall policy framework and the economic conditions of production become the key to locational decisions. There is general agreement that efficient economic institutions and a stable macroeconomic climate are preconditions for attracting foreign direct investment. Beyond that, Governments must provide efficient infrastructure and facilitate international trade exports to allow firms to bind into the international production system.

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