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World Investment Report 2011

Key Messages

FDI trends and prospects
Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in 2010

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

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For the first time, developing and transition economies together attracted more than half of global FDI flows

Outward FDI from those economies also reached record highs, with most of their investment directed towards other countries in the South. In contrast, FDI inflows to developed countries continued to decline.

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Some of the poorest regions continued to see declines in FDI flows

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

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International production is expanding, with foreign sales, employment and assets of transnational corporations (TNCs) all increasing

TNCs’ production worldwide generated value-added of approximately $16 trillion in 2010, about a quarter of global GDP. Foreign affiliates of TNCs accounted for more than 10 per cent of global GDP and one-third of world exports.

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State-owned TNCs are an important emerging source of FDI

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

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Investment policy trends
Investment liberalization and promotion remained the dominant element of recent investment policies

Nevertheless, the risk of investment protectionism has increased as restrictive investment measures and administrative procedures have accumulated over the past years.

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The regime of international investment agreements (IIAs) is at the crossroads

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

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FDI policies interact increasingly with industrial policies, nationally and internationally

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

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The investment policy landscape is influenced more and more by a myriad of voluntary corporate social responsibility (CSR) standards.

Governments can maximize development benefits deriving from these standards through appropriate policies, such as harmonizing corporate reporting regulations, providing capacitybuilding programmes, and integrating CSR standards into international investment regimes.

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Non-equity modes of international production and development
In today’s world, policies aimed at improving the integration of developing economies into global value chains must look beyond FDI and trade

Policymakers need to consider non-equity modes (NEMs) of international production, such as contract manufacturing, services outsourcing, contract farming, franchising, licensing, management contracts, and other types of contractual relationship through which TNCs coordinate the activities of host-country firms, without owning a stake in those firms.

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Cross-border NEM activity worldwide is significant and particularly important in developing countries

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

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NEMs can yield significant development benefits

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

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NEMs also pose risks for developing countries

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

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Policy matters

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

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