10:30 AM Sep 25, 1996

FDI FLOWS INCREASE, MOSTLY FOR M & A

Geneva 25 Sep (Chakravarthi Raghavan) -- Foreign Direct Investment inflows increased in 1995, reaching a total of $314.9 billion compared to $225.7 in 1994, or a 40% increase

But, as for 1994, a very large portion of the inflows in 1995, $229 billion, is attributable to cross-border mergers and acquisitions (M & A), and only about $85 billion is 'greenfield' investments that may create new production facilities for goods and services, and perhaps some employment.

Even the potential for 'employment' and 'growth' via greenfield FDI may depend on whether the greenfield FDI creates additional production inside a country or a competing production (to local facilities) that may, particularly in developing countries, be bankrupted and/or forced to close down - often throwing more, less paid, workers on to the streets.

According to an UNCTAD official from the Division of Transnational Corporations and Investment (DTCI), who was at a press conference by Secretary-General Rubens Ricupero, while it could be assumed that greenfield investments almost always creates employment, in case of mergers and acquisitions it would all depend on what comes after in terms of restructuring of the acquisition.

Other studies suggest that the evidence, random though, is mixed.

The World Investment Report, 1996 (WIR-1996), which like its predecessors, provides a large amount of data from various sources, and thus not always easily comparable for quick analysis or meaningful conclusions for the policy-makers and decision-makers.

And because of the differences in the definition of FDI and 'Transnational' corporate relationships (wholly owned subsidiaries, joint ventures with minority ownership and shareholdings -- that could be or be turned into portfolio investments), the WIR data may not easily comparable to data of other sources.

Policy- and decision-makers in countries look at FDI flows from the perspective of whether it benefits and helps economic growth and development, including employment and earnings, and their actual effects on a country's macroeconomics -- earnings, balance of payments and other elements.

Also, the IMF data definitions, reinvestment of profits from FDI investments are shown as outflows on current account, with a corresponding entry on capital account as inflows of FDI.

But with countries being run, or being pushed to run like businesses in terms of neo-liberal theories, it is not only the 'balance sheet' about capital inflows and outflows that have to be looked at, but also cash flows, which in the case of reinvested profits is nil, but a potential liability to be provided for.

Unfortunately, there is no system wide attempts to evolve some common definitions (involving the entire UN system, the BWIs and hopefully the OECD) to enable meaningful data from which conclusions could be drawn.

The FDI flows for mergers and acquisitions showed such activity highest in Western Europe, as a whole, (totalling some $50 billion in sales and $ $66 billion in purchases). Almost half of these took place in Britain which, for TNCs from outside Europe is proving a useful platform to get inside the EU and sell.

The US, as a country ranked highest with $49 billion of sales and $38 billion in acquisitions across borders.

The developing countries accounted for inflows of $99.7 billion compared to $87 billion in 1994, with FDI as a result of privatization, accounting for $5.075 billion in 1994. Figures on account of privatization in 1995 are not listed in the data tables, and it is difficult to say how much of the increased flows in 1995 are due to this factor. FDI for privatization though is an one-off affair.

In the case of Latin America, the DTCI official said, the new investments were due to mergers and acquisitions, as also inflows on infrastructure projects -- railways, ports, energy, telecommunications etc. There was also the FDI activity going into the auto-vehicle sectors, more so in the light of the MERCOSUR regional integration process. Perhaps there would also be new investments going into consumer durables.

The investments in infrastructures, particularly by US investors, Ricupero said, is similar to what happened in Latin America in the late 19th century or early 20th century when British capital went to building railways, ports etc. In a sense this "back to the past".

In a sense he added this was similar to the FDI inflows in the last century, when British FDI went into railways and other infrastructures.

Central and Eastern Europe registered inflows of $12.08 billion compared to $5.89 billion in previous year.

The FDI flows continue to be concentrated in a handful of countries of the South, mainly in Southeast and South Asia as also China, where some of it is round-tripping, but has slowed down due to the measures taken by China to deal with this. There is also increase in flows to Latin America.

But most other regions and countries are still starved for FDI flows, despite their 'open house' and incentives.

No clear answer was forthcoming from the UNCTAD officials whether in their view a multilateral investment agreement would increase the FDI flows to these countries now starved or lagging behind.

It may help, Ricupero said, but would also depend on other elements including growth in these countries, as well as other variables like macroeconomic factors.

However, Ricupero said, UNCTAD and UNIDO were cooperating in preparing country and sectoral profiles in African countries to show areas of profitability and growth for FDIs, and thus promote FDI.

Asked about the job creation and migration effects of FDI (a factor much in the news in the United States politics these days), the DTCI official there were no clear and unambiguous answers.

FDI and trade, the WIR says, are both handmaidens of growth and development, but it is important to understand the inter-linkages. The role of trade as a positive factor in growth and development has long been recognized and reflected in trade policies. FDI increasingly influences the size, direction and composition of world trade, as do FDI policies. The role of FDI as a positive factor in growth and development is being increasingly appreciated, and increasingly reflected in FDI policies.

The WIR-96, as past reports, identifies the TNCs as the major element in FDI, and FDI as a major force shaping globalization and regional integrations, and the world's largest TNCs becoming more transnational.

The report deals at length with the sequential process of internationalization of production and globalization of economic activity by the TNCs, and suggests that potential benefits can far exceed potential costs.

But as WIR-95 noted, somewhat guardedly, there is a conflict involved or a potential one, between TNCs and host developing countries since the interest of a TNC (in seeking to maximise their global operations) will not coincide with that of the host country, and the local operation there.

With TNCs pursuing complex strategies of integrating their operations, and with the new scope for a TNC to slice up its various activities at different locations, subject to the central planning of its headquarters, "no single country... in which a part of a TNC system is located can be assured of capturing... the benefits" that are expected to flow from the globalized TNC activity.

Though WIR-95, for example, said that "it can reasonably be assumed that attempts by a TNC to improve its competitiveness would have favourable repercussions on at least some of the national economies within which it is operating", there can be no such presumption that this does or will happen in the developing host country vis a vis a developed country TNC and its global operations.

And UNCTAD's Trade and Development Report this year, in its analysis of lessons of East Asian experience, has brought out that the advantages that a host country can derive from TNC activities would depend on the degree of control that TNCs retain over their assets, particularly technological assets.

It has also brought out the problems that some of the second tier NIEs of East Asia (Malaysia, Thailand and Indonesia) face in terms of technological upgradation to vacate labour-intensive activities for which there is increasing competition.