5:43 AM Sep 20, 1994


Geneva 19 Sep (TWN) -- Contrary to misconceptions and fears of US labour and some NGOs, outward Foreign Direct Investment (FDI) by United States corporations promotes US exports and do not seem to have had significant effect on US imports.

On the other hand, Japanese FDI, contrary to some widely held views in the United States, do not concentrate exclusively on selling Japanese exports, but in fact appear to result in increase of imports into Japan, especially where Japanese TNCs are involved in natural resource development.

These are among the findings and conclusions in a study, "Determinants of Direct Foreign Investment and Its Connection to Trade" published in the 30th anniversary issue of the UNCTAD Review.

The article is by Gary Hufbauer, a senior fellow at the Institute for International Economics, Washington and two research assistants at the institute, Darius Lakdawalla and Anup Malani.

The main catalyst behind buoyant FDI in the Third World, the authors say, has been the process of economic reform: the introduction of macroeconomic stabilization policies combing fiscal austerity with conservative monetary policies and relaxed exchange controls; lifting or removal of regulatory obstacles to foreign ownership and opening up of financial markets. Equally important has been massive privatization of government assets.

According to the UN, over the period 1985-1990, privatization in 70 countries has resulted in selling off $282 billion worth of public assets -- with a quarter of this in Latin America where Mexico alone sold off $22 billion of government airlines, banks and utilities.

While UNCTAD's division on TNCs (the former UNCTC) expects continued high FDI growth in developing countries if they persist in reform policies, the authors suggest that this is postulated on a critical assumption, namely that both developing and development would keep their doors open to foreign investment flows.

"With growing concerns over the possible adverse effects of foreign investment on trade balances, this assumption should not be taken for granted," the article says.

In real terms, world trade growth declined from an 8% in the 1970s to a 3.9% in the 1980s. While the Uruguay Round's outcome may boost the rate of growth in the 1990s, there are significant obstacles to such growth.

Apart from obstacles to trade in financial, audiovisual and shipping services, lack of international standards on private cartels and regulated monopolies, and yet to be written global rules on conflicts between environmental treaties and international trade rules, there are also fears of 'a different brand of capitalism, leading the US and Japan to agree on quantitative measures antithetical to multilateral rules-based liberalization.

Compounding these concerns, is the continued growth of trade imbalances among major industrialized powers, with most of the surpluses concentrated in East Asia.

To the extent countries of North America and Europe are unhappy with their deteriorating trade position, they might criticize the TNCs and suspicion could be inflamed by the large share of world trade dominated by intra-firm transactions. By 1990, nearly one-third of world trade is among TNCs and their foreign affiliates, with much of this trade in intermediate goods.

The ratio of intermediate good imports to total imports ranges from around 50 percent in Canada, Germany, the UK and the US to almost 60 percent in France and a very high 70 percent in Japan.

According to the US Commerce department, foreign affiliates of US parent companies accounted for over 50 percent of US merchandise trade in 1989 and 1990. In those years, exports to foreign affiliates exceeded imports from foreign affiliates of US enterprises by about 17 percent, resulting in a surplus of nearly $35 billion in both years.

At the same time, US affiliates of foreign TNCs were responsible for 23 percent of US merchandise exports and 37 percent of US imports in 1991. These statistics, the authors say, are surprising compared to the small share of US labour employed by foreign owned affiliates (five percent) and their small (six percent) share in US GDP.

But in terms of political impact, over the past decade US affiliates of foreign companies have been "responsible" for up to 88 percent of US trade deficit.

The conclusion is straightforward: countries unhappy with their overall trade balance or feel their access to particular overseas markets is limited, may look for "leverage" in inward and outward investment flows, the authors note.

Analysing the factors behind the foreign investments, the authors say that market size and income levels may influence investment decisions, but these are not overwhelmingly important.

As for trade-investment links, the authors note three main arguments of opponents of capital outflows: * firstly, TNCs invest abroad to circumvent tariffs and quotas protecting the host country market and this "tariff-jumping" investment serves to replace home country exports with foreign production.

But the problem with this claim is that tariffs among industrial countries are already low, about five percent on average, and yet FDI among them is quite large. Also the FDI boom among developing countries coincides with a good deal of trade liberalization in these countries.

* secondly, international business, in the drive to cut costs, invests abroad to take advantage of cheap labour and as a result not only do home country exports fall, but imports rise as TNCs import products from their foreign affiliates with cheaper labour.

However, 80 percent of FDI flows are still between industrialized countries where the cheap labour arguments does not come into play. Also, TNCs are not strictly concerned with cheap labour as with ratio of labour cost to labour productivity.

* thirdly, developing countries impose performance requirements on TNCs to ensure a positive trade effect of the investment or stipulating domestic-content requirements.

(This last though will be phased out after the Uruguay Round and its TRIMs agreement).

Examining various studies on relationship between outward FDI and home country exports, the authors note that except for one Swedish study -- which may not apply to US, Japanese or German TNCs -- there is a positive association between outward FDI and home country exports.

In their own regression analysis, using a model examining cross-country data on fDI levels in different host countries, the authors found that US imports did not seem to have been materially affected by the extent of US investments abroad.

On the other hand, a given amount of outward Japanese FDI promoted about twice as many Japanese imports as exports.

This finding contradicts a popular conception, widely held in the US, that Japanese TNCs concentrate exclusively on selling Japanese exports.

"Many Japanese TNCs, especially those involved in natural resource development, promote Japanese imports," the authors say.

In respect of Germany, the authors conclude that on balance, German FDI outflows probably promoted German imports at the beginning of the 1980s, but not necessary at the end of the decade.

"In evaluating foreign investment," the authors conclude, "observers in industrial nations should not lose sight of the forest. Whatever the balance between imports and exports associated with FDI, there is much to be said for letting firms invest wherever their capital can yield the highest return. How ironic it would be if Lenin's warnings about exploitation of labour in developing countries should be turned into a fear that developing countries will exploit capital from the industrial world."