CEPMLP Internet Journal

UN/UNCTAD, World Investment Report 2001 "Promoting Linkages"
ISBN 92-1-112523-5 (322 pages, bibliography, statistical annex.) Sales No. E.01.II.D.12

The annual World Investment Report (WIR) is one of the most professional products the UN puts out every year. Produced by a very large international and interdisciplinary team under the leadership of Karl Sauvant with the help of development economist Sanjaya Lall it has acquired authority as an annual and comprehensive review of private foreign investment flows (inward and outward), of accumulated foreign direct investment stocks, with a particular focus on developing countries. The World Bank foreign investment advisory service participated in this project as well as the International Chamber of Commerce. Collaboration, though, seems not to have reached two other centers of relevant expertise - the WTO, half a mile away from UNCTAD in Geneva, and the OECD, the main source of official expertise from Western countries, are not mentioned. This absence, likely due to the inter-organisational rivalry on one or both sides, is to be regretted as some of the WTO work on trade and investment policy issues or OECD work on new issues for foreign investment (note the article by P. Sauve in 2 JWI 529 (2001)) might have enriched the conceptual basis of this survey. In probably quite conscious parallel to theWorld Bank´s annual "Development Report", the WIR adds a particular "theme" to the annual survey. The 2001 WIR concentrates on the issue of "linkages" between foreign investors (multinational companies, known in the particular UN parlance as "TNCs") and domestic businesses.

The survey finds - as in previous years - that most investment flows are between industrialized countries, driven largely by mergers and acquisitions in the boom year 2000. The share of developing countries declined to 19% of world flows, compared to 41% in 1994. This relative decline shows up as an even absolute decline in the case of Africa. FDI inflows into Asia and from Asia reached record numbers, with China (including Hongkong) most prominent. This reflects the basic fact that capital flows are largely between successful and developed economies, and that the poorer the country, the less can and does it offer opportunities for profitable investment under attractive conditions. The report, however, goes further than illustrating this self-evident fact by developing an "inward FDI index" which captures a country´s performance in attracting FDI in relation to its GDP, employment and exports; it - very roughly - indicates if countries do better or worse in attracting FDI than one would expect them to do. Japan, Italy, Greece, Korea, Taiwan, Turkey and Saudi Arabia perform badly, Hongkong/China, Singapore and some East European countries perform well. Such positioning on that index allows some initial benchmarking of the success or failure of economic policies and may suggest that there is something wrong about the economic policy and the economy´s ability to attract and digest foreign capital.

The survey then discusses - and substantiates with some statistics and many examples - Michael Porter´s concept of "clusters" attracting capital, i.e. geographical areas where infrastructure and government policy, but even more so the concentration of technology, skills and innovation attracts ever more participants seeking to benefit from the cluster - and contributing it. This "network effect" - with every clustering leading to more intensive clustering - is well known; Silicon Valley, the City of London, Bangalore or Italian fashion valleys are good examples. The survey includes an interesting map indicating industrial and service clusters correlated with the location of research-active universities (happily for the reviewer, the University of Dundee seems to be correlated to a local biotechnology cluster). Again, the survey invites benchmarking, and one should think of what is wrong with universities without a symbiotic relation to a commercial, financial or manufacturing cluster. FDI, so the report states, and probably quite rightly, is attracted much less than in the past by conventionally cited factor advantages such as cheap labour, lax environmental rules and low taxes than by "modern" location advantages such as high-quality infrastructure and a concentration of technology and skills in a geographical spot - whatever the much touted communication advantages of the internet, being able to hobnob together is as much a competitive advantage as it was in the late Mediaeval Italian and German commercial cities. The report does not go into detail, and certainly not into critical analysis, of what governments can do in enhancing the competitive advantages of their countries and particular locations, but suggests a three-tier model: from liberalizing the regulatory framework to "enable" FDI on level 1 to a pro-active investment promotion approach executed by national investment promotion agencies on level 2 to, finally, on level 3 the nurturing, often by provincial or municipal promotion agencies, of specific clusters building on the pre-existing competitive advantages and opportunities, e.g.promotion of discrete banking in Geneva, Euro-trade in London or Frankfurt, software development in the Silicon Valley or Bangalore or high-value ties in Italian fashion centers.

Linkages are not a new subject. There was a 1970s discussion on linkages which advocated the imposition of duties - as conditions for access - on foreign investors to maximize domestic procurement. Such protectionist linkages are out of fashion, at least in international agency thinking (even if not in, e.g. Russian practice or the practice of countries linking access to oil&gas acreage to domestic procurement). The WTO TRIMs agreement outlaws such practices, at least in principle. In this very liberal approach of UNCTAD - a full reversal of the orientation of UNCTAD in the 1970s and 1980s - linkages should "work with the market". The report describes a number of special linkage promotion programmes carried out by government agencies and "responsible" MNCs which are aimed at identifying opportunities for linkage and then promoting and nurturing the local suppliers competence to provide a competitive quality service or product to the foreign investor, normally at a much higher level of industrial competence with much higher expectations with respect to quality and technological prowess of its suppliers.

The survey is certainly a very valuable, and perhaps the most authoritative, source of information and analysis in foreign investment flows. But I would question if it is not too much based on conventional concepts of development economics. The various annual "competitiveness surveys" published by business schools and institutes have a clear purpose: they are meant to rank countries in terms of their attractiveness for investors; they should serve both the decision-process of companies about a suitable location and by benchmarking encourage countries to pursue better economic policies. Similar surveys are done on countries by the political risk agencies (to assist investors and banks in managing their risk exposure) or credit rating agencies (to help financial investors and banks to properly identify the credit risk - and thereby the appropriate interest rate - of loans and bonds). The UNCTAD survey does a little bit of that - the identification of countries that underperform their investment attraction potential (e.g. Japan, Italy et. Al.) allows to pinpoint policy failure, and the list of countries that overperform (Singapore, Hongkong) might suggest to consider imitation of successful policies. But to a large extent the listing of investment flows, inward and outward, does not serve that function of identifying policy failure or success or a more market-oriented business intelligence function. In the past, such surveys might have been used to highlight the economic power of multinational companies which was inferred from their foreign investment activities and then, quite incorrectly, related to the budget or GNP size of countries for comparison. Possibly, the focus on FDI flows is also related to the by now largely obsolete concept relating underdevelopment to underfinancing, i.e. the need to close a national "savings" or "investment" gap by either official aid or private capital flows. Here, the report would be seen as contributing to the - self-evident - fact that the less developed an economy, the less it attracts foreign capital (apart from a geological resource endowment). But then the report would have to compare private capital flows with aid-related financial flows - which it does not. In terms of economic development, it is not DFI which is per se a crucial condition, but rather the ability of an economy to encourage investment (foreign or national, private or public) which is actually and in practice converted to productive assets (which is always the weakness of developing countries). Just focusing on DFI therefore only captures one part of the investment situation, and without account of the more important national investment situation it is misleading, typically exaggerating the role of small countries (where DFI, inwards and outwards) is more important than that of large countries. Possibly, therefore, the whole conceptual underpinning of the WIR in its focus on "foreign investment" needs to be rethought - in terms of what is to be analysed and why. For example, a large part of the statistical analysis under the title of "DFI flows" now consists of mergers and acquisitions. These do not always and perhaps not even often contribute "new" capital to an economy, but reflect only a change of ownership and a restructuring of corporate assets. They are, in my view, not really "foreign direct investment" in the sense of a contribution in capital and other assets to establish a "new" productive asset. They may enhance efficiency - less than it is generally propagated by the investment banks - but they often rather close down productive assets rather than creating new ones. The original focus of the report was probably measuring private capital inflows into developing countries as a means of boosting industrialization, but now it has become to a significant extent a reflection on West-West corporate acquisition sprees in boom times. What does it mean for, e.g. African countries, that they represent a very small part of FDI flows when these are mainly measured in the currency of acquisitions. It is not that relevant for, say, Ghana if Chrysler is owned by Daimler or not or Mannesmann is taken over by Vodafone, nor does it say anything sensibly relevant or useful about multinational companies setting up shop in Ghana.

The survey, in its policy-related parts, raises more questions than it answers. First, the discussion of linkage policies, agencies and particular cases is useful and illustrative. But what one needs here is in particular a critical assessment of what works and what does not work. This is probably - as in the case of most development aid, development bank financed projects and many governmental activities - hard to come by as institutional self-praise overwhelms the interest and resources of a truly critical - and truly independent - appraisal. It would be nice to know more about some sort of objective measurement of the ability of the many national promotion agencies to perform in reality in accordance with their PR brochures. The question here is really to understand more about the true scope of influenceability of economic processes by direct government intervention, a theme that is heavily loaded with the ideological straitjackets prevailing in most international economic agencies and which would very much invite an effort at impartial assessment. Do these many well-meaning efforts of national agencies and MNCs conscious of their corporate responsibility make any difference - or is that just pretense to get governmental funding?

Second, there is very little, or nothing, in the report on the current challenges of the global economy - much advanced by accelerating linkages between MNCs and national economies and by liberalized investment conditions around the world. It almost seems that the UNCTAD survey is too much aware of its own dirigiste tradition in the 1970s and 1980s to wish to confront the revival of criticism of economic globalisation with and through MNCs by the NGO movement. What are the arguments, and counter- arguments about liberalization of today? Do developing countries get a "raw deal" through liberalization? The report suggests that they fall back even more behind in terms of the "modern" reasons for attracting investment - high-tech and high-skills dominate over the traditional advantages of cheap labour, convenient location and lax regulation. The strategies of nurturing "clusters" advocated by Michael Porter and his many followers in governments seem almost unfeasible for developing countries. Are they therefore falling back further in their ability to shape and implement policy which helps development? The policy advice given in the UNCTAD survey would require highly complex strategies for which developing countries as a rule are not competent. Are there counter-strategies or strategies that are not a mere imitation of developed government "cluster promotion" policies which are realistic for a developing country? Is liberalizing serving their interest? One hypothesis would be that the best scenario for them would perhaps be a slowing-down of liberalization in the competitive developed countries accompanied by greater liberalization in developing countries - to give them a chance in competition where they play with very weak cards. Or would a return to protectionism make sense for them? Do the policies de facto imposed by the international financial institutions on developing countries by loan leverage actually work to their benefit in the investment game or do they do nothing else than reinforce the competitive advantage enjoyed by multinational companies and the providers of goods and services from developed countries? Do the NGOs criticizing globalisation, including the work and recipes of international agencies among which UNCTAD must be now counted, have constructive policy alternatives which might actually work? These are questions I raise upon reading the report, and I wonder if the focus on measuring investment flows is still a timely approach.

The UNCTAD survey is a very professional work which provides authority on current investment data. It is also a very useful description of the efforts of promoting domestic linkages in a market-economy environment different from the dirigiste environment of the1970s. But one should re-think the overall conceptual approach, the main questions raised and perhaps a rejuvenation of the economic expertise relied upon and more linkage with both "civil society" and the more modern thinking in the other international economic think-tanks (OECD, WTO, academia, consultancy companies, investment banks) may be necessary.

Thomas Wälde
CEPMLP
Dundee
(added 07 January 2002)

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