Foreign Investment Rebounding, Non-Equity Modes of Production Key for Development: UNCTAD

28 July 2011

Global foreign direct investment (FDI) will rebound to pre-crisis levels by 2013, according to the UN Conference on Trade and Development (UNCTAD) in their 2011 World Investment Report. The report, released on Tuesday 26 July, argues that, although global FDI is still 15 percent below its pre-crisis average, FDI will likely grow to US$1.4-1.6 trillion in 2011, approaching its 2007 peak by 2013.

Significantly, the report also notes that developing countries absorbed half of global FDI inflows in 2010, and generated record levels of outflows, directed primarily at other developing countries. This trend reflects the emerging presence of developing countries in the global economy, and also demonstrates the growing potential of South-South co-operation as a means for sustainable development. The major winners were East and South-East Asia as well as Latin America, which experienced strong growth in FDI inflows.

Not all developing countries experienced FDI surges. Least developed countries, landlocked developing countries, small island developing states, Africa, and South Asia experienced declines in FDI flows. At the report's launch, UNCTAD Secretary General Supachai Panitchpakdi noted that the poorest countries are still experiencing an "FDI recession."

The report also found that FDI to developed countries remains well below the levels seen prior to the economic crisis, with marginal declines in 2010; Europe especially saw a "sharp fall" in FDI inflows, according to the report.

UNCTAD argues, however, that FDIs are not the only drivers of economic growth. Supachai noted that international production in transnational corporations, which were the focus of last year's report (see Bridges Weekly, 28 July 2010), is expanding. These corporations are also showing an increased trend towards engaging with developing and transition economies through non-equity modes of production (NEMs), which Supachai stated "will be a key component of future growth."

NEMs include contract manufacturing, services outsourcing, contract farming, franchising, and licensing, among other activities.

The potential for growth in NEMs is the principal focus of this year's World Investment Report. Cross-border NEM activity is estimated to have created over US$2 trillion in sales in 2009, and is predicted to result in significant benefits for development.

UNCTAD reports that NEMs employ an estimated 18 to 21 million workers worldwide, with the majority of workers located in developing countries. NEMs are closely tied with international trade, and are often important points of access for developing countries to global value chains. For example, the report finds that contract manufacturing represents over 50 percent of global trade in the electronics and garment industries. NEMs can therefore play an important role in boosting the productive capacities of developing countries.

The organisation argues that the risk for developing countries in depending on NEMs for growth is that employment in sectors like contact manufacturing can be "highly cyclical" and "easily displaced." Additionally, there is the risk of "remaining locked in low-value-added activities."

Finally, the report also includes a number of policy recommendations about how to best support the development capacity of NEMs. UNCTAD urges developing countries to ensure that NEMs are embedded in their national development strategies; that governments support efforts to build productive capacity; that a strong legal and institution framework be put in place to support NEMs; and that government policies address the risks posed by NEMS by strengthening the bargaining power of local NEM partners, ensuring fair competition, and protecting labour and environmental rights.

ICTSD reporting.

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