RESTRICTED
WORLD TRADE WT/WGTI/W/8
23September 1997
ORGANIZATION(97-3860)
Original: English Working Group ontheRelationship
between Trade andInvestment
IMPLICATIONS OFTHE RELATIONSHIP BETWEEN TRADE AND
INVESTMENT FOR DEVELOPMENT AND
ECONOMIC GROWTH
Work Undertaken inOther Intergovernmental Organizations
Atitsmeeting of2and3June1997, theWorking Group requested theWTO Secretariat to
prepare apaper which would present theresults ofwork undertaken inother intergovernmental
organizations onthesubjects covered byItemIoftheChecklist ofIssues Suggested forStudy
(WT/WGTI/M/1, paragraph 11).Pursuant tothisrequest, theSecretariat invited UNCTAD andother
intergovernmental organizations working inthisareatoprovide asummary description ofwork carried
outonthese subjects.
Thepresent notereproduces thecontribution received from theOECD. Contributions from
theIMF, theUNCTAD, theWorld Bank andfromanyother intergovernmental organization willbe
circulated shortly inaddenda tothisdocument.WT/WGTI/W/8
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OECD Submission totheWTO Working Group onthe
Relationship between Trade andInvestment
This paper wasprepared bytheOECD Secretariat, based onsubmissions from several
directorates, attherequest oftheWTO inorder topresent thefindings ofOECD work andrelated
studies concerning achecklist ofissues prepared bytheWTO Working Group ontheRelationship
betweenTradeandInvestment.TheOECDwasaskedtocommentontheimplicationsoftherelationship
between trade andinvestment fordevelopment andeconomic growth, including:
- economic parameters relating tomacroeconomic stability, suchasdomestic savings,
fiscal position andthebalance ofpayments;
- industrialization, privatization, employment, income andwealth distribution,
competitiveness, transfer oftechnology andmanagerial skills;
- domestic conditions ofcompetition andmarket structures.
Table ofContents
Page
INTRODUCTION ...............................................3
I. TRENDS INFOREIGN INVESTMENT ............................3
II. THE RELATIONSHIP BETWEEN TRADE AND FDI...................10
III. FOREIGN DIRECT INVESTMENT, TRADE AND DEVELOPMENT .........14
IV. THE PERFORMANCE OFFOREIGN AFFILIATES INOECD
COUNTRIES .............................................15
V. THE EFFECTS OFFOREIGN DIRECT INVESTMENT
AND TRADE ONEMPLOYMENT AND INCOME DISTRIBUTION .........17
VI. FOREIGN INVESTMENT AND DOMESTIC COMPETITION .............19
VII. MACROECONOMIC IMPLICATIONS OFFOREIGN
INVESTMENT LIBERALIZATION ...............................19WT/WGTI/W/8
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INTRODUCTION
1. TheOECD presented itsactivities concerning tradeandinvestment totheWTO Working Group
ontheRelationship between Trade andInvestment on2June1997. Thispaper focuses onthefindings
orconclusions ofthose activities toseewhatlighttheyshedontheissues ofconcern totheWorking
Group, notably “theimplications oftherelationship between trade andinvestment fordevelopment
andeconomic growth ”,assetoutinPartIofthe“Checklist ofIssues ”.Particular attention isgiven
totheroleofforeign direct investment.
2. Atthemeeting ofOECD Ministers inMay1997, theOrganization wascalled ontoproduce
areport explaining thebenefits oftrade andinvestment liberalization inorder toinform public debate
onthese important issues. Work onthistheme isunder way.
3. Foreign direct investment (FDI) maybeunderstood tomean capital invested forthepurpose
ofacquiring alasting interest inanenterprise andofexerting adegree ofinfluence onthatenterprise ’s
operations. Direct investment differs fromportfolio investment inthatitinvolves control oftheasset
inquestion, while portfolio investors arepassive investors, motivated onlybytherateofreturn on
theasset. While thisdistinction isuseful foranalytical purposes, OECD member countries are
increasingly adopting abroader viewofFDIwhich includes many investments otherwise considered
asportfolioflows.1Forthisreason,theanalysispresentedbelowmakesoccasionalreferencetoportfolio,
aswellasdirect, investments.
I. TRENDS INFOREIGN INVESTMENT
Recent trends inforeign direct investment
4. Global flows ofFDIhavereached record levels inrecent years, growing faster thanmerchandise
tradeandrepresentingthemostimportantformofforeigncapitalinflowsformanydevelopingcountries.2
Outflows from OECD countries haveaveraged US$250 billion overthepastthree years, compared
withaverage outflows ofUS$110 billion intheprevious tenyears (Chart 1).Over three fourths of
thisinvestment remains within theOECD area. Increased intra-OECD flows havebeenboosted to
alargeextent bychanges inOECD countries ’policies towards FDI(seeBox1).While thenon-OECD
areahasbeengrowing inimportance forOECD investors recently, itsshare ofglobal inflows isstill
atthelevelwhich existed before thedebtcrisis intheearly 1980s (29percent). Anincreasing share
ofthese inflows comes from within thenon-OECD areaitself.
1Both theOECD Benchmark Definition ofFDI(Third edition, OECD, 1996) andtheIMF Balance of
Payments Manual recommend thatthepossession byaninvestor oftenpercentormore oftheordinary shares
ofacorporate enterprise bethecriterion used toestablish effective control. However, theOECD Code of
Liberalization ofCapital Movements (OECD, 1997) usesabroader definition, andtheMultilateral Agreement
onInvestment (MAI) currently under negotiation attheOECD maycover nearly allforms ofinvestment.
2OECDinvestmentstatisticsarepublishedannuallyintheInternationalDirectInvestmentStatisticsYearbook.
Recent trends areanalysed intheJuneissue ofFinancial Market Trends .There areanumber ofmethodological
problems associated withFDIdata. Countries ’dataonoutflows andinflows frequently donotmatch, inpart
because countries treatretained earnings differently. Other problems arise from fluctuations inintra-company
transactions (inparticular lending) andtheroleoftaxhavens andoffshore banking centres. Finally, exchange
ratechanges affect thestatistics because oftheir impact onstocks andflows when converted intoacommon
currency. These difficulties donot,however, invalidate theanalysis ofthissection.WT/WGTI/W/8
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5. Among developing economies, inflows ofFDIhavebeendistributed unevenly. Forthemost
recent fiveyears forwhich dataisavailable, thetoptennon-OECD recipients tookinthree quarters
oftotalnon-OECD inflows. China alone represented onethirdofnon-OECD inflows (Table 1).This
concentration ismuch more pronounced forFDIinflows thanfortrade flows, where thetopten
non-OECD countries takein57percentoftotalnon-OECD imports.
6. Developing countries arealsobecoming more important ashome countries formultinational
enterprises. Non-OECD outflows haveaveraged US$30 billion since1992andrepresented onequarter
ofglobal outflows in1994. Alarge share ofthisinvestment hasbeenbyfirms inHong Kong into
China, butfirms from Chinese Taipei, Singapore andevenChina havealsobeenactive. Japanese
andKorean firms havealsoinvested heavily within Asia. Intraregional flows havebeenincreasing
inbothEastAsiaandSouth America and,toamuch lesser extent, inAfrica.WT/WGTI/W/8
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Box1.Liberalization ofFDIinOECD countries
Unquestionably, thesecond halfofthe1980s represented awatershed forFDIinOECD countries.
Theperiod sawaremarkable riseofFDIflows between Member countries, outstripping growth of
international trade anddomestic capital formation. Justasremarkable wasthechange inpolicy
approach inmany OECD countries which resulted intheremoval ofmany impediments tocross-border
capital flows including FDI. Patterns ofinvestment flows alsochanged: several traditional exporters
ofdirect investment became important hostcountries forFDIaswell, while many traditional host
countries became increasingly active asinvestors abroad.
Amajor factor wasthechange inattitude towards theroleofgovernment intheeconomy. Along
withsound macroeconomic management, structural policies wereintroduced toremove supply-side
constraintsandtoboostproductivecapacityandeconomicgrowth.Thesepoliciesinvolvedderegulation,
privatizationandde-monopolisationonanunprecedentedscale,particularlyinservice-relatedactivities.
Theybrought major reforms inthefinancial sector, abolition ofexchange controls andmoreintegrated
financial markets.
Theliberalization ofrestrictions onforeign investment wasanimportant partofMember countries ’
newmarket-oriented policy approach. Inaddition tojobcreation andtechnology transfer, governments
became more attentive tothebeneficial effects offoreign firms’presence ondomestic competition,
productivity andcompetitiveness. Theinternationalisation oftheworld economy andtheemergence
ofnewmarkets encouraged theremoval ofobstacles tooutward direct investment sothatdomestic
firms could takebetter advantage ofgrowth potential abroad.
Liberalizationhada“knock-on”effectasreformsinsomecountriesdrewattentiontotherestrictions
ofother countries which feltprogressively compelled tointroduce more liberal policies. Regional
initiatives –inparticular theSingle Market initiative andenlargement oftheEuropean Economic
Community, andtheCanada-United States FreeTrade Agreement –alsofuelled theprocess of
liberalization.
During thisperiod, screening mechanisms were simplified orabolished infavour ofsimple
notification orverification procedures, usually foradministrative orstatistical purposes while
authorization requirements weremaintained onlyforpolitically sensitive large newtransactions or
acquisitions. Sectoral restrictions toowere abolished oreased, andnewsectors oractivities were
opened toprivate enterprises andforeign participation. Thebanking andfinancial services sector
wastheprimary beneficiary, butothersectors suchasspecialised telecommunications orbroadcasting,
under theimpetus ofnewtechnologies, werefaced withalessrestrictive foreign investment regime.
Virtually allrestrictions ontheauthorization andfinancing ofoutward direct investment wereremoved.
Sectoral liberalization wasaccompanied byanincreasing recourse toreciprocity requirements,
especiallyinfinance,transport,basictelecommunicationsservicesandinfrastructureandpublicutilities
(gas,electricity, water supply, etc.). However thedegree ofliberalization achieved hasbeenpreserved
andfurther progress hasbeenmade inthe1990s.WT/WGTI/W/8
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TheroleofFDIindevelopment finance
7. Foreign direct investment isjustoneformofcapital flowtodeveloping countries. Total private
capital flows havenowbecome theprincipal source ofdevelopment finance. Netannual capital flows
fromOECD countries todeveloping countries more thantripled between 1988and1996fromUS$96
billion toUS$307 billion (Table 2).Thisriseisinpartexplained byforces underpinning global
integration, notably theliberalization oftrade andinvestment regimes, technological advances inthe
telecommunications andinformation sectors andfinancial market integration. Other factors include
therestored financial solvency ofdebt-distressed countries, progress withstructural reform andthe
transformation ofseveral countries from planned tomarket economies.
8. Thepastdecade hasbeenmarked byadramatic reversal inthecomposition ofthese flows
asbetween private andpublic sources. Private capital intheform ofFDI, bankcredits, bonds and
equities increased itsshare oftotalflows from 38percentto76percentovertheperiod, emerging
asamajor source ofdevelopment finance fordeveloping countries. Official concessional finance (of
which approximately 70percenttakestheformofgrants) stagnated anditsshare dropped significantly
inthefaceofexpanding private flows. Thenewpattern isessentially anindication ofsuccess inthe
development process forawidening range ofdeveloping countries.
9. Shifts alsotookplace among thedifferent components ofprivate capital. Over theperiod,
theshare ofdirect investment remained generally static, averaging approximately 20percentofnet
inflows. International banklending expanded briskly from 8percentto23percentoftotalflows.
Themostspectacular rise,however, occurred withbond issues, which haverisen from2percentto
28percentofthetotalsince 1988. Much oftheriseinbondissues isaconsequence ofliberalization
following widespread financial repression inthefirsthalfofthedecade (intheaftermath oftheLDC
debtcrisis). Other portfolio flows broadly keptpacewiththese developments.3
10. Thereasons forthesurge inprivate capital flows canbesummarised asfollows:
- FDI: Push factors include enterprise strategies torationalise production (based on
relative factor costs, geographic proximity, organizational change) andenter newor
growing markets. Pullfactors include widespread liberalization offoreign investment
andtraderegimes indeveloping countries, theadoption ofdomestic policy frameworks
amenable toprivate sector-led growth, andregional trade andinvestment agreements
(e.g.Mercosur, APEC). Figures understate actual OECD investment inthedeveloping
world totheextent thatbonds andbank credits have supported investment in
infrastructure concessions, Build-Operate-Transfer schemes andtheirderivatives and
privatization operations.
- Bank andbondlending: Many countries cutofffrominternational borrowing markets
inthewake ofthe1980s debtcrisis re-established theirfinancial solvency overthe
pastdecade asaresult ofdebtrelief andrestructuring provided through anumber of
international work-out arrangements. Successful economic reform andgrowth played
apivotal roleinthisregard. More recently, bondissues havesurged asaconsequence
ofimprovedinformationflows,growthanddiversificationstrategiesbeingimplemented
byOECD financial market actors andstructural trends infinancial markets (e.g.debt
securitization).
3Development Assistance Committee (DAC) statistics reflect netcapital flows (e.g.afterinterest, dividends,
capital repayments, etc.have been deducted). Equity flows aresignificantly understated inthetable, since a
number ofmajor source countries (United States, United Kingdom andJapan) donotreport these flows.WT/WGTI/W/8
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- Portfolio flows: Portfolio investment flows have become animportant source of
development finance inthelastfiveyears, asliberalization inalarger number of
developingcountriesacquireda"criticalmass"andOECDMembercountryinstitutional
investors began more aggressively topenetrate untapped foreign markets.
Prospects forprivate capital flows todeveloping countries
11. Theprospects forcontinued highprivate capital flows from OECD Member countries to
developing countries seem promising. Increasing global competition inproduct andservice markets,
incentivestoreducecostsandproducemoreefficiently,continuingeffortstoincreaseoutputanddiversify
exports aswellastheroleofnewtechnologies inreducing communication andtransport costs4can
beexpected tostrengthen recent trends. Privatization isattracting foreign investors throughout the
developing world. Portfolio flows willbeencouraged byacombination ofOECD institutional investors ’
limited exposure todeveloping country assets, pressures forthem tomaximise returns anddiversify
holdings, andfinancial sector reform andderegulation within developing countries.
(a) Pension fundinvestment intodeveloping countries
12. Astudy bytheOECD Development Centre argues thattheneedforhigher returns onpensions
tofundanageing population inOECD countries andthesuperior growth prospects fordeveloping
countries willencourage portfolio flows todeveloping countries.5Pension fundmanagers canreap
large diversification benefits frominvesting inemerging stock markets. These benefits, which have
sofarbeenlargely unexploited, willrequire theremoval ofimportant regulatory andmarket barriers.
Theauthors advise regulators inOECD countries tofreepension assets fromlocalisation requirements,
while governments inemerging markets should design policies thatreassure institutional investors on
sovereign riskandstock market illiquidity. Ifthesepolicies areadopted, thestudy predicts thatOECD
pension funds willinvest about three percentoftheirassets (US$350 billion) intheemerging stock
markets bytheyear2000.
(b) Financial sector liberalization inemerging markets
13. Many emerging market economies havealsoengaged inmajor programmes offinancial sector
liberalization bothinternally andexternally. Financial sector liberalization improves resource allocation
andallows forthebetter management offinancial risks. External liberalization, including removal
ofbarriers toFDIviaestablishment oracquisition, brings theadditional benefits ofimproved access
toworld capital markets andthepotential toincrease theefficiency ofthedomestic financial sector
throughinwardandoutwardfinancial-sectorinvestment,includingequityparticipationandestablishment
inthefinancial sector.
(c) Privatization
14. Privatization, which isintimately linked toforeign investment (seeBox2),hasbecome highly
visible intheinternational economy since 1990. Privatizations haveattracted FDIinmany countries.
FDIinflows accounted formorethanhalfofinfrastructure privatization revenues indeveloping countries
from 1988 through 1995 (twothirds forprivatizations involving telecommunications companies).6
4Towards aNewGlobal Age: Challenges andOpportunities ,OECD, Paris, forthcoming.
5“Pension fundinvestment: from ageing toemerging markets ”,Policy Brief No.9,OECD Development
Centre, Paris, 1994.
6Towards aNewGlobal Age:Challenges andOpportunities ,Analytical Report, OECD, Paris, forthcoming.WT/WGTI/W/8
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Privatizations have alsobeen amajor vehicle forFDIflows inother areas, astherollback of
state-ownership inthepost-communist countries ofCentral andEastern Europe andtheformer Soviet
Union aswellasinOECD countries gained momentum.7Withprivatization programmes being more
comprehensive, records weresetin1996andmany observers expect yetanother record yearin1997.8
II. THE RELATIONSHIP BETWEEN TRADE AND FDI
15. Anydiscussion oftheimplications oftherelationship between trade andFDIforeconomic
growth anddevelopment mustfirstestablish aworking hypothesis about thenature ofthatrelationship.
Itistherefore necessary topre-empt thediscussion contained inPartIIoftheWorking Group ’sagenda
tosome extent when contributing toPartI.Theprevailing assumption inthework reviewed below
isthattrade andinvestment, though different intheir nature, effects andpolicy response, are
complementary inseveral important respects:
- theyaretwoways forfirms tosellabroad;
- theyareoften driven byacommon setoffactors suchasmarket sizeorproximity
oftheimporting orhostcountry;
- theyencourage eachother inthesense thatpriorexports facilitate eventual investment
andthatinvestment brings withitimports ofcapital goods andothergoods notproduced
bythelocalaffiliate;
- foreign investment alsostimulates exports fromthehostcountry, bothfromtheaffiliate
itself andeventually from localfirms; andfinally;
- government policies towards tradehaveastrong impact onFDIflows andviceversa.
7Privatization inDeveloping Countries: Reflections onaPanacea ,Policy Brief No.3,OECD Development
Centre, Paris, 1992.
8SeeSpecial Feature inFinancial Market Trends n°66.OECD information onprivatization isbased upon
theanalytical work oftheSecretariat, mainly oftheDirectorate forFinancial, Fiscal andEnterprise Affairs
(DAFFE). Foranumber ofyears, theCommittee onFinancial Markets hasmaintained contacts withmarket
participants andwithresponsible officials inMember countries andhasespecially stressed theroleoffinancial
markets inprivatization. Other relevant groups include theOECD 'sprivatization network which brings together
regularlyseniorofficialsfromprivatizationinstitutionsinMembercountries,managersandinformationgatherers.WT/WGTI/W/8
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Box2.Privatization andinvestment
Onecanidentify three main motives forprivatization: 1)mostfundamentally, governments favour privatization owing tothe
convictionthatprivatelyruncompaniesarelikelytobemoreefficientlymanagedthanstate-runcompaniesandthatinanincreasinglyglobalized
economy, living standards canonlybesustained ifdomestic industry isinternationally competitive; 2)privatization fosters thedevelopment
ofstrong domestic financial systems, particularly capital markets; and3)privatization willleadtostronger fiscal positions.
Governments havebeenpursuing comprehensive policies aimed atenhancing efficiency, through deregulation andstructural
reform, partly toinject more competition intotheeconomy. Reforms often include deregulation ofdomestic markets andtheopening of
agrowing number ofsectors tointernational competition. Increasingly governments haveconcluded thatwhile some government-owned
companies arecomparatively well-managed, itisnecessary toholdcorporate management responsible forprofitability, rather thanforthe
more diverse setofpolicy goals thatcharacterise state-owned companies.
Inaddition topromoting competition inproduct markets, privatization aimsatexposing companies tocompetitive forces in
thefinancial market. Wider ownership ofequity byinstitutions whose mainconcern isfinancial return willencourage amovement towards
an"equity culture" inwhich individual andinstitutional investors, withaccess toadequate information, assess andcompare corporate
management toindustry benchmarks.
Inprivate industry, rationalisation toachieve greater productivity andefficiency ispartly reflected inmergers, acquisitions
andstrategic alliances, aimed atdeveloping highly competitive entities withstrategic positions intheirownindustry usually onaglobal
basis. Restructuring andmodernisation areincreasingly important inkeystrategic sectors (e.g. telecommunications andairtransport),
which haveuntilrecently beencharacterised byheavy government ownership andcontrol. Moreover, private companies –especially foreign
firms –maybemore willing toundertake jointventures orstrategic alliances withanenterprise thatisrelatively freeofstateinterference.
Thedistribution ofownership between thegovernment andprivate investors andbetween foreign anddomestic investors afterprivatization
willvarydepending upon thegovernment ’sobjectives. Insome cases, thegovernment retains a“golden share”providing therightto
vetocertain actions ofthecompany, including takeovers. Inothers, shares aredistributed among a“stable core”ofinvestors. For“strategic ”
enterprises, restrictions aresometimes imposed onforeign capital, suchasceilings onforeign ownership, limitations onvoting rights or
onmembership onboard ofdirectors andmanagement.
Although themotives forengaging inprivatization aresimilar inOECD andnon-OECD countries, some useful distinctions
canbemade. Themost common method ofprivatization inOECD countries isthrough anInitial Public Offering (IPO) onthecapital
market inwhich shares aresoldtoamixofretail andinstitutional investors. Generally speaking, capital markets incountries outside the
OECD areaarelessdeveloped andinmany cases privatised companies cannot besoldtopassive equity investors. Thus, trade salesare
frequently usedindeveloping countries andareaverycommon means ofprivatization oflarge companies (excluding mass privatization)
informer Communist countries. Privatization bypublic offerings nevertheless represents asizeable amount indeveloping countries where
apublic offering frequently actsasacatalyst forthedevelopment ofthedomestic capital market.
Privatization isintimately linked tointernational investment. Governments willoften actively seekaforeign strategic investor
whowillexercise managerial control andbring know-how andincreased efficiency tothecompany soldandtotheeconomy ingeneral.
16. Thiscomplementarity hasbeen observed empirically inarecent study ofUSandFrench
investment flows.9Thus fortheUnited States, forexample, bothinward andoutward investment
stimulate USexports. Outward investment alsopromotes imports, while inward investment hasan
insignificant dampening effect onimports. Theoverall effect isoneofcomplementarity. Inopen
economies, anysubstitution which might occur ismost likely toinvolve trade withthirdcountries,
withthese markets supplied bytheaffiliate instead ofthehome country.
17. While thedominant feature oftherelationship between tradeandFDIisoneofcomplementarity,
itisimportant tokeep inmind howthetwodiffer. Direct investment isgenerally alongterm
commitment onthepartoftheinvestor tothehosteconomy. Thus, obtaining access tothemarket
through establishment ortheability toacquire local firms satisfies onlypartoftheconcerns ofthe
investor. Investors needguarantees thattheywillbetreated fairly andequitably inthefuture with
respect topractically every aspect ofdomestic regulation. Inother words, aforeign investor will
typically beconcerned withabroad range ofpolicy variables thataffect localcompetitive conditions.
Policy issues ofspecific importance toinvestment include national treatment offoreign investors and
theirinvestments, protection against expropriation, andtheright totransfer funds toandfrom host
countries. Because FDIimplies foreign ownership ofdomestic assets, itraises non-economic issues
relating tosovereignty.
18. From theperspective ofthehostcountry, thepotential gains frominward investment include:
arelatively stable means offinancing current account deficits andoftransferring technology, managerial
skills andother assets belonging tothefirm. FDIalsoallows forgains inskilled employment in
9“Thelinksbetween foreign direct investment andtrade: empirical evidence forUSandFrench industries ”,
STIWorking Papers, OECD, Paris, forthcoming.WT/WGTI/W/8
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higher-valued industries andoffers thepossibility forexport diversification andother effects which
influence thecompetitiveness ofthehosteconomy. Theactivities ofmultinational enterprises ina
hostcountry alsoassist inestablishing links withforeign markets.
19. FDImayoccasionally substitute forexports inparticular cases when anexporter isfaced with
highbarriers totrade. Many countries often combine some measure oftrade protection (tariffs,
quantitativerestrictions,technicalstandards,etc.)withinducementsforfirmstoinvest,withtheintention
ofsubstituting localproduction (albeit foreign-owned) forimports. Inthese cases, theissue forthe
investor isnotoneofmarket access, since thefirmisstillgranted suchaccess aslongasithasthe
means toinvest abroad. Rather, itisoneofallowing thefirmtochoose itspreferred mode ofentry
intoamarket. Box3explains howthatpreference isshaped bycorporate strategies andgovernment
policies.
20. Itmust alsobekeptinmind thatthere isnotalways atrade-investment alternative. Notall
firms havesufficient intangible assets orfinancial resources toallow them toinvest abroad, andnot
allfirms produce goods which canbeexported. Some goods arenon-tradable because of,forexample,
transport costs, andmany firms sellservices rather thangoods, often requiring alocal presence to
doso.Forthese firms, there isnooption ofexporting andnodirect trade effect ineither thehome
orhostcountry. Many ofthebenefits ofsuchinvestment willnevertheless resemble thegains typically
deriving from trade.
Box3.Globalization ofindustry
Thechoice between investing andexporting atthemicroeconomic levelofthefirm, andhence therelative importance of
tradeandFDIflows intheworld economy isafunction ofevolving corporate strategies andgovernment policies towards inflows
andoutflows ofgoods, services andcapital. AnOECD report examines theextent andstrategies ofglobalization offirms in
anumber ofmajor industrial sectors. Theresults ofeachcasestudy aresummarised inAnnex 1,withasynthesis provided
inTable 3.Thedecision toinvest ortoexport willdepend onthecharacteristics oftheindustry andthepolicy mixinhome
andhostcountries. While exporters relyondomestic factors ofproduction fortheircompetitiveness, foreign investors must
havesome formofproprietary assets which canbetransferred toaffiliates abroad. Thisexplains whyforeign investment tends
tobemore important relative totrade inhigher technology sectors.
Inaddition toindustry characteristics, government policies haveanimportant influence onthemixbetween exporting and
FDI. Trade barriers influence thepattern oftrade, including therelative importance ofinter- andintraregional flows. They
mayencourage direct investment intheprotected market under certain conditions, buttheoverall effect oftrade barriers on
thevolume ofinward investment isambiguous. While protected markets offer thepotential forhigher profits forinvestors,
theyalsoraisethecosts ofimported inputs. They alsoinhibit theinformation flows between thetwocountries through trade
which cansubsequently encourage direct investment. Given thecompelling firm-specific factors promoting outward investment,
itisnotclear thatbarriers totrade always haveastrong positive effect onthevolume ofFDIflows.
Whether through trade orFDI, globalization isoneofthemajor forces driving therestructuring oftheworld economy.
Newtrends ininvestment, tradeandcollaboration between firms havevastly changed thescope ofworld business andexpanded
theroleofforeign companies innational economies. Firms areengaging incross-border activities across thewhole spectrum
oftheirdevelopment, production, supply, marketing andfinancing activities. Thisenables themtoexpand andachieve greater
global efficiency.
TheOECD globalization report identifies international direct investment andinternational collaboration agreements astwo
important measures ofglobalization. Theanalysis shows thatthree-quarters ofallinternational investment andmostcollaboration
agreements arebetween OECD-based firms inOECD countries. R&D- andskill-intensive industries arethemain industries
driving foreign investment andentering intocollaboration agreements, andtheyarelocated principally inOECD countries,
which alsoprovide theirmarkets.
International trade intheR&D- andskill-intensive industries hasrisenrapidly andthese industries aremore trade-intensive
thanlow-technology, low-wage industries except fortextiles, clothing andfootwear. Most ofthehigh-technology trade takes
place among OECD countries. About halfofalltradeisbetween firms thatarerelated through equity holdings (intra-firm trade).
Andhigh-technology trade issettoexpand further asinternational investment continues toincrease. Domestic salesofforeign
affiliates havegrown evenfaster thaninternational trade andstand atsome 150percentofworld exports.
Thereport shows thatfirms transfer theirproduction toother countries more readily thantheirR&D andother strategic
operations, which theytendtocentralise inthehome country. TheUnited States, where foreign investment inR&D isfound
insuchhigh-technology industries aspharmaceuticals, chemicals andcommunications equipment, provides amajor exception.
Foreign firms alsoinvest significantly inR&D insome countries where R&D efforts ofdomestic firms areweak andwhere
market access isimportant tothem.WT/WGTI/W/8
Page13Table 3
Industry andGovernment Policy Influences onTrade andInvestment Patterns
Technological
sophisticationConcentration Trade patterns FDIpatterns Trade policies FDIpolicies
Pharmaceuticals High Low Trade relatively
unimportant, mostly
involving intra-firm
shipments ofinputs.Mergers andacquisitions
increasing asindustry
consolidates.Markets aresegmented by
regulations.Patent protection issometimes
offered asaninducement for
firms toinvest. Theabsence of
suchprotection discourages FDI.
Relatively highinternational
market penetration.
Computers High, except for
certain hardware.High Very trade intensive,
particularly interregional
trade.
High share ofintra-firm
trade intotaltrade.Relatively fewmergers and
acquisitions.
Increasing commoditization will
encourage FDIindeveloping
countries.Fewtrade restrictions, but
recourse toanti-dumping
duties incertain major
markets.Governments often sponsor
domestic R&D. Theeffect on
FDIwilldepend onwhether
principle ofnational treatment is
applied. FDIhasbeenactively
encouraged recently inmany
countries.
Automobiles Medium -High High Above average for
manufacturing intrade
intensity.
Most trade is
intraregional.Greenfield investments are
relatively important. Thenon-
OECD share ofproduction is
growing asdemand expands in
those countries.Tariffs, quotas andvoluntary
export restraints haveall
limited thepotential for
interregional trade.Political sensitivities limit
M&As among major producers.
Governments often actively
encourage inward investment in
thissector.
Consumer electronics Medium -High High Interregional trade is
decreasing asFDIgrows.Overseas production isa
relatively recent phenomenon for
many firms.Anti-dumping duties andother
barriers totrade infinalgoods
arecommon.
Non-ferrous metals
(aluminium)Low High, butbarriers
toentry falling.Onehalfofaluminium
production isexported.FDIdriven bylocation ofraw
materials andinorder to
produce where energy costs are
lowest. Alsosome FDIinthe
form ofrisksharing.Formerly restrictions onFDIin
natural resources inmany
countries.
Steel Low Low Onequarter ofsteel
production istraded.FDIinvolves inter-firm alliances
andmergers andacquisitions as
partoftheglobal rationalisation
oftheindustry.Governments havebeen
actively involved inthe
rationalisation ofthesector in
parts ofEurope.
Clothing Low Low Intraregional trade is
increasing
Lowintra-firm tradeLittle FDI, mostly related to
preferential market accessDiscriminatory quantitative
restrictions (MFA) andhigh
tariffs
Source: Synthesis ofcasestudies presented inAnnex 1.WT/WGTI/W/8
Page14
III. FOREIGN DIRECT INVESTMENT, TRADE AND DEVELOPMENT
21. Certain developing countries havebeenhighly successful inbuilding adevelopmental strategy
based onforeign investment intheireconomies. Inthesecases, inward investment hasbeenassociated
withrapid industrialization andaconcomitant expansion ofincreasingly technologically sophisticated
manufactured exports. Thebenefits ofFDIusually manifest themselves inthehostcountry trade
performance. Initially, inward investment influences thepattern oftrade andthetypeofgoods and
services which areexported. Most ofthese export changes arebrought about directly through the
activities offoreign MNEs. Inthelonger term, through transfers oftechnology andlinkages with
thelocaleconomy, theinfluence ofFDIshows upinthegrowing competitiveness oflocal firms in
world markets.
22. Anumber ofOECD studies havelooked attherolethatFDIhasplayed inindustrialization
andhence ineconomic growth anddevelopment inparticular hostdeveloping economies. Astudy
ofChinese Taipei, Malaysia, Singapore andTaiwan concluded thatgrowth inallfourcountries has
been facilitated bydomestic policy changes inamore market-oriented direction, including the
liberalization oftrade andinvestment regimes.10Foreign direct investment influences growth by
contributing newcapital andtechnology. Theauthors findthatinvestment policy restrictions arevery
important indiscouraging foreign investment, butinvestment policy incentives areonlyonevariable
attracting suchinvestment.
23. Theauthors argue thatwhile FDImay“crowd out”localcapital inoutput orinput markets
incertain cases, italsoprovides technology andexpertise which isusually missing inadeveloping
economy, thushelping tocreate –forexample through jointventures andskills training –domestic
industrial capabilities which would nototherwise exist. Foreign investors contribute toafoundation
fortheriseofalocalentrepreneurial classdrawn fromtheranks oflocalpartners andskilled employees.
24. Theextent towhich these gains arerealised depends onlocalcapabilities, notably related to
education andinfrastructure, andonthepolicies which areemployed toencourage foreign investment.
Trade policies playanimportant roleinthisregard. Open tradepolicies contribute totheattractiveness
ofeachcountry asalocation forMNE production byallowing firms tomake useofcheaper inputs
from abroad. Theforeign dominated electronics industry inAsia, which ishighly competitive and
internationalised,hascontributedgreatlytoforeign-exchangeearnings,employmentandskillsacquisition
inallfourAsian countries studied. InChinese Taipei andSingapore, where educational standards
andinfrastructurearemostdeveloped,thisinvestmenthasalsospawnedmanylocalsuppliers,competitors
andservice firms, including independent indigenous enterprises which arehighly successful inworld
markets andwhich have, insome cases, become multinational themselves.11
25. Openness isnottheonlytrade policy which isusedtoattract investors. Certain economies
withlarger domestic markets areabletoattract investors byclosing offtheirmarket toimports. In
theautomobile sector, forexample, which ishighly protected inmost oftheAsian countries inthe
study, small, protected domestic markets haveresulted inhighcostsandinefficient anduncompetitive -
though profitable -firms. Unlike intheelectronics industry, where these NIEs aremajor players on
theworld stagebothashosts toMNEs andincreasingly alsointheirownright, theregional automobile
industry isstillsmall andwilllikely remain marginal totheworld industry.
10Linda LimandPang EngFong, Foreign Direct Investment andIndustrialization inMalaysia, Singapore,
Taiwan andThailand ,OECD Development Centre, Paris, 1991.
11Ibid,p.175.WT/WGTI/W/8
Page15
26. These conclusions havebeenconfirmed inOECD studies ofother developing countries. Trade
liberalization helps toprovide amore competitive location forexport andhence mayassist inattracting
export-oriented foreign investors. InBrazil, forexample, anOECD study reports thatbusiness and
government circles increasingly recognise thatstrong import protection isaserious handicap to
international competitiveness inmost sectors ofBrazilian industry.12
27. Foreign investment canalsocontribute toexport growth inother ways. Forexample, MNEs
andjointventures canplayadecisive roleintheexpansion oftechnologically-sophisticated manufactured
exports, given thespecific technological advantages theypossess. Industry-specific analyses inthe
Brazilian study suggest thatMNEs already playthisroleinBrazil andthattheyarelikely tocontinue
toso.
28. TheroleofFDIinindustrial andexport diversification comes outclearly inanongoing OECD
study oftheroleofFDIindevelopment. InMalaysia, forexample, foreign investment hasplayed
akeyroleineconomic restructuring, contributing toeconomic development through itscatalytic role
instructural changes thathave turned Malaysia from anagricultural andprimary producer intoa
manufacturing economy. Therelative shares ofagriculture andmanufacturing intheeconomy have
beenreversedsince1960.Thestructuraltransformationisevenmorepronouncedifonelooksatexports.
In1960, twothirds ofMalaysian exports were commodities, primarily rubber andtin,while
manufacturing accounted forunder ninepercent. Bytheearly 1990s, three quarters oftotalexports
were from themanufacturing sector, principally electronic goods.
29. Theexperience ofthese developing countries suggests thatforeign direct investment canplay
apivotal roleindiversifying acountry ’sexports away fromtoonarrow afocus onalimited number
ofexport markets orproducts. Under therightconditions, foreign firms cangreatly expand theexports
ofahostcountry, thushelping tomitigate balance ofpayments pressures. Butexperience shows that
foreign investors willnotnecessarily export fromtheiraffiliates iftheeconomic conditions inthecountry
inwhich theyarelocated arenotconducive tosuchexports atcompetitive prices andwithsufficient
attention toquality.
30. Developing country examples provide strong evidence ofthesynergy between market openness,
growthanddevelopment.ArecentstudycomparestheexperienceofSoutheastAsia(Malaysia,Thailand
andIndonesia) withthatofAfrican countries.13Itidentifies theopening ofmarkets andawelcoming
environment forinternational investment astwokeyfactors explaining thesuccess stories.
IV. THE PERFORMANCE OFFOREIGN AFFILIATES INOECD COUNTRIES
31. Quantifying effects ofFDIonmacroeconomic variables isdifficult because ofthemultitude
ofcyclical andstructural factors which affect these variables independently ofFDI. Itisalsodifficult
toestablish asatisfactory counterfactual: what would havehappened intheabsence oftheforeign
investment? Onewaytominimise thesedifficulties istocompare theperformance offoreign affiliates
inhostcountries withthatoflocalfirms inthesame sector. TheOECD Secretariat has,foranumber
ofyears, monitored foreign affiliate activities inMember countries.
32. Astudy offoreign affiliates found that,while thevastmajority ofdifferences between the
performance offoreign anddomestic firms isattributable todifferences instructure suchassize,sector
12Winston Fritsch andGustavo Franco, Foreign Direct Investment inBrazil: ItsImpact onIndustrial
Restructuring ,OECD Development Centre, Paris, 1991.
13SeeGlobalization andLinkages to2020: Canpoorcountries andpoorpeople prosper inthenewglobal
age?, OECD, Paris, forthcoming .WT/WGTI/W/8
Page16
ofactivity anddegree ofinternationalisation, itisnevertheless trueforthecountries inthestudy that
thepresence offoreign affiliates improves theperformance ofthehosteconomy.14Thestudy found
thatproductivity growth inforeign affiliates waslargely duetoincreased production capacity, while
indomestic firms itwasaccounted formostly bylabour shedding. Foreign affiliates relyformost
oftheirtechnology ontheparent company, although theshare offoreign affiliates inoverall research
anddevelopment (R&D) hastended torisesteadily overtime.
33. InadditiontoprovidingquantifiableestimatesoftheimpactofFDIonhostcountries,theresearch
onforeign affiliate activities alsooffers analternative measure tobalance ofpayments dataforthe
extent towhich inward investment hasbecome more important inindividual hosteconomies. Ongoing
analysis since theOECD study waspublished suggests thefollowing recent trends inthisarea:
- Inthecountries forwhich dataareavailable, theshare offoreign affiliates intotal
manufacturingproductionishigherthaninemployment,asforeigninvestmentisusually
insectorswithhighexposuretocompetitionandwithhighlabourproductivity.Between
1985and1993,foreignaffiliates'shareofproductionandemploymentrosesubstantially
inmost OECD countries.
- InCanada andIreland, foreign affiliates account forover50percentofmanufacturing
production. IntheNetherlands, theshare offoreign affiliates inmanufacturing
production exceeds 30percent; intheUnited Kingdom andFrance itexceeds 20per
cent. Inmostother countries, itisbetween 10and20percent,butitisbelow 3per
centinJapan.
- Between 1985and1993, employee numbers inforeign affiliates inthemanufacturing
sector roseinmostcountries, while those ofnational firms fellsharply. Despite this
trend, labour productivity offoreign affiliates rosemore rapidly thanthatofnational
firms inseveral countries.
- InFrance, Ireland, Japan andtheNetherlands, however, productivity ofnational firms
grewfaster thanthatofforeign affiliates, particularly asaresult ofemployment trends
inthose firms andaffiliates. InIreland andtheNetherlands, employment increased
substantially inforeign affiliates butdeclined innational firms. InFrance, employee
numbers decreased more innational firms thaninforeign affiliates, while inJapan
theyrosemore inforeign affiliates thaninnational firms.
- In1993, theR&D intensity offoreign affiliates intheentire manufacturing sector was
lower oratmostequal totheaverage intensity fortheentire manufacturing industry
inthehostcountries, except inJapan and,toalesser extent, Australia. Thisresult,
which contrasts somewhat withtheperformance offoreign affiliates infields other
thanR&D, confirms theassumption thatthecreation ofaresearch laboratory requires
acritical mass ofactivity thatisdetermined byanumber offactors, suchasthetype
oR&D workortheindustrial sector concerned. Insomesectors where foreign affiliates
playanimportant part,R&D intensity thusexceeds thesector 'saverage intensity a
national level.
- ThecaseofJapan might beexplained bythefactthattheforeign affiliates onitsmarket
areconcentrated insome high-technology sectors (mainly computers, electronics and
chemicals). Between 1990 and1992, itisestimated thattheR&D expenditures of
14ThePerformance ofForeign Affiliates inOECD Countries ,OECD, Paris, 1994.WT/WGTI/W/8
Page17
foreign affiliates rosebyafactor offour, while theirturnover ofnational firms rose
byonly20percentandtheirR&D expenditures were down.
- Insome countries, virtually alltheR&D offoreign affiliates isfinanced bytheaffiliates
themselves (particularly inAustralia andIreland), butinother cases theparent
companies meetasubstantial proportion ofthefunding, especially astheresearch is
often carried outontheirbehalf.
- Thedatadonotidentify therecipients (national firms orforeign affiliates) offunds
from abroad. However, combined withtheshare offoreign affiliates inR&D, they
areindicative. Itisverylikely thatahighproportion offunds supplied from abroad
forindustrial R&D inCanada goestoforeign affiliates, which account forover40per
centofthecountry 'sR&D inthemanufacturing industry. However, theveryhigh
proportion ofR&D funds supplied from abroad inthecaseofGreece (over 27per
cent)would rather suggest thatthese funds gotonational firms, considering thesmall
number offoreign affiliates.
V. THEEFFECTS OFFOREIGN DIRECT INVESTMENT AND TRADE ONEMPLOYMENT
AND INCOME DISTRIBUTION
34. Therelationship between employment andincome distribution (orrelative wages ofdifferent
types oflabour) andglobalization isoneareawhere tradeandinvestment issues aremostclosely related.
Workers inbothOECD andnon-OECD countries sometimes express concern thatincreased imports
fromlower wage countries areharming theirownearnings prospects. Outsourcing bylocalfirms from
theiraffiliates abroad (hence through FDI)plays animportant roleinthisprocess. When afirmshifts
production abroad, itispresumed tohaveadirect effect ondomestic employment inthatsector and
anindirect effect onrelative wages inthehome country through theincreased imports which flow
from affiliates inlower wage locations.
35. Thefirstthing topoint outisthatMNE motives forinvestment abroad aregenerally togain
more effective access tolocalorregional markets inwhich theaffiliate islocated.15Theoutsourcing
ofproduction tosupply thehome country market, totheextent itoccurs, ismore likely toinvolve
production within thegeographical region ofthehome country, suchasthemaquiladora plants of
American andother firms inMexico tosupply theUSmarket ortheproduction bysmall German
manufacturing firms intheCzech Republic tosupply German clients.16
36. Concerning theimpact ofanincrease intrade withlowwage countries, some ofwhich is
intra-firm trade, ontherelative wages ofunskilled workers inthehome orimporting country, economic
theory predicts thatlower skilled workers inthecapital richcountry willfaceadecline intheirrelative
wagesasaresultoftradewithrelativelymorelabourabundantcountries,whilelabourabundantcountries
should seeanincrease intherelative wages ofunskilled workers. Anumber ofstudies, including
15OECD Economic Outlook ,December 1996, p.24.
16“ThePolicy Challenges ofGlobalization andRegionalization ”,Policy Brief n°11;OECD Development
Centre, Paris, 1996; Globalization andRegionalization: TheChallenge forDeveloping Countries, OECD
DevelopmentCentre,Paris,1994;NewFormsofInvestmentinDevelopingCountryIndustries,OECDDevelopment
Centre, Paris, 1989.WT/WGTI/W/8
Page18
some undertaken intheOECD, havesought toestablish whether relative wage shifts haveoccurred
andtheextent towhich trade withlowwage countries hasinfluenced thisphenomenon.17
37. Thedemand forunskilled labour hasshrunk dramatically inOECD countries, resulting ineither
adecline inrelative wages orincreasing unemployment among thissection ofthelabour force. The
OECD JobsStudy andmany similar studies conducted elsewhere havefound thatthisphenomenon
ismore theoutcome oftechnological progress incertain sectors thanitistheresult ofgreater trade
withpoorcountries.18Because greater competition stemming fromglobalization hasprovided aspur
totechnological progress, thedistinction between thetwoeffects maybelessthanthesestudies imply.
Furthermore, because globalization affords higher incomes atanaggregate level, itwillaffect production
andconsumption ineachcountry andhence willhaveindirect income effects onthedemand forlabour,
including forunskilled workers.19
38. Foreign direct investment isoneofthemechanisms bywhich production isshifted tolower
wage countries. Theavailable evidence doesnotpoint toamajor direct impact onjobsandwages
inOECD countries stemming fromthisoutflow todeveloping economies. Some researchers havefound
evidence tosuggest thatdevelopments inrelative labour costsmatter moreforforeign direct investment
amongcountrieswithasimilarlevelofdevelopmentand,inparticular,countrieswithacommonregional
tradingarea.ThisdoesnotexcludethepossibilitythatdelocalisationfromOECDtonon-OECDcountries
insome cases hasbeenundertaken withaviewtoreduce labour costs, butitraises doubts about the
importance ofthatphenomenon inthewider picture.20
39. Toacertain extent, thedebate overdelocalisation misses thepoint about foreign direct
investment. Itassumes thatthere isafixed demand forlabour andhence onceproduction isshifted
abroad itreduces thedemand forlabour athome andcreates unemployment. Instead, FDIisadynamic
process withitsstrongest impact onthetypeofemployment athome andinforeign affiliates. Outward
investment isonewayinwhich afirmremains competitive andhence abletomaintain employment
levels inthehome country -inbothdomestic production andinheadquarters services (management,
research anddevelopment, etc.), while creating newjobsabroad.
40. When afirmshifts production fromthehome country toanother country withlower unitlabour
costs, itisperforming animportant function intheglobal economy. From thefirm’sperspective,
itisknown astheproduct cycle. Forthecountries concerned, itisstructural transformation. This
process would occur evenwithout themultinational enterprise. Outward investment merely facilitates
thisadjustment process. Thebenefits accrue notonlytothefirmbutalsotoboththehome andhost
countries, inspiteofshort termadjustments inthelabour markets which maybeofspecial concern
atatimeofhighunemployment incertain home countries. Indeed, some ofthemost successful
non-OECD economies atattracting investment haveactually encouraged certain, more labour-intensive
17SeeR.E.Baldwin,“Theeffectsoftradeandforeigndirectinvestmentonemploymentandrelativewages”,
OECDEconomicStudies,23,1994;J.-P.Cotis,J.-M.-GermainandA.Quinet,“Technicalprogress,international
trade andlow-skilled labour:, OECD STIReview ,18,1996; R.Z. Lawrence, Single World, Divided Nations?,
OECDDevelopmentCentre,1996;P.Messelin,“Theimpactoftradeandcapitalmovementsonlabour:evidence
ontheFrench case”,OECD Economic Studies ,24,1995.
18Employment Outlook ,OECD, Paris, July1997, Chapter 4.
19These arguments were presented inaspeech byKumiharu Shigehara, Deputy Secretary-General ofthe
OECD, entitled “Globalization, technology andjobs”,inLondon, 4July1997.
20Ibid,p.8-9.WT/WGTI/W/8
Page19
activities totransfer abroad. Thisisparticularly thecaseforcertain EastAsian economies suchas
Singapore.
VI. FOREIGN INVESTMENT AND DOMESTIC COMPETITION
41. TheOECD experience shows thatforeign investment canenhance thelevel ofcompetition
indomestic markets andhence economic efficiency tothebenefit ofthehostcountry. Bybringing
newplayers abletochallenge market positions ofalready established enterprises, foreign greenfield
investments andmergers andacquisitions provide incentives fordomestic enterprises toadjust inorder
toremain competitive. Participation offoreign investors onanational treatment basis inbidsfor
concessions provides aguarantee thatsuchconcessions aregranted onthebestterms andconditions.
Also, thefaculty ofdomestic enterprises toborrow directly fromforeign banks abroad exerts helpful
pressure ondomestic banks toreduce thecostoftheirservices andextend therange ofcredits they
offer; similarly, theopportunity given todomestic enterprises toraisefunds oninternational capital
markets incites stockmarket institutions toimprove thefunctioning andtheattractiveness oflocalcapital
markets.
42. Theremay,however,besituationswhereforeigninvestmentsreducecompetitioninthedomestic
market. Inparticular, iftheinvestment isthrough theacquisition ofadomestic producer byaforeign
firmalready exporting intothatmarket, competition maybereduced through increased concentration.
Thepresence offoreign firms inadomestic market mayalsocomplicate thetaskofthenational
competition authority, particularly ifcartel activity issuspected, asinformation necessary tothe
investigation ofacartel isspread across thejurisdictions ofseveral countries.
43. Thepossibilitythataforeignfirmwouldacquireandthenabuseadominantpositioninadomestic
market isnotareason tohamper FDI. Anti-competitive practice isneither aninherent orexclusive
behaviour offoreign investors. Abuse ofadominant position byanyfirm, foreign ordomestic, can
usually becontrolled bynational competition authorities withthenecessary enforcement powers,
particularly provisions requiring pre-merger notification andprohibiting anti-competitive mergers and
seeking theco-operation ofcompetition authorities inother countries. Removal ofremaining
discriminatory restrictions onentry offoreign firms cangreatly helpthetaskofnational competition
agencies inthisregard, astheentry ofadditional firms isthebestlong-term strategy toprevent the
acquisition ofexcessive market power.
VII. MACROECONOMIC IMPLICATIONS OFFOREIGN INVESTMENT LIBERALIZATION
44. Concerns havesometimes beenexpressed thatforeign investment liberalization mayadversely
affect thebalance ofpayments andmacroeconomic stability. First, thenetcontribution offoreign
investment tothehostcountry ’sbalance ofpayments could become negative overtimeifprofits are
systematicallyrepatriatedabroadratherthanreinvestedlocallyorifforeign-controlledenterprisesdisplay
agreater propensity tosource abroad thandomestic firms. Second, ithasbeennoted that,iftheinflow
ofcapital becomes verylarge, itmaycomplicate theconduct ofmonetary andexchange ratepolicies
andinparticular theimplementation ofmacroeconomic stabilisation programmes: largecapital inflows
mayputupward pressure ontherealexchange rate. Depending onthemonetary policy setting, this
would betheresult ofeither nominal exchange rateappreciation orhigher inflation. Inbothcases,
thecurrent account deficit islikely todeteriorate –sometimes leading todeficits thatarelarger than
desirable. Finally, ithasbeenpointed outthatexcessive reliance onexternal financing maymake the
economy, itsbanking sector inparticular, vulnerable tosudden reversals infinancial market conditions
abroad andinforeign investors ’sentiment. These concerns areaddressed separately below.WT/WGTI/W/8
Page20
FDIandthebalance ofpayments
45. Foranygiven investment project, repatriated profits oncetheaffiliate isprofitable mayexceed
initial inflows ofequity capital inthelongrun.Theinvestment willusually besustained bytheretained
earnings oftheaffiliate. Based onthisnotion oftheinvestment cycle ofaforeign investment project,
ithasbeenargued thatFDImayleadtoadeterioration inthebalance ofpayments position ofthehost
country overtime. Suchreasoning isflawed forseveral reasons. First, FDIalsoaffects thebalance
ofpayments through thetrade account, withnetexports from theaffiliate potentially offsetting net
capital outflows. Intheshortterm, aninvestment islikely tobeaccompanied byanincrease inimports
ofcapital goods fromthehome country astheinvestor establishes aproduction facility. Inthelonger
term, however, theinvestor islikely tobegin toexport fromthehostcountry, provided hostcountry
policies aresuchthattheaffiliate isabletocompete withproducers elsewhere. Theneteffect onthe
balance ofpayments from these offsetting current andcapital account flows isdifficult todetermine
apriori .
46. Second, theexperience ofanindividual investment project isnotthefullstory. Foreign direct
investment isacontinuous process: assome older investors begin torepatriate profits, newarrivals
injectadditionalequitycapitalintothehosteconomyandexistinginvestorsexpandtheirpresencethrough
retained earnings. Bothforms ofinvestment arerecorded ascapital inflows inthebalance ofpayments.21
Third, more important thantheactual direct effect ofinward investment onthebalance ofpayments
isthelongterm indirect benefit derived from transfer oftechnology andknow-how todomestic
producers. These transfers improve theoverall ability ofthehostcountry toexport andhence allow
theeconomy tosustain greater inflows offoreign capital overtime. Tofocus onlyonthedirect impact
onthebalance ofpayments ofindividual investments misses theseimportant indirect gains tobederived
from inward investment.
FDIandmacroeconomic performance
47. Theconcerns raised above withrespect toprivate capital flows intodeveloping countries have
received much attention recently, especially given theturmoil inSoutheast Asian financial markets.
Before discussing therolewhich FDImight playinmacroeconomic stability, thereareseveral general
points which needtobemade. First, greater international capital mobility improves global resource
allocation bydirecting world savings toitsmostproductive uses,allows recipient countries tomaintain
stable levels ofinvestment andconsumption inspiteoffluctuations intheirincome, andsends important
signals tohostcountries concerning thesustainability oftheirpolicies. With appropriate economic
policies which donotdistort theflowofcapital intoparticular areas, these inflows allow thehost
economy tosustain higher growth ratesthanwould otherwise havebeenpossible.22Second, domestic
investors maycontribute moretocapital flight thanforeign oneswhen economic conditions deteriorate.23
21Under thebalance ofpayments accounting identity which states thatthecurrent account balance must
beequaltothedifferencebetweensavingsandinvestment,FDIcanincreasecapitalformationorprovideadditional
financing forthebalance ofpayments butcannot perform bothfunctions simultaneously.
22Estimates suggest thatoverall theannual gains arising from themobility ofinternational capital areon
theaverage oftheorder ofatleast1percentage point ofGDP, andpossibly larger .See“Regulatory Reform
intheFinancial Services Industry: Where have webeen? Where arewegoing? ”,inFinancial Market Trends ,
No.67, June 1997.
23JeffreyFrankelandSergioSchmukler(1996),“CountryfunddiscountsandtheMexicancrisisofDecemb er
1994:Didlocalresidentsturnpessimisticbeforeinternationalinvestors?”InternationalFinanceDiscussionPapers,
Board ofGovernors oftheFederal Reserve System, Washington.WT/WGTI/W/8
Page21
Third, capital controls impose acostonthedomestic economy through theinefficiencies which they
engender.24TheOECD experience withcapital movements liberalization ispresented inBox4.
48. Foreign direct investment mayappear asjustanother formofprivate capital flowinthebalance
ofpayments, butitdiffers inimportant waysfromother forms ofinvestment, andthishasimplications
fortheissues discussed above. Evidence suggests thatFDIislesslikely toraisesuchproblems than
other types ofcapital inflows. Direct investment involves much more stable andgenerally smaller
amounts ofcapital thanportfolio investment andcredits. Because thetransaction costs, andtherefore
therisks involved, areconsiderably higher when aninvestor establishes anenterprise compared to
thepurchase ofshort-term Treasury billsforexample, greenfield direct investments represent long-term,
carefully selected investment projects which cannot beliquidated atshort notice. Furthermore, direct
investment mostoftentakestheformofequity capital, which, asopposed todebtcreating instruments,
imposes noobligations onthedebtor tomake fixed interest payments andtoreimburse theprincipal
atadetermined date; aforeign investor maybeunable orunwilling toliquidate hisshares unless he
canfindacounterpart willing tobuythem atthedesired price. Finally andperhaps even more
importantly, intheabsence ofperfectly fluidfinancial markets andsubstitutable financing instruments,
direct investment canbeexpected tocontribute tothefinancing ofproductive investment inahigher
proportion overall thanportfolio investment andcredits, thereby enhancing thehostcountry ’scapacity
toassure theservice ofitsdebtthrough increased exports atalaterstage.
Box4.TheOECD experience withtheliberalization ofcapital movements
When confronted with“capital inflow ”problems, anumber ofOECD countries were, inthepast,inclined toresort torestrictions
onforeign investment. Such restrictions generally didnotapply toforeign direct investment, however. Furthermore, OECD countries
progressively dismantled theircapital controls asinternational integration offinancial markets anddomestic financial reforms progressed,
moreefficientindirectmonetarypolicyinstrumentsweredeveloped,moreflexibleexchangeratearrangementswereadoptedandmacroeconomic
polices conducive tolong-term price stability were given priority.
Inretrospect, theOECD experience hasshown thatcapital controls create important inefficiencies, often become ineffective
inthelonger runandcannot substitute forconsistent macroeconomic policies andnecessary structural andinstitutional reforms. Onthe
contrary, capital controls maygivetheauthorities afalsesense ofsecurity anddistract themfromtheiressential taskofmaintaining sound
fiscal andmonetary policies andarealistic exchange rateandofpursuing reforms overthemedium term. Capital controls should beconceived
atbestastransitory measures tobuytimetotakemore fundamental adjustment policy measures inorder toredress thesituation.
Indeed, while foreign investors andinternational markets havesometimes tended to“over-react ”toevents, creating interference
withotherwise desirable policies, difficulties arising from capital inflows inOECD countries mostoften were associated withsituations
where foreign investment hadbeenattracted primarily bytheprospects ofhighshort-term interest ratedifferentials inacontext offiscal
slippage, misaligned exchange ratetargets andtightmonetary policy. Suchmacroeconomic configurations wereunlikely tobesustainable,
andforeign investment wasaccordingly unlikely torepresent along-term commitment onthepartofforeign investors. Alsoa“too”large
share ofshort-term investment commitments intotalcapital inflows often reflects alegitimate reluctance oftraditionally risk-averse foreign
investors, suchaspension funds andinsurance companies, totakelong-term, lessliquid assetpositions. Thisisespecially thecasewith
respect tohostcountries where property rights remain uncertain duetoaccounting andbankruptcy lawdeficiencies orwhere thestock
market isnotfunctioning properly. Attention should alsobegiven tothefactthatforeign investors ’focus onshort-term investment may
sometimes reflect alackofopportunities forlonger-term, direct investment duetorestrictions aimed atprotecting national ownership.
Theexperience ofOECD countries hasshown thatthefullmacroeconomic benefits offoreign investment, including FDI,
canbestberealised ifsustainable andcredible macroeconomic policies arealready inplace, orareputinplace asrapidly aspossible.
Awell-supervised andefficient financial sector isalsoimportant because thissector mayhavetoabsorb capital inflows andoutflows as
wellasrapid andlarge changes infinancial market prices, suchasexchange ratesandinterest rates. Economic flexibility more generally
isalsohelpful inthecontext ofliberalized financial markets, asthebenefits ofsuchliberalization canbelimited ifproduct andlabour markets
failtoadjust smoothly tochanging economic conditions. Theavailability ofhighquality andtimely information isalsoimportant toimprove
investor decision making andtobolster confidence ingovernment policy making.
24SeeOECD (1993), Exchange Control Policy ,Centre forCo-operation with European Economies in
Transition.WT/WGTI/W/8
Page22
OECD Documents andPublications onTrade andInvestment
1. General
OECD Economic Outlook ,JuneandDecember (1996-97)
“EmergingMarketsandtheLiberalizationofCapitalMovements”,inOECDEconomicOutlook,No.58,
December 1995.
2. Foreign Direct Investment Policies, Trends andStatistics
Special Feature onRecent Trends inForeign Direct Investment, Financial Market Trends
(June issue, 1994-97)
International Direct Investment Statistics Yearbook (1996)
OECD Benchmark Definition ofForeign Direct Investment :Third Edition (1996)
“Theeffectsoftradeandforeigndirectinvestmentonemploymentandrelativewages”,OECDEconomic
Studies ,23(1994)
Exchange Control Policy ,Centre forCo-operation withEuropean Economies inTransition (1993)
International Direct Investment -Policies andTrends inthe1980s (1992)
Foreign Direct Investment andIndustrialization inMalaysia, Singapore, Taiwan andThailand ,OECD
Development Centre, Paris (1991)
Foreign Direct Investment inBrazil: ItsImpact onIndustrial Restructuring ,OECDDevelopmentCentre,
Paris (1991)
“Thelinks between foreign direct investment andtrade: empirical evidence forUSandFrench
industries ”,STIWorking Papers ,OECD, Paris (forthcoming )
3. Foreign Direct Investment Reviews
Argentina (1997), Denmark (1995), Finland (1995), France (1996), Greece (1994), Ireland (1994),
Italy(1994),NewZealand(1993),Norway(1995),Portugal(1994),Sweden(1993),Switzerland(1996),
United States (1995), Chile (1997), Brazil (forthcoming)
4. Trade andInvestment
Employment Outlook ,OECD, Paris, (July, 1997)
Market Access AftertheUruguay Round, Investment, Competition andTechnology Perspectives (1996)
Single World, Divided Nations?, OECD Development Centre (1996)
Trade, Employment andLabour Standards (1996)
Trade andInvestment Interface (1996) (available ontheInternet)
“Technical progress, international trade andlow-skilled labour ”,OECD STIReview ,18(1996)
“Globalization, Trade andCompetition ”(Article inTheOECD Observer No.201ofAugust-September)
“EmergingMarketsandtheLiberalizationofCapitalMovements”,inOECDEconomicOutlook,No.58
(December, 1995)
“Theimpact oftradeandcapital movements onlabour: evidence ontheFrench case”,OECD Economic
Studies ,24(1995)
NewDimensions ofMarket Access inaGlobalizing World Economy (1995)
Foreign Direct Investment, Trade andEmployment (1995)
“Pension fundinvestment: fromageing toemerging markets ”,Policy BriefNo.9,OECD Development
Centre (1994)
Trade andInvestment: Transplants (1994)
Investment andtheFinal ActoftheUruguay Round: APreliminary Stocktaking (1994) (available on
theInternet)WT/WGTI/W/8
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ThePerformance ofForeign Affiliates inOECD Countries (1994)
NewForms ofInvestment inDeveloping Country Industries ,OECD Development Centre (1989)
5. Globalization
Globalization ofIndustry: Overview andSector Reports (1996)
Globalization andSmall andMedium Enterprises (SMEs) (1996)
“ThePolicy Challenges ofGlobalization andRegionalization ”,Policy Brief No.11(1996) TheJobs
Study (1995)
Private Sector Development: AGuide toDonor Support (1995)
Support ofPrivate Sector Development (1995)
GlobalizationandRegionalization:TheChallengeforDevelopingCountries,OECDDevelopmentCentre
(1994)
Economic Globalization andtheEnvironment (forthcoming )
Towards aNew Global Age: Challenges andOpportunities ,Analytical Report, OECD, Paris
(forthcoming ).
Globalization andLinkages to2020: Canpoorcountries andpoorpeople prosper inthenewglobal
age?, OECD, Paris (forthcoming)
“Globalization, Trade andCompetition ”(Article inTheOECD Observer No.201ofAugust-September)
“Globalization,technologyandjobs”,speechbyOECDDeputySecretary-GeneralShigehara,inLondon,
4July1997.
6. Investment Guides
Belarus (1994), Bulgaria (1996), Estonia (1996), Russian Federation (1996), Ukraine (1993 -tobe
updated ),Uzbekistan (1996)
(GuidesareinpreparationonLatvia,Lithuania,theFormerYugoslavRepublicofMacedonia,Mongolia,
Ukraine andKazakhstan)
7. Development issues
PrivatizationinDevelopingCountries:ReflectionsonaPanacea,PolicyBriefNo.3,OECDDevelopment
Centre, Paris, 1992.
Foreign Direct Investment andIndustrialization inMalaysia, Singapore, Taiwan andThailand ,OECD
Development Centre, Paris, 1991.
Foreign Direct Investment inBrazil: ItsImpact onIndustrial Restructuring ,OECDDevelopmentCentre,
Paris, 1991.
“ThePolicy Challenges ofGlobalization andRegionalization ”,Policy Briefn°11;OECD Development
Centre, Paris, 1996
GlobalizationandRegionalization:TheChallengeforDevelopingCountries,OECDDevelopmentCentre,
Paris, 1994
NewForms ofInvestment inDeveloping Country Industries ,OECD Development Centre, Paris, 1989.WT/WGTI/W/8
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ANNEX 1
GLOBALIZATION OFINDUSTRY: CONCLUSIONS OFSECTORAL STUDIES
I. PHARMACEUTICALS
49. Globalization inthepharmaceutical industry isseeninthebroad geographical distribution of
finalproduction andmarketing, highlevels offoreign penetration ofnational markets andintra-firm
trade. However, international tradeincluding thesourcing ofintermediate inputs isappreciably lower
thaninmany other industries. Theextent ofglobalization hasincreased considerably asaresult of
cross-borderacquisitionsandmergersandcollaborativealliancesinR&Dandmarketing.Pharmaceutical
products areessentially "universal" intheircomposition anduse,butmarkets arehighly segmented
because ofnational health andprice regulations andtheincidence ofparticular diseases andtraditions
ofmedical practice which leadstodecentralised finalproduction, certification andmarketing functions.
Thereisadistinctivemulti-countryformofglobalizationcharacterisedbyextensiveproduction,finishing,
packaging andmarketing incountries offinalsale,butwithR&D stilllargely centralised inthehome
country.
50. Thelarge European andUSresearch-based firms which leadtheindustry andoperate inall
majorworldmarketssharplyincreasedtheirforeigninvestmentactivitiesinthelate1980sandmid-1990s.
Alarge share ofthisinvestment intheUnited States andEurope hasbeenmergers andacquisitions.
Between 20and60percentofsalesinmajor OECD countries come from foreign-controlled firms,
andtheshare isevenhigher insome smaller OECD countries anddeveloping countries. Sales of
foreign-controlled firms inmajor markets arenowtwotofivetimes greater thanimports. InJapan
compared withother industries, thelevelofforeign investment isexceptionally high(20percentof
salescomes fromforeign-controlled firms), whereas Japanese firms havesmall shares ofother OECD
markets.
51. Pharmaceuticals R&D stillremains highly centralised inthehome country, butgrowing
cross-border consolidation andcollaboration (mergers, acquisitions, jointventures, strategic alliances)
arehelping firms toshare risks andcosts inproduct development, joining large firms withsmall
biotechnology firms, andexpanding markets torecoup R&D costs. Newinternational collaboration
agreements, directed mainly toproduct development andmarketing, increased inthelate1980s atthe
same timeasforeign investment. TheUnited States istheoverwhelming focus ofinternational
agreements between large pharmaceutical andsmall biotechnology firms.
52. International tradeisnotasimportant asinmany other industries, reflecting themulti-country
pattern ofglobalization, highpenetration offoreign firms, andthenecessity toproduce finished products
infinalmarkets. Intermediates make upafairly highshare ofpharmaceutical trade (40percent), as
international firms shipactive ingredients forformulation infinalmarkets, butoverall theratioof
imported todomestic sourcing isstilllower thanformany other industries, reflecting strategies and
requirements toproduce locally. Detailed dataforUnited States trade inpharmaceuticals between
affiliates andparent firms (intra-firm trade) shows thatitaccounts foraconsiderably higher share of
trade thantheaverage forallmanufacturing industries asfirms haveadopted strategies tointernalize
theirglobal operations asmuch aspossible. Theshare ofintra-firm trade doesnotseem tohave
increased.
53. World production andtradeareconcentrated geographically inOECD countries. In1993-94,
thefivelargest countries accounted forover65percentofworld markets, closeto60percentofexports
and40percentofimports. Developing countries tookadeclining share around one-fifth ofimports
andsmaller shares ofproduction and,particularly, exports. Incontrast, theindustry isnothighlyWT/WGTI/W/8
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concentrated atfirmlevel. In1995, onlythethreelargest firms hadmore than4percentoftheworld
market; nonehad20percentofanymajor national market. However, theleading positions ofthe
largest firms areclearly established. Thetop10firms in1995 were allinthetop20fifteen years
earlier, global concentration hasclimbed recently andthe20largest firms nowtakeone-half ofworld
sales.
54. Regulations specific tothepharmaceutical industry arethemostimportant policy areaaffecting
theindustry andacting asbarriers totrade. Forhealth andsafety reasons national administrations
control admission ofnewdrugs todomestic markets through complex regulations relating tostandards,
certification, packaging andlabelling. However considerable progress hasbeenmade oninternational
harmonisation ofregulations andstandards toeaseandsimplify certification andacceptance which
mayhelpfoster efficiency indrugdiscovery anddevelopment.
55. Industry policy andresearch policy playprimarily apromotional roleintheindustry. This
rangesfromsubstantialgovernmentfundingofgeneralinstitutionalbiomedicalresearchanddevelopment
oftherapeutics, topromotion ofconsortia forbiotechnology R&D, andincentives toassist "start-ups"
ofnewfirms. Forforeign investment, theindustry issubject tothegeneral regulatory framework
ofOECD countries withfewifanyimpediments specific topharmaceuticals. Insome countries there
havebeenspecific inward investment promotion programmes forforeign firms toestablish orexpand
operations.
56. Patent protection playsakeyroleintheindustry, andmuch attention hasbeenpaidtooptimizing
thebalance between providing adequate protection fornewproducts andencouraging theirwidespread
use. Competition policy hasfocused ontheimpacts ofpatents andlicences, attempting toprovide
incentives forinventors while ensuring reasonable prices forconsumers. Anareaofchange in
competition policy hasbeeninthegrowing acceptance ofinter-firm collaboration inR&D andgradual
expansion ofthese agreements toallow jointexploitation ofresults.
57. Three current trends arehaving major impacts ontheindustry. First, government
cost-containment programmes inhealth-care havebecome increasingly important withgreater attention
focused ongeneric products, monopoly-pricing, andpriceformation. Cost-containment hasencouraged
firms tosetupinternational jointventures toshare R&D andmarketing costs, andtoenter generic
andover-the-counter markets through acquisitions andalliances. Second, withtherising costs of
developing newproducts, R&D willbecome moreinternationalised asfirms drawonexternal resources
inseveral countries (e.g.inbiotechnology andtheresearch infrastructure) tostrengthen theirproduct
portfolios. Finally, growing liberalization andimproving prospects forforeign investment inEastAsia
andLatin America isexpected tosignificantly enlarge themarket forpharmaceuticals. Thiscould
expand thescope ofglobalization intheindustry andreduce itspresent concentration intheOECD
area.
II. COMPUTERS
58. Thecomputer industry ishighly globalized. Ithasrelatively highlevels ofinternational
investment inproduction, international sourcing ofpartsandcomponents andperipheral equipment,
intra-firm trade, andinternational collaboration agreements. Theindustry isverytrade-intensive.
Thecomputer industry isamong themost active ofallhigh-technology industries inthese areas.
59. Firms inthecomputer industry havetended togrow organically, through exploitation oftheir
technological advantages, rather thanthrough mergers andacquisitions. Thishasbeenduetothenature
oftheindustry, dominated foraverylongperiod byonelarge USfirm(IBM), andmore recently due
totheincreasing importance ofestablished Japanese computer firms. Thishasbeenthepattern sinceWT/WGTI/W/8
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the1950s, when large electrical engineering firms inEurope andJapan, andtoacertain extent the
US,moved intothecomputer industry.
60. Thepattern ofglobalization haschanged recently asthestructure oftheindustry hasmoved
from being dominated bytheestablished firms supplying large systems andcompeting ontechnical
grounds withproprietary systems, towards newentrants supplying small systems andcomputers for
individual usecompeting onthebasis ofefficient manufacturing andmarketing andusing open or
common systems.
61. Theindustry hasalsoseentheadvent ofmany newentrants intospecialised areas ofcomputing
(technical work stations, super-computers, services), andtheindustry isincreasingly using external
sourcesofpartsandcomponentsandsoftwarefromspecialisedsuppliers.Dominantfirmsintheindustry
nowsupply microprocessors (Intel) andsoftware (Microsoft) foruseinhardware frommany different
suppliers, rather thanthetraditional hardware suppliers. Theearly andrapid development ofnew
companies toexploit successive waves oftechnological change, from main-frame computers to
mini-computers, topersonal computers, tosmaller portable machines, hasoccurred particularly inthe
United States. With declining component costs andtheincreasing emphasis ondispersed networks
ofstandard units, computers arebecoming more user-friendly andaccessible products, marketed to
individual customers. Inthisnewenvironment, marketing andcompetition withconsumer-oriented
electronics firms willbecome increasingly important ifhistorical distinctions between thecomputing,
telecommunications andbroadcasting industries continue todisappear.
62. Theindustry isveryR&D-intensive (thesecond orthird-highest among major industries after
aerospace), with60percentoftheworld 'sR&D carried outintheUnited States, one-quarter ofthe
totalinJapan, andasmaller share inEurope. R&D remains highly centralised inthehome country
ofparent firms (predominantly USandJapanese), butlargefirms intheindustry havebeenveryactive
inestablishing collaboration agreements fordevelopment. These havebeencentred around USfirms,
andtheindustry continued setting upnewagreements through theearly 1990s, incontrast tomany
other industries.
63. Theindustry ishighly concentrated inOECD countries, withcloseto80percentofproduction
and90percentofworld consumption inOECD countries. ThetopfiveOECD producing countries
produce twothirds oftheworld totalandconsume close tothree quarters ofthetotal, andaccount
forclose to60percentofexports and55percentofimports. TheDynamic Asian Economies have
rapidly become important suppliers, particularly ofperipherals andparts andcomponents which are
exported toOECD countries. Singapore isthethird largest world producer andexporter, andthe
dynamic Asian Economies (DAEs: Korea, Chinese Taipei, Hong Kong, Singapore, Thailand, Malaysia)
togetherproduce20percentoftheworldtotal,andexportonequarter.Theindustryisalsoconcentrated
atfirmlevel. Thetopfirmhasclose toonefifthoftheworld market, although thisshare hasdeclined
from aquarter in5years, andthetop5firms havealmost 40percent.
64. Trade isinter-regional rather thanintra-regional inthisindustry, withtheexception ofEuropean
trade. BothEastAsiaandNorth America trademuch more outside oftheirregion thanwithin it,with
exports from EastAsia(including Japan) being particularly oriented tomarkets outside theregion.
Theshare ofintra-regional computer exports forallthree major regions didnotchange significantly
inthe1980s through to1993. Ontheother hand, theshare ofintra-regional imports intotalimports
decreased greatly forNorth America andslightly forEurope. Intra-regional imports increased greatly
forEastAsia, duetotheemergence ofEastAsian countries asmajor exporters andthegrowth of
sourcing networks around EastAsia.
65. Two-thirds ofUStrade incomputers andother office equipment wasintra-firm trade (IFT),
which wasconsiderably higher thantheaverage share ofIFTformanufacturing industries which wasWT/WGTI/W/8
Page27
alittleoverathird. Thisshare increased sharply inthe1980s, duetotheestablishment ofUSfirms
inEastAsiaandofEastAsian firms intheUS.Intra-industry trade (IIT)indices havealsoincreased
sharply forUStrade incomputers, asUStrade inthatsector became more balanced. IITindices for
Europe aregenerally highduetotheimportance ofintra-European trade. They arehowever, quite
lowforJapan andother EastAsian countries, duetotheirlarge trade surplus.
66. Animportant areaforgovernment policy hasbeenintheareaofR&D support. Theimportance
ofcomputers fordefence andtheirkeyroleintheinformation infrastructure hasmeant thatgovernments
haveprovided extensive support tocomputer development andtheinformation technology industry.
Intellectual property rights playanimportant roleinproviding protection toinnovators while ensuring
rapid diffusion. Newapproaches havebeendeveloped toextend copyright protection tosoftware,
butprotection andenforcement isstillnotuniform orcertain, andthere stilliswidespread copying
andcounterfeiting.
67. Thecomputer industry hasahighleveloftradeintensity. Eventhough theindustry isperceived
tohavestrategic importance, governments havebeenreluctant toapply trade restrictive measures due
tothestrong linkages withother industries. Tariffs arerelatively lowandthere arefewquantitative
restrictions. Trade friction exists however, asthere areperceived problems ofmarket access, some
ofthem addressed bybilateral initiatives. Trade friction hasarisen from theintroduction ofaseries
ofanti-dumping duties, generally focused onperipherals andparts andcomponents from Japan and
other EastAsian suppliers. Thecomputer industry wasuntilrecently theobject ofextensive export
restrictions, mainly forsecurity reasons.
68. Three current trends willre-shape theglobal operations oftheindustry. First, theshifttowards
"commoditization" ofcomputers, duetoveryrapid declines inhardware prices islikely tocontinue,
anddomestic andindividual usestoexpand. Thiswillfavour efficient international production and
sourcing ofpartsandcomponents andperipherals inDynamic Asian Economies andinduce production
andexports fromother industrializing countries suchasChina, India, andBrazil. Second, thesoftware
andcomputer-related services industry islikely toremain thecompetitive advantage ofOECD countries
andofafewrapidly developing Asian countries which havehighly-skilled engineers andatechnically
trained work-force, geographically close tofinalconsumers andusers ofthese services. Finally, the
highresearch-intensity oftheindustry suggests thatinternational alliances andconsortia arelikely to
become more important, particularly between computer firms, component producers andsoftware
firms, particularly ifnewmarkets develop duetotheconvergence ofcomputing, telecommunications
andbroadcasting.
III. AUTOMOBILES
69. Globalization intheautomobile industry ischaracterised by:
- concentration ofproduction, consumption andtrade within themajor OECD regions
(inter-regional trade haslargely beenJapanese exports tothese regions);
- theincreasinglyimportantroleofforeignsubsidiariesandFDI,linkingfirmsbothwithin
regions andbetween regions, reinforced byaveryhighlevel ofintra-firm trade
(available datashow thisparticularly between theUnited States andCanada);
- industrial organization which relies onincreased networking andalliances -within
nations andregions butalsobetween regions. Thisisrelated togrowing external and
international sourcing ofcomponents, aswellasofR&D anddesign.
70. Although theautomobile canbeconsidered a"global" product, theregionalization ofproduction
andtradeinthisindustry corresponds tothecompetitive needtorespond toconsumer tastes, toconformWT/WGTI/W/8
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withdifferent government regulations andtoprovide highquality marketing andaftersalesservice.
While notallcountries ormanufacturers participate tothesameextent inthisregionalization, thethree
main OECD markets (Western Europe, North America andJapan) together account forover80per
centofworld salesofpassenger vehicles and90percentofworld automobile trade.
71. Recent developments intechnology andproduction techniques havecontributed significantly
tothepattern ofglobalization. Newproduction andorganizational methods havebeenintroduced,
suchas"lean production" and"just-in-time" delivery, sothatcompetitiveness isincreasingly based
onrapid adaptation andflexibility. Toachieve this,interrelated strategies havebeenadopted involving
"doing everything inoneplace", coupled withincreasing externalisation ofcomponent andservice
inputs.
72. Such strategies suggest thatthetrend toward international sourcing could belimited bythe
proximity requirements ofjust-in-time, andinputs requiring development andcustomization willbe
locally orregionally sourced. Many major parts andcomponents producers arerelocating activities
closer tofinalassemblers, asshown inrelative increases inintra-regional exports ofcomponents,
encouraged bygovernment policies toincrease totalvalue added andlocalcontent inthehostcountry.
However therearelimits toexternalisation, partly because itmaybemore efficient tomaintain control
ofkeycomponents inside assembly firms, andalsobecause the"Toyotist" model ofleanandefficient
production isbased onverytightlinks(quasi-integration) between component supply andassembly.
73. Duringthelastdecade,newgreen-fieldinvestment,acquisitionsofsmaller,specialistautomobile
firms, formation ofminority shareholdings andjoint-ventures haveallbeenpartofglobal strategies
which have improved therelative position ofmajor assemblers. There hasalsobeen extensive
restructuring ofthefragmented component industry asfirms re-organised tohavegreater presence
ineachofthethree major producing areas. However, thestrategic directions offirms fromeachpart
oftheTriad varyconsiderably. Japanese producers haveentered US,European andAsian markets
through newinternational investment, while USandEuropean producers havebuiltonestablished
positions inEurope andLatin America andselectively entered newmarkets inEastern Europe and
Asia. Direct green-field investment plays averyimportant roleintheindustry, butglobalization
strategies havefavoured formation ofcomplex networks ofequity holdings, rather thanextensive
acquisitions bymajor assemblers.
74. Most largeautomobile companies manufacture orareplanning tomanufacture inmajor foreign
markets, andthistrend isincreasing. International expansion ispromoted bygovernment policies,
butpolicies topromote thenational interest areincreasingly complex duetoglobalization. While such
policies traditionally sought tohelp"national" firms strengthen theirinternational competitiveness and
ensure thatforeign firms didnothaveunimpeded access todomestic markets, policies areincreasingly
aiming atimproving linkages between foreign-owned anddomestic firms andincreasing localinputs
intoforeign-owned production.
75. Tradepolicieshavebeenasignificantinstrumentofgovernmentpolicyintheautomobileindustry.
Voluntary restrictions andother nontariff measures havebeenparticularly prominent. Thisispartly
explained byincreased international competition, over-supply andtensions indomestic markets. In
additiontoeconomicandtechnologicalfactorswhicharethemainforcesdrivingglobalization,relocation
offinalassembly andproduction ofpartsandcomponents tothemarket offinalsalesmaybeencouraged
bytrade-related government policies, forexample informal orformal understandings oragreements
onlocalcontent (minimum levels oflocalvalue added forlocalproduction).
76. Government policies toattract foreign direct investment alsohaveanimpact onthelocation
ofassembly. Many countries havebeenexamining ways ofimproving thelinkages between small
local component suppliers andlarge assemblers andenhancing theinternational competitiveness ofWT/WGTI/W/8
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suppliers. Other government policies, including environmental regulations andstandards toachieve
environmental objectives arealsobecoming moreprominent. Inresponse tosuchregulations, numerous
consortia, some involving government support, havebeenformed tocarry outR&D toachieve these
objectives. These regulations mayaffect business decisions regarding thesiteofproduction.
77. Finally, despite theconcentration ofautomobile production andtrade within theOECD area,
production ofautomobiles andparts hasgrown rapidly insome non-OECD countries (some DAEs
andChina). Exports from some ofthem havegrown rapidly, suggesting thatthese countries have
developedcomparativeadvantage,makinguseofforeigncapital,moderntechnologyandcommunications.
Through specialisation, investment andtrade, theyareplaying agreater roleinglobalization ofthe
industry.Othercountriesmayemergeascompetitiveproducers,drivenbydomesticdemand,geographic
proximity tomajor markets, andeconomic factors including skilled labour, appropriate infrastructure
andtheability toabsorb foreign investment.
IV. CONSUMER ELECTRONICS
78. Theconsumer electronics industry mainly produces massconsumption audio andvideo products
which require arelatively lowdegree ofcustomization. Theindustry isdominated byafewcompanies
which produce andmarket globally, andengage inworld-wide rivalry. Thepatterns ofglobalization
canbewelltraced byobserving thestrategies oftheglobal leaders. With theexception ofPhillips,
which haspursued aninternational strategy veryearlyoninitshistory, allthemajor competitors have
donesoonlymore recently. Twoprincipal driving forces seem tohavecharacterised theprocess of
global siting ofproduction, although inopposing geographical directions. Ontheonehand, the
economics ofproduction hasencouraged thedispersal ofmanufacturing activities insearch ofefficiency
maximisation. Ontheother hand, growing tradecompetition hasengendered some strong protectionist
pressures which haveinduced therelocation ofsome manufacturing operations, above allfrom Asia
toEurope andNorth America.
79. Theindustry ishighly scale intensive, withrapidly decreasing unitproduction costs. Sales
areingeneral veryprice-sensitive andglobal companies areconstantly vying formarket shares inorder
tominimise costsandensure profitability. Thisimplies thattheyarefiercely competing inallthethree
major markets -Europe, North America andAsia. Barriers tomarket access, including structural
ones, mayhaveasignificant impact oncompanies strategies andperformances.
80. Theconsumerelectronicsindustryisofvitalimportanceasatechnologydriverfortheelectronics
industry aswellasfortheeconomy asawhole, contributing bothtoinnovation andthedevelopment
ofcommercial applications. Inthislightthedominant world position acquired byJapanese companies
hasledother countries tomake significant useoftrade policy measures. Thelatter havegenerally
provedineffectiveatatimewhencompetitionbetweenleadingcompanieswasshiftingfrombeingmainly
international trade-based tobeing global inproduction andmarketing strategies.
81. International tradehascontinued togrow, butithasbecome more concentrated within thethree
mainregions noted above, asaresult offoreign investments. Andithasbeenpartly replaced bylocal
production-cum-international sourcing, withtheeffect ofsubstituting some trade inend-products for
tradeincomponents, which isshowing arising trend. Inparticular therelative decline ofinterregional
trade inconsumer electronics products, especially fromEastAsiaandJapan toward bothEurope and
North America, isinlarge measure attributable totheparallel increase ininvestment flows andthe
establishment ofregional production operations.
82. Consumerelectronicsproductstendtoincorporateanincreasingnumberofhigh-techcomponents,
suchasmicroprocessors, memory devices andother forms ofdigital circuitry. Consumer electronics
companies areoften vertically integrated manufacturers, which design, produce andsellanumber ofWT/WGTI/W/8
Page30
electronic components. Consumer electronics maythusbeconsidered aquiteR&D andcapital intensive
industry, above allatthehighendofthemarket. Automation hasbeenspreading andhasledto
substantial productivity gains.
83. Therising costs ofproduct development andofcapacity building haveincreased thebarriers
toentry intheindustry. These trends havecontributed togrowth inthenumber andimportance of
international collaboration agreements, adding anewdimension totheleading firms'global strategies.
They allow companies toshare thecostsandtherisksofpursuing expensive research anddevelopment
(R&D) programmes andreduce product lines, thusensuring ahighdegree ofcompetitiveness by
concentrating ontheircorecompetencies.
84. Intheconsumer electronics industry themain players consider theworld astheirreference
market andhavedeveloped verysophisticated global strategies aimed attaking advantage ofthebest
production andtechnological opportunities available globally interms oflocations andofinter-firm
collaboration. But,ontheother hand, theirstrategies remain quiteconstrained andstrongly influenced
byfactors suchasthemacroeconomic environment, including inparticular relative exchange rates,
andpublic policies, especially trade andtechnology policies.
V. NON-FERROUS METALS
85. Thenon-ferrous metals industry haslongbeenanindustry withcharacteristics which could
justify itbeing termed "globalized". These included:
- thewidegeographic distribution oforedeposits;
- alarge partofoutput entering international trade;
- recourse toforeign investment todevelop bothmining andmetals activities, through
transfer ofcapital andtechnology.
86. Thelargemetalsfirms'strategiesgenerallyconsistedofensuringsourcesoforesandconcentrates
fortheirsmelters/refineries through integration ofoperations upstream.
87. The1970s and1980s represented awatershed intheindustrial organization ofthissector.
Today, iftheabove threefactors remain important, thenature oftheindustry 'sglobalization hasshifted:
- theintegrated nature ofthemajor companies hasloosened intheupstream direction,
withtheriseofdeveloping country producers andother independents inmining;
- smelting andrefining operations haveshifted toanumber ofchoice sitesknown for
thelowcosts ofessential inputs, suchaselectricity;
- global siting attheproduction ofthemetals stage hasledtorising trade-intensity,
particularly inunwrought metal, butalsoinworked metal orsemi-manufactures and
recycled metal;
- foreign direct investment (FDI) hasshifted towards various forms ofrisksharing, e.g.
involving several partners inconsortia andjoint ventures, ornewstructures with
interlocking ownerships straddling economic activity, continent andmetal;
- jointventure andcollaboration agreements havebeenestablished incertain downstream
operations.WT/WGTI/W/8
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Aluminium metal andaluminium semi-manufactures
88. After World WarII,thealuminium oligopoly consisted entirely ofintegrated producers, with
captivebauxiteminesandaluminiumplants.Theoilshocksinthe1970s,followedbyaseriousdownturn
inconsumption, ledtothewithdrawal ofanumber offirms intheUnited States andthedismantling
oftheJapanese primary aluminium industry. Atthefirmlevel, theBigSixconcentration weakened
astheyabandoned theirleadership strategy, thereby further lowering barriers toentry andhastening
theentrance ofnewindependent operators. Bythelate1980s, most major firms hadreduced their
dependency onprimary metal. Either theyhadstrengthened theirdownstream operations where they
enjoyed higher margins ortheyhaddiversified horizontally intorelated, butnon-aluminium businesses,
suchasceramics, plastics orother advanced materials. Many newfirms hadappeared inthesmelting
business withnewproduction sitedtotakeadvantage oflower costinputs andbased onmixed ownership.
89. Thenature oftheglobal orientation ofthealuminium industry haschanged during theperiod
from thecrisis oftheearly 1970s uptothelate1980s. The"disintegration" and"deverticalization"
strategies adopted bytheformer members oftheoligopoly haveincluded going "short" onaluminium
metal. Thisprobably hasledtoalesser role, relatively, forshipments ofmetal between affiliates,
including aweakening ofintra-firm trade formany majors, asaffiliates havebought primary metal
fromindependent sources. Ontheother hand, certain medium-sized firms havebeenamong thejoint
venture partners innew,orexpanding, smelter capacity inamove toincrease theircoverage ofmetal
needs, which maybeleading togreater intra-firm tradefromthesefirms. Overall therehasbeengreater
cross-border movement intrade. Theratioofworld exports toworld production ofmetal hasdoubled
in20years; since 1991, nearly 500kilos pertonofaluminium produced havebeenexported.
90. Withrespect tothenewprimary smelting capacity, cheaper energy sources notonlyrepresent
amove away from earlier centres ofproduction, buthavehadacertain dispersal effect interms of
thenumber ofcountries where capacity hasbeeninstalled. Foreign investment isattracting greater
numbers ofpartners inorder toshare risksinUS$1-2 billion dollar projects.
91. Inthecaseofaluminium semis, production appears tohavebecome more concentrated atthe
firmlevel, although geographical dispersal ofproduction siteshascontinued asseveral North American
firmsacquiredholdingsinEurope,andseveralEuropeancompaniesinvestedinsemi-fabricatingactivities
intheUnited States. Theshare ofsemis output which isexported hasdoubled overthepasttwodecades.
Intra-industry trade indices forseveral OECD countries show arising trend forworked aluminium,
indicating aspecialisation invarious aluminium semis. More recently crossboundary strategic alliances
haveappeared toexploit strengths ofthecarandaluminium companies intheforthcoming "aluminised"
car.These alliances involve Japanese steelandaluminium firms (with linkstothecarindustry); US
aluminium andJapanese aluminium/steel firms; andafewEuropean aluminium firms andcarmakers.
92. Overall, aluminium metal production isandhasbeenaglobalized industry interms oftrade
andforeign investment, butshows fewsigns ofincreases inexternal sourcing ornewalliances, such
ascollaboration arrangements, e.g.toshare research anddevelopment (R&D). Customization isnot
relevant toaluminium metal production, since theingot isproduced tojustafewstandard sizesand
alloys. Ontheother hand, FDIappears tobeincreasingly involving jointventures inwhich thesmaller
andmedium companies areparticipating. Foraluminium semis, ontheotherhand, globalization appears
tobeonarising trend inthesense thatexternal sourcing (i.e.ingot) isincreasing, asisthedensity
ofnetworks among firms, andfirms areworking directly withthecustomer tocustomise products.
Cross border alliances intechnology, production andmarketing arrangements havebegun toappear.
93. Recent andfuture buoyant growth inthealuminium sector iscentring onsecondary aluminium
andrecycling ofscrap, favouring theappearance ofsecondary smelters whose feedstock isgenerally
dependent onanetwork oflocalcollection centres, i.e.locally sourced.WT/WGTI/W/8
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94. Evenifgovernments donotgenerally havelawsandregulations today which specifically target
non-ferrous metals, policies ofahorizontal nature affect thissector pervasively. Previous controls
onforeign investment innatural resource ventures havetended tobeliberalized andtoday, asforeign
investment inthelow-cost energy countries areeagerly courted, theyentail fewdelays. Technology
policies, including support toR&D, areaimed atpromoting research intargeted areasoratrationalising
private andpublic efforts byensuring acoordination role. Asnon-ferrous metals andaluminium in
particular arelargeelectricity users, thegovernment power monopolies 'conditions forlargecustomers
entail policy issues affecting national competitive advantage. Thecurrent widespread usage ofvariable
power tariffs linked totheprice ofaluminium isacaseinpoint.
95. Competition policies havebeenamajor issue foraluminium andother non-ferrous metals in
thepast. With atendency inmergers andacquisitions overthepastdecade towards concentration in
thealuminium semis plants, there aresigns thatcompetition lawsmaybeposing barriers toindustry
plans forfurther rationalisation.
96. Trade disputes inthenon-ferrous metals areahavebeenlessfrequent thanforother metals.
Reducing tariffpeaks andtariffescalation areissues which theUruguay Round addressed. Onlylimited
progress wasmade inreducing tariffs onhigher stages ofprocessed metal andtheproposal toeliminate
tariffs onprimary metal wasnotsuccessfully adopted. Inthecaseofaluminium metal, ingot continues
tobeprotected bya6percenttariffintheEuropean Union (EU). Australia, Canada andJapan dropped
theirpeaktariffs onaluminium semi-manufactures, andtheEUreduced tariffs oncertain semis. In
viewofthegrowing importance oftradeinscrap, export controls which havebeeninplace inthepast,
could again become anareaforconcern.
97. Effects ofenvironmental policies constitute without adoubt industry 'sgreatest preoccupation
today. Besides firstgeneration environmental issues ofcompetitiveness andsubstitution issues arising
from emission regulations, andliabilities forclean-up ofhazardous wastes, newissues concern the
shipments ofsecondary rawmaterials, which insome national lawsandinternational environmental
conventions could besubject tostrict controls.
VI. STEEL
98. Globalization inthesteelindustry isseeninprimarily three areas: international sourcing of
rawmaterials; international trade; andinter-firm alliances andforeign investment. Since World WarII,
steelplantshavebeenconstructedinbothresource-poorandresource-richcountries,somanysteelmakers
areobliged tosource principal rawmaterials from outside thehostcountry 'sborders. From an
international trade perspective, overone-quarter oftheworld 'sproduction offinished steelcrosses
international boundaries. More recently globalization inthesteelindustry isseeninanumber ofjoint
ventures, mergers andacquisitions andstrategic alliances, particularly among USandJapanese firms,
andEuropean firms.
99. Thesteelindustry hasexperienced major turmoil andchange since the1970s, andmajor
developments orchanges inanumber ofareas, including adjustments ingrowth andproduction,
technology, rawmaterials, international trade, andforeign investment, willmost likely continue.
100. Reduced consumption, over-capacity, imports fromtheCentral andEastern European Countries
(CEECs), price declines andreduction inwork forces aresome ofthespecific problems facing
steelmakers intheOECD area. Many steelmakers throughout theworld areusing national trade laws
todealwiththose problems inorder toprotect theirdomestic markets fromlow-priced orsubsidized
steel.WT/WGTI/W/8
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101. Onaglobal basis, thesteelindustry should experience growth indeveloping countries asthe
industrialized countries continue tomaintain orreduce theircapacities. Ingeneral, growth should be
tempered bytechnological improvements throughout thesteelindustry, which havereduced thetonnage
ofcrude steelusedinmaking finished steelproducts. Whatever growth occurs inindustrialized countries
willprobably notcome from thelarge integrated producers, butfrom thesmaller, more efficient
minimills. Theavailability andprice ofscrap metal (orscrap substitutes), however, willaffect the
extent towhich these smaller mills cansuccessfully expand production.
102. Theprincipal rawmaterials (i.e., ironore,coalandscrap) forsteelproduction varyintheir
availability. Thesteelmakers oftheFarEastcontinue toimport alloftheirrequirements, andWestern
Europe istending inthatdirection. Brazil andAustralia willcontinue topredominate the400million
tonnes exported annually. Trade willcontinue tobeanecessity aswellforcoalandscrap.
103. Despite theexistence ofnumerous measures torestrict steeltrade, theproportion ofproduction
traded internationally tended torise,albeit slowly, during the1970s and1980s. Theoutlook forthe
1990s andbeyond, however, isunclear. Ontheonehand, steelmakers inindustrialized countries are
moving towards obtaining partoftheirsteelrequirements insemi-finished form, thusreducing their
ironoreimports andtheaccompanying pollution problems associated withcokeovenandblastfurnace
operations. Trade insemi-finished steelistherefore likely togrow during thenextdecade. Theoutlook
fortrade infinished products, however, seems lesspredictable assome factors suggest growth while
others would tendtoreduce theimportance oftrade. What seems clearisthatincreased steelproduction
indeveloping countries willreduce theamount ofsteelimported from industrialized countries.
104. Substantial foreign investments insteelmakers located inindustrialized countries isdirected
tomodernising steelplants toreduce costs, increase productivity andimprove quality. Inthedeveloping
countries, investment isbeing directed toward increasing capacity.
105. Inlightofthestructural problems affecting thesteelindustry, government involvement has
beenwidespread, taking suchforms asquantitative import restrictions, anti-dumping andcountervailing
duties,subsidies,pricecontrols,exportpromotion,etc.Otherpolicieshavealsoaffectedcompetitiveness,
e.g.,environmental policies.
106. Thepattern ofgovernment policies hasaffected theways inwhich thisindustry hasbeen
globalizing. Forexample, loworzerotariff levels oninputs havefostered international sourcing;
similarly, investment andcompetition policies havebeenconducive toforeign direct investment (FDI)
andinter-firm alliances.
107. Withrespect totradepolicies, restrictive measures affecting steelimports, however, havebeen
common, andgiven thelong-term adjustment problems inthesteelindustry, therecould becontinued
pressures fortrade actions. Successfully concluding aMultilateral Steel Agreement (MSA) could,
overthelonger term, diminish pressures fortrade actions concerning subsidization. Trade actions
concerning dumping could alsodiminish assteelmakers formstrategic alliances orjointventures thereby
making steelmakers more reticent toaccuse theirforeign partners ofunfair trading (pricing) practices.
More openaccess tomarkets (which willoccur under theagreements reached intheUruguay Round)
should reduce theextent towhich producers canprice-discriminate indifferent national markets; this
tooshould tendtodiminish thepossibilities fordumping actions.
108. Thedecisions thatglobalized steelcompanies make onproduction, tradeandcapital investment
(including investment innewfacilities aswellastheclosure ofoperations) willhaveadirect effect
onthecountries inwhich theyoperate. Governments mayfeelaneedtobalance theinterests ofsuch
companies (which might seektomaximise efficiency through foreign investment) withnational interests
(which focus onpromoting domestic economic activity).WT/WGTI/W/8
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109. Thegrowth intheimportance ofminimills andtheriseinsteelproduction inthenon-OECD
countrieshavetendedtodecreaseglobalconcentrationintheindustry.Therecentgrowthintransnational
inter-firm alliances andinvestment, however, represents atendency towards increased concentration.
Governmentsmaybeconcernedaboutthecompetitiveimplicationsofsuchgrowthininvestmentactivity,
andtheeffects ofsuchactivity onoverall industry efficiency.
110. Theanalysis ofglobalization inthesteelindustry suggests thatenvironmental regulation could
havesignificanteffectsoninternationaltradeandinvestmentpatternsinsteel.Thegreaterthedifferences
innational environmental regulations, thegreater itseems thepotential effect onproduction, trade
andinvestment patterns (i.e., through increased incentives topromote production andinvestment in
lessrestrictive areas).
VII. CLOTHING
111. Globalization intheclothing industry isseenintheincreasing levelofimport penetration of
clothing innational markets (globalization ofsupply) andanemerging trendinwhich production process
isseparated between pre-assembly andassembly activities onaglobal basis (seedefinition in
section 1.A.a). Textiles trade, providing aninput toclothing production, issubstantial anditgrew
atabout thesame rateastotalworld exports since 1975. Trade incuttextiles components forfurther
assembly isrelatively small butgrowing inthecontext ofpreferential market access measures. Trade
inassembled clothing partsishowever notsignificant. Separate statistical items forassembled clothing
partsarenotusually provided forintradeclassification systems. Increasing tradeintextiles andclothing
tookplace against amanaged trade environment characterised bydiscriminatory quantitative trade
restrictions andhightariff levels applied toimports originating from low-cost countries. Textiles
protection acted asataxondomestic clothing production andmayhavereduced itsproduction options
andquality.
112. Bothforeign direct investment andresearch anddevelopment efforts werelessthanproportional
totherelative importance ofthissector intheeconomy. Outward investment wasfound tobestrongly
correlatedtopreferentialmarketaccessmeasuresestablishedbysomeOECDcountrieswhich,inpractice,
have benefited only afewselected low-cost countries. Intra-firm trade hasremained lowand
concentrated inqualifying projects under preferential market access measures. Mergers, vertical
integration andstrategic alliances areisolated cases andcannot beassociated withanemerging trend.
113. Barriers toentry intheindustry rankamong thelowest inindustrial production processes, the
industryisthereforecharacterisedbyamultitudeofsmallandmedium-sizedenterpriseswhichconcentrate
production infewproduct categories. Asaresult ofstructural changes inthe1980s andearly 1990s,
small andmedium-sized enterprises haveadopted moreflexible production processes. Large enterprises
haveadopted advanced technological equipment, concentrated production inclothing linesoffering
economies ofscale inproduction andincreased sub-contracting tominimise direct labour costs and
capital requirements. During the1980s, despite tradeprotection measures, competition intheclothing
industry intensified asaresult ofincreased import competition, anincreased number ofsmall firms
andreduced importance oflarger firms intotalproduction.
114. Technological developments haveprofoundly modified pre-assembly activities buthavefailed
tomodify thehighly labour-intensive process ofassembly activities. Developments incomputer-aided
design(CAD)andcuttingsystemshavepermittedanintegrationofpre-assemblyactivitiesandsubstantial
productivity gains. Within theassembly process, theuseofconventional sewing machines stilloffers
adequate flexibility tomostmanufacturers toremain viable inafashion-oriented business withshort
production runs. Theapplication ofmodern telecommunication networks hasfacilitated aseparation
ofpre-assembly andassembly activities without sacrificing quality andprocess efficiency. Thisprocess
ofseparation hashappened bothwithin national markets andonaglobal basis.WT/WGTI/W/8
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115. Research anddevelopment efforts incomplete automation processes havenotyetresulted in
commercial application. Inherent technical difficulties associated withthecomplex manipulation of
limpmaterials areverydifficult toovercome. Technological improvements were however made in
dedicated applications. Theautomation ofclothing manufacturing process hasthepotential togradually
modify thestructure oftheindustry frombeing labour-intensive tocapital-intensive. Thegeneral view
intheindustry isthatevenifthere isatechnological breakthrough, thenature ofthefashion business
withshort production runswillstillleave aconsiderable share ofproduction bystandard technologies
intheassembly stage.
116. During the1980s, several factors haveinfluenced thestructure oftheindustry andhavehad
implications forthelocation ofproduction plants andemployment. Inresponse tojust-in-time delivery
requirements, theadoption ofelectronic point ofsalesystems attheretail levelandrapidly changing
demand, clothing manufacturers havehadtoadapt toshortproduction runs, smaller orders andshorter
production-deliverycycles.Clothingmanufacturershavemodifiedtheirproductionprocessesaccordingly.
These structural changes havebenefited domestic manufacturers overoverseas manufacturers asthey
wereabletomeetshort delivery requirements. However, increasing concentration ofclothing sales
among larger retail groups meant thatthese larger groups were better placed tocompare
domestically-made withimported clothing. Theconcentration ofretail saleswithin large groups has
favoured overseas clothing manufacturers whenever delivery requirement waslessofapriority.
117. Thesimpleaveragepost-TokyoRoundtariffisapoorindicatorofthelevelofprotectionafforded
toclothing production inOECD countries. Itmasks tariffpeaks andthefactthatseveral regional trading
arrangements haveprovided for,orareintheprocess ofestablishing, freetradeinclothing tradeamong
participating OECD countries. However tariff protection wasnotthemain instrument ofprotection
asseveralOECDcountriesapplieddiscriminatoryquantitativerestrictionstoclothingimportsoriginating
from low-cost countries inthecontext oftheMultifibre Arrangement (MFA). Theaverage
tariff-equivalent ofMFA quotas wereestimated tobewithin arange of25percentforclothing and
15percentfortextiles.
118. Despite trade protection afforded byOECD countries, theshare ofOECD clothing imports
originating fromnon-OECD countries increased significantly from44.3to61.3percentbetween 1975
and1992. Most oftheincrease occurred priorto1985andsincethentheshare ofnon-OECD countries
hascontinued torisealbeit atareduced rate. Since 1985, theshare ofOECD clothing imports
originating fromChina increased strongly anddisplaced imports fromother non-OECD countries and
particularly from Hong Kong andSouth Korea.
119. Intra-regional tradeinclothing hasincreased inallmajor regions oftheworld andparticularly
inEastAsia. Intra-regional tradehasremained thehighest inEurope, between countries oftheEuropean
Community (EC)andtheEuropean FreeTrade Agreement (EFTA), andreached 83.9percentoftotal
trade in1991.
120. Government intervention intheclothing industry hasconcentrated onprotection against foreign
competition. Otherwise government intervention hasbeenmodulated toeasespecific problems faced
bysmallandmedium-sizedenterprisesandimplementedthroughhorizontalprogrammessuchasregional
developments assistance, research anddevelopment andtraining activities.WT/WGTI/W/8
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ANNEX 2
Recent Trends inForeign Direct Investment
Recent trends inForeign Direct Investment1
121. Flows ofdirect investment toandfromOECD countries fellslightly in1996 fromtheirpeak
intheprevious year. Outflows from OECD countries totalled US$259 billion andinflows US$197
billion in1996 (Table 1).2Inspiteofthedecline from thehistoric levels of1995, the1996 figures
forflows were stillthesecond highest onrecord (Chart 1).When figures forthenon-OECD area
arefullyavailable, itmaywellbethatglobal levels offoreign direct investment (FDI) in1996exceeded
those in1995. Thecontinued highlevels offlows suggests thattheprocess ofglobalization brought
about inpartthrough international direct investment shows littlesignofrelenting. Thetrend towards
globalization isevenmore pronounced ifonelooks atcross-border mergers andacquisitions which
havegrown steadily throughout the1990s andlooksettocontinue athistoric levels in1997.
122. Asamixture ofnewinvestments andmergers andacquisitions, FDIissusceptible tothebusiness
cycleinbothhomeandhostcountries.Thelongperiodofuninterruptedexpansionofeconomicactivities
inmany countries, particularly theUnited States, hasnodoubt provided asteady impetus tointernational
directinvestment.Thereareseverallong-termandinterrelatedelementsbehindthecurrenttrendtowards
globalization, including continued liberalization inbothOECD andnon-OECD countries, technological
change andchanging strategies oftheworld ’slargest firms towards amore aggressive expansion in
markets inwhich theyareunder-represented orinwhich growth prospects arebetter.
123. Deregulation, demonopolization, privatization andthereform oftradeandforeign investment
regimes havebeencentral tothehighlevels ofinternational direct investment inthe1990s. Therecent
wave ofinternational mergers among telecommunications andairline companies istestament tothe
tremendous impetus toFDIgiven byderegulation. Anevengreater impetus worldwide hascome about
through privatization, withsignificant shares in,andsometimes control of,privatised firms going to
foreign investors. According toOECD estimates, worldwide receipts from privatizations amounted
toarecord US$88 billion in1996, ofwhich US$68 billion came from OECD countries.3Inmany
countries, particularly insmaller OECD countries andinthedeveloping world, thesaleofpublic
companies toforeign investors hasbeentheprimary source ofinward investment inrecent years.
124. Inspiteofcyclical downturns andbarring anyreversal ofliberalization measures, global FDI
trends aretosome extent self-perpetuating. Asmultinational enterprises (MNEs) expand theirglobal
presence, suppliers ofgoods andservices -suchascomponents producers orbanks -often follow in
theirwake, sometimes attheexplicit request oftheclient firm. Furthermore, when onefirminvests
abroad, itscompetitors often dothesameevenattheriskofaggravating excess capacity inaparticular
market. Theglobal expansion offinancial institutions andtelecommunications firms alsohelpstoreduce
thecosts ofoperating aglobal company, justastheMNE serves asaconduit forfurther trade and
investment byreducing theinformational barriers between countries.WT/WGTI/W/8
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I. FDIPERFORMANCE IN1996
125. Theslight decline inOECD outflows in1996 came about largely asaresult ofsharp declines
ininvestment abroad byGerman, USandSwedish firms. Most other home countries maintained the
same highlevels ofoutward investment asin1995. British firms invested arecord amount abroad
in1996, confirming theposition oftheUnited Kingdom asthesecond greatest overseas investor after
theUnited States. Inyenterms, Japanese outflows grew forthethirdconsecutive yearatover20per
cent,butremain atonlyonethirdthelevelofoutflows inthepeakyearof1990. Although USoutflows
fellin1996, USfirms werethemostactive foreign investors astheyhavebeenforthepastsixyears
andindeed throughout mostofthepost-war period. Since 1990, theyhaveinvested directly abroad
overUS$400 billion oroveronequarter oftotalOECD outflows.
126. Looking atoutflows bysector, USfirms inmostmanufacturing industries invested significantly
lessabroad in1996 thanin1995, while theirinvestment infinance (excluding banking), insurance
andproperty almost doubled. Much ofthevolatility inUSoutflows overtimehascome from
investments inthefinancial andinsurance sectors. ForJapanese firms, bothmanufacturing and
non-manufacturing investments experienced adramatic riseinflows inthelate1980s followed byan
equally dramatic fallintheearly1990s. Thedifference between thetwo,however, isthatmanufacturing
hasquickly recovered, reaching anewhighin1995, while other sectors arestillwellbelow earlier
levels.
127. TheriseinJapanese manufacturing investment abroad overthepastfouryears isaresult of
several forces, notably theappreciation oftheyen,renewed growth athome andabroad, andthe
continuing needforJapanese firms toraisetheshare ofoverseas production tothelevels found inother
major home countries. Since 1994, Asiahasbeen thefavoured destination forFDIbyJapanese
manufacturing companies, followed closely bytheUnited States. Therapid growth ofJapanese
investment intoEurope which occurred inthelate1980s andwhich sparked offfearsofadéfijaponais
hassince abated: inflows haveaveraged onlyUS$2 billion ineachofthepastfouryears, compared
tomanufacturing investment byJapanese firms inAsiaandtheUnited States ofUS$8 billion eachlast
year. TheUnited Kingdom continues toreceive thelargest share ofJapanese investment inEurope
byawidemargin.
128. Thetrendininflows shows substantial divergence among OECD Member countries. Combined
increases ofUS$34 billion fortheUnited States andtheUnited Kingdom were more thanoffset by
anaggregate dropofUS$43 billion ininflows intoAustralia, Canada, Germany, theNetherlands and
Sweden. Thelargest decline ininflows occurred inGermany where estimated retained earnings of
foreign firms inGermany were negative in1996.4Thecombination ofhighoutflows andnegative
inflows made 1996 arecord yearfornetoutflows from Germany. Incontrast, preliminary figures
show record inflows intotheUnited States, principally byEuropean firms. USinflows from Japan
in1996 were stillwellbelow thelevels in1989-90, buttheywere nevertheless aslarge astotal
cumulativeinvestmentsfromJapaninthethreeprecedingyears.ReportedinvestmentsintoJapanremain
atrelatively lowlevels, although thereisreason todoubt whether thesefigures fullycapture theactivities
offoreign firms inJapan. NotonlyhaveUSfirms reported investing US$9 billion inJapan inthe
pastfouryears, but1996 sawariseinacquisitions byforeign firms inJapan toanestimated
US$4.8 billion.5Neither ofthese appears tobefullyreflected intheJapanese data.
129. Germany,JapanandtheUnitedKingdomwerethelargestnetoutwardinvestorsin1996.Table2
shows cumulative netflows foreachMember country since1990. TheOECD asawhole isasubstantial
netinvestor intherestoftheworld, withnetoutflows tonon-OECD countries averaging almost
US$60 billion inthe1990s. OECD Member countries aredivided roughly equally between netoutward
investors andnetrecipients. Ingeneral within theOECD area,larger orricher countries tendtoinvest
more abroad thantheyreceive ininward investment. Theextent towhich smaller countries aremajorWT/WGTI/W/8
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outwardinvestorsdependsontheirindustrialbase.Smallercountrieswhichhavespecialisedinindustries
mostprone toglobalization through FDI,suchasfoodandchemicals inSwitzerland, aremore likely
tobeimportant home countries. Forthese countries, substantial outflows maybetheresult ofthe
activities ofonlyahandful ofverylarge firms.
130. Itisimportant tostress thatthere arenonormative implications from acountry ’sranking in
Table 2.Bothinward andoutward investment canoffer substantial benefits toacountry, andthere
isapriori nooptimal balance between thetwo.Furthermore, many ofthelargest netoutward investors
arenevertheless among themostactive hostcountries forFDI,notably theUnited States, theUnited
Kingdom andGermany. Inaddition, aswithanycomparison based onFDIdata, thedefinitions of
FDIvarysomuch from onecountry toanother thatsubstantial variations canarise simply from
differences inreporting methodologies.
131. Although OECD Member countries invest substantially more outside oftheOECD thanthey
receive fromthose countries, theyarealsoamong theworld ’smostactive hostcountries. After falling
throughout the1990s, theOECD share oftotalglobal inflows grew in1995 toreach 70percent, or
roughly thesame levelastenyears ago. Table 3shows cumulative inflows forindividual countries
forthemostrecent fiveyearperiod forwhich afulldatasetisavailable. TheUnited States hasbeen
thefavoured location fordirect investment inthe1990s inpartbyvirtue ofitssheer economic size.
Thetoptwenty locations aredominated byOECD member countries, which isnotsurprising given
theirweight intheworld economy. Fornon-OECD countries, onlyChina figures among thetopten.
Thus, theUnited States andChina haveaccounted forover30percentofglobal inflows inthe1990s,
thetopfivecountries foronehalfoftotalinflows andthetop10countries fortwothirds ofinflows.
132. Global flows aretherefore focused onasmall group ofcountries. While theuneven distribution
ofglobal FDIflows maybeofconcern tothose hostcountries notfiguring nearthetopofthelistin
Table 3,thereisnotnecessarily adirect relationship between thelevelofinvestment acountry receives
andthebenefits which accrue from thatinvestment. Thebenefits depend onthepolicy environment
inwhich theinvestment ismade, including tradeandcompetition policy, andontherelationship between
thesizeoftheinward investment andtotalprivate investment inthehostcountry.
Mergers andacquisitions
133. Global flows ofdirect investment aredominated bymergers andacquisitions (M&As) invalue
terms. IntheUnited States, forexample, acquisitions represented 85percentofforeign investment
in1995, withestablishments contributing only15percent. With thelargest merger in1996 worth
overUS$30 billion, theimpact ofcross-border M&As ontotalFDIflows islikely togrowinthefuture.6
Byallaccounts, mergers andacquisitions reached record levels in1996. Much ofthisM&A activity
involves twofirms inthesamemarket, particularly inthose markets withafavourable business culture
andalarge andactive stock market.
134. Cross-border M&As areestimated tohavereached arecord US$263 billion in1996, following
eightyears ofcontinuous growth.7Cross-border acquisitions havebeenfollowing apattern established
bynational mergers. Indeed, totalcross-border M&As aresignificantly lessthanmergers between
firms within theUnited States which exceeded US$420 billion in1996.8International andnational
mergers aredriven bythesamegeneral setofindustrial considerations, buttherearenevertheless certain
differences inemphasis depending onwhether themerger involves firms from different countries.
International mergers arisepartly because markets arestillsegmented andtheacquisition ofalocal
firmafford thequickest access totheforeign market. Domestic mergers aremore likely tobedriven
bythedesire toachieve economies ofscale, although evennational markets mayalsobesegmented
tosome degree. Asglobal integration continues, industrial consolidation willgradually become more
important thangeographical diversification, evenforinternational mergers.WT/WGTI/W/8
Page39
135. Theforces behind thedramatic growth ofmergers andacquisitions inthe1990s aresometimes
specific toaparticular industry orcountry, butmany aregeneral innature. Through technological
change andeconomic reforms which haveoccurred invirtually allcountries overthepastdecade,
includingliberalizationoftradeandinvestmentpolicies,geographicandproductmarketsareconverging,
andindustries areconsolidating inresponse. Many ofthelargest cross-border mergers haveoccurred
inthetelecommunications sector where formerly domestic companies areracing toachieve global reach
asnational monopolies arebroken upandsoldoff.Similar motives aredriving consolidation inair
transport. Other general factors include economic growth, rising share prices andthedesire offirms
toshedaffiliates inunrelated sectors.
136. Because M&As represent suchalargeshare ofglobal FDIflows, thepattern ofM&As accounts
formuch oftheobserved direction ofFDIflows. Thuscountries withlargestock markets andabusiness
culture which facilitates acquisitions, suchasintheUnited States andtheUnited Kingdom, arelikely
tobeprominent asbothhome andhosts tomultinational enterprises. Hence, mergers andacquisitions
involving USfirms (including purely national M&As) aregreater thanallM&As -bothdomestic and
international -intherestoftheworld combined. Similarly, British firms areoften themost active
acquirers bothintheUnited States andintherestofEurope. In1996, acquisitions ofBritish firms
byforeign investors amounted tomore thantwice thevalue ofthenextmosttargeted European country.
137. ThefactthattheUnited States andtheUnited Kingdom share acommon language andabusiness
culture which stresses shareholder interests explains inlargepartwhytheirbilateral investment flows
areusually thegreatest bilateral flows between anypairofcountries. In1996, suchbilateral flows
amounted toUS$35 billion. Theroleofmergers andacquisitions intotalFDIflows andtheimportance
ofbusiness culture inpromoting M&As helptoexplain whysome countries aremore favoured than
others ashome orhosttoMNEs. Forthisreason, using FDIflows asameasure oftheapproval of
theinternational business community inthepolicies adopted bythehostcountry isnotnecessarily
appropriate. Inmostcases, FDIflows inbothdirections according totheavailability oftarget companies
andtheclimate forsuchacquisitions ineachcountry.
II. INTERNATIONAL DIRECT INVESTMENT INTHE 1990s
138. Areview ofdevelopments in1996 provides onlyapartial picture oftrends ininternational
direct investment. Direct investment tends tobeevenmore volatile thanother forms ofinvestment,
anditistherefore inappropriate todraw toostrong conclusions based ononlyoneyear. Thissection
reviews trends inthe1990s, aperiod inwhich OECD outflows haveexceeded cumulative outflows
oftheprevious three decades innominal terms.
139. Byprincipal country andregion, theUnited States remains thesingle largest host,butitsrelative
share hasdeclined substantially since 1987when ittookinroughly onehalfofinflows (Chart 2).As
agroup, thecountries oftheEuropean Union have recently attracted more investment thanthe
UnitedStatesoranyotherregion.MuchofthisinvestmenthasoriginatedwithinEuropeitself.Intra-EU
investment tookoffinthesecond halfofthe1980s andwasencouraged bythemoves towards aSingle
Market although global forces alsoplayed arole. Excluding intra-EU flows, Europe ’sposition as
ahostfallsbehind bothNorth America andAsia. Latin America andthedeveloping countries ofAsia
havebothreceived substantially more inward investment thaninthe1980s. Although many countries
inAsiahavereceived copious inward investment inthe1990s, thespectacular growth ininflows into
theregion isinpartduetotheemergence ofChina. Direct investment flows toChina nowexceed
those totherestofdeveloping Asia. TheriseofChina inonlyafewyears has,toacertain extent,
induced agreater openness inthepolicies ofthose countries intherestofAsiaeager toattract inward
investment.WT/WGTI/W/8
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140. Chart 3shows FDIoutflows bymajor home country orregion since 1985.9While the
United States remains thesingle mostimportant home country formultinational enterprises, firms from
theEuropean Union asawhole haveinvested more abroad. Aswithinflows, thelargest share ofthis
EUinvestment hasremained within Western Europe. While intra-EU flows havecontinued athigh
levels throughout the1990s, extra-EU outflows havebeenlower inthe1990s thaninthelate1980s.
Asaresult, European companies nowinvest roughly twice asmuch within theEuropean Union as
theydointherestoftheworld. Outside ofEurope, theUnited States isbyfarthefavoured location,
often involving acquisitions ofAmerican companies. Arising share ofextra-EU outflows hasgone
toEastern andCentral Europe. Japanese outflows arealsolower thanearlier andarefocused more
onAsiaandNorth America. Thedeveloping countries ofAsiahaveemerged asamajor source of
investment, principally asaresult ofHong Kong investment inChina. Most ofthisinvestment remains
within theregion.
141. TheremainderofthissectionconsiderstherelativeattractivenesstotheprincipalOECDinvestors
ofthethree main regions fornetinward investment: Latin America, Central andEastern Europe and
theemerging economies ofAsia. Certain recent OECD Member countries areincluded ineachof
these regions. Theanalysis seeks toanswer twoquestions. First, foreachoftheprincipal OECD
investors, howimportant iseachregion relative totheother two? Second, within eachregion, how
important iseachinvestor withrespect totheother principal OECD investors? Charts 4-6show the
relative importance ofAsia, Latin America andEastern andCentral Europe toinvestors fromtheUnited
States, Japan andtheEuropean Union.
142. What isimmediately apparent isthatEuropean andAmerican firms show nooverwhelming
preference foreither AsiaorLatin America. Flows tobothregions haveincreased dramatically in
the1990s. Only Japanese firms show aclearpreference forinvesting inAsia. Central andEastern
Europe isthefirstchoice forEuropean firms, asmall butrising share forAmerican onesandanegligible
oneforJapanese MNEs.
143. USoutflows toLatin America andtothedeveloping countries ofAsiahavefollowed asimilar
pattern ofgrowth overtime(Chart 4).USoutflows tobothregions werenegligible intheearly1980s,
partly asaresult ofthedebtcrisis which dampened growth prospects andledtogreater restrictions
ontheactivities offoreign firms. In1995, American investments were overUS$9 billion toLatin
America andUS$8 billion totheemerging economies ofAsia. ThefallinUSinvestment inbothregions
in1996 wasdramatic inbothabsolute andrelative terms. InAsia, itresulted largely from adecline
ininvestment byUSelectronics firms inMalaysia andmachinery producers inSingapore. InLatin
America, USdirect investment fellprecipitously inthechemicals sector inArgentina andinthe
machinery industry inBrazil. These declines should notbetaken asevidence ofalessening interest
onthepartofUSMNEs ineither region. Thepotential sizeofindividual investments hasgrown in
recent years, especially when atarget firmisbeing privatised, andhence annual flows arelikely to
show greater volatility thaninthepast. Flows ofafewbillion dollars intoaregion could bepartly
theresult oftheinvestment decisions byahandful oftheworld ’slargest MNEs. Because these firms
donotinvest aconstant amount eachyearineachregion, investment flows arenecessarily “lumpy ”.
144. Investment inAsiabyJapanese firms began inearnest in1985. Investments intheregion in
the1970s hadoften beeninnatural resource industries ortoproduce behind protective tariffs inlarge
developing markets. Recent investments havebeenmuch more oriented towards regional andglobal
markets. Inthesecond halfofthe1980s, onehalfofthisinvestment inAsia went tothefour
Newly-Industrializing Economies orNIEs (Chinese Taipei, Hong Kong, Korea andSingapore). These
locations werethensuperseded bythedeveloping markets ofSoutheast Asia. Beginning in1995, China
hasreceived more thanthesetwogroups. Indeed, while Japanese direct investment inChina hasgrown
from almost nothing in1990 tooverUS$4.5 billion fiveyears later, Japanese investment intherest
ofAsiain1995wasatthesamelevelasattheendofthe1980s (Chart 5).Annual Japanese investmentWT/WGTI/W/8
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inLatin America hasfallen since itspeakinthelate1980s, andCentral andEastern Europe hasfailed
toattract anymajor Japanese presence.
145. Chart 6shows EUoutflows tothethree regions. Thefigures forLatin America arebased
onasample ofsixofthemain destinations forEuropean direct investment intheregion (Argentina,
Brazil, Chile, Colombia, Mexico andVenezuela) inorder toremove thesignificant influence ofoffshore
financial centres intheCaribbean onEuropean FDIinLatin America. European Union investments
intoallthree regions havebeengrowing quickly inthe1990s withonlyaslight preference forEastern
andCentral Europe, which became more pronounced in1995. Asagroup, thethree regions have
been receiving steadily more investment from Western Europe, from US$2 billion in1986 to
US$18 billion in1995. With theannouncement oflarge scale investments byEuropean automotive
companies inLatin America, rapid growth inAsiaandaresurgence inEastern Europe, itseems likely
thatthistrend willcontinue inthefuture -barring arecession athome orabroad. Byhome country,
German investors aremostactive inEastern Europe while Spain isemerging asamajor investor in
Latin America, particularly inrecently privatised sectors suchastelecommunications andairtransport,
butalsoinbanking.OtherEuropeancountriesaremoreactiveintheautomotivesectorinLatinAmerica.
146. Theprevious charts compared eachregion fromtheperspective ofthehome country. Charts 7-9
lookinstead atFDIflows tothese regions from theperspective ofthehostregion. How important
areinvestors fromtheUnited States, Japan andtheEuropean Union ineachofthethreeregions? The
results provide support fortheconventional viewthatthemostimportant investors inLatin America,
AsiaandEastern Europe areinvestors fromwithin theregion itself. Thus, American firms aremost
active inLatin America, EUfirms inCentral andEastern Europe, andJapanese firms inAsia. Firms
fromtheUnited States arebestrepresented inallthreeregions, while theJapanese presence inEastern
Europe isnegligible andEuropean firms lagbehind inAsia. What issurprising isthatitisactually
inAsiawhere thethree investors aremost evenly represented, inspiteoffrequent comments about
Asiabecoming thechasse gardée ofJapanese firms. Indeed, eveninvestments from Japan palein
comparison withwhatfirms from other Asian countries areinvesting within theirownregion.
147. Thelimitations inFDIdatamilitate against drawing toostrong conclusions from thetrends
inCharts 7-9.Some American andJapanese firms, forexample, mayinvest inEastern Europe from
their subsidiaries inWestern Europe. Inmost cases, thisinvestment would berecorded asan
intra-European flow, regardless oftheultimate owner oftheinvesting firm. Thesame canbetrue
forother regions, suchasEuropean andJapanese investment inMexico through affiliates inthe
United States. Furthermore, although investors aremostlikely tocome from within thegeographic
region, investments byfirms from theother twoprincipal home regions ineachcasearealsooften
increasing.
148. Theexception isFDIfromJapan: while itisgrowing evermore rapidly inAsia, itisshowing
nosigns ofanupward trend ineither Eastern Europe orLatin America. Japanese firms haveinvested
substantial amounts inbothMexico andBrazil andmayfeelthattheirpresence inthose markets is
sufficient intheshort term. InEastern Europe, Japanese investors havetended toadopt acautious
attitude, possibly inthebelief thatpotential first-mover advantages frominvesting earlyareoutweighed
bytherisksofestablishing inaregion which isstillintransition. Inanannual Eximbank survey of
investment intentions byJapanese firms, theonlynon-Asian countries which rankwithin thetopten
most promising destinations forJapanese FDIinthenextthree years aretheUnited States andthe
United Kingdom. Forinvestments overthenexttenyears, onlytheUnited States andMexico are
present apart from Asian countries. TopofthelistareChina, India andVietnam. Thus, the
regionalization ofFDIflows maycontinue inthenearfuture. Astrong Japanese pushintoAsiadoes
not,however, preclude growing European andAmerican investments within theregion. Indeed, it
mayactually encourage suchinvestments.WT/WGTI/W/8
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NOTES
1. Thisarticle wasprepared byStephen Thomsen, aneconomist intheCapital Movements, International Investment
andServices Division.
2. These totals exclude figures forSwitzerland. AsSwiss firms made several major acquisitions abroad in1996,
theOECD totals willnodoubt becloser tothose of1995 once Switzerland inincluded.
3. “Privatization: Recent Trends ”,Financial Market Trends ,vol.66,OECD, Paris, March 1997.
4. Aspointed outinlastyear’sarticle onFDItrends, inflows ofFDIrecorded bytheBundesbank areoften substantially
lower thanthose reported bytheinvesting country.
5. “Thevalue ofglobal cross-border mergers andacquisitions soartonewheights ”,KPMG International Home Page
(http://www.kpmg.com/) Virtual Library, February 1997.
6. Estimates ofmergers andacquisitions areoften based onthose M&As reported inthepress although incertain
cases theexact figure fortheamount oftheacquisition isnotreported. There isnostrict one-to-one concordance between
thevalue ofinternational M&As andFDIflows. Thefigures forFDIrecorded inthebalance ofpayments include onlythat
share oftheacquisition which isfunded either bytheparent company orthrough thereinvested earnings ofanaffiliate already
inthehostcountry. Figures forM&As havetheadvantage ofbeing available almost immediately, whereas balance ofpayments
dataonFDIareoften reported onlywithaconsiderable lag.
7. “Thevalue ofglobal cross-border mergers andacquisitions soartonewheights ”,KPMG International Home Page
(http://www.kpmg.com/) Virtual Library, February 1997.
8. Acquisitions Monthly ,February 1997.
9. Intra-EU outflows donotnecessarily match intra-EU inflows intheprevious chart because ofmethodological
differences across Europe inthewayFDIisrecorded.WT/WGTI/W/8
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