The World investment Report released in July by the United Nations Conference on Trade and Development (UNCTAD) forecasts a return of global Foreign Direct Investment (FDI) to pre-crisis levels within two years provided no major economic shocks occur during this period.
The welcome news to developing countries is that the FDI flows will be more towards the developing countries. According to the report, in 2010, for the first time, more than half of the global investment was directed towards developing countries, while investment towards developed countries declined.
However it is also noted that there was a decline of FDI to South Asia, with India and Pakistan showing a decline, while inflows to Bangladesh increased. Macroeconomic concerns were reported as partly responsible for the declines in investment to India while Bangladesh became more important as a low cost production location. Also in line with the current trend of increasing South-South investment and trade, the report observes that developing countries themselves were investing in other developing countries.
The report notes another interesting point, that FDIs are not the only driving force for economic growth. The increased interest of transnational corporations to get involved with the developing and transition economy countries for their operations has also been noteworthy.
Some of the areas mentioned as being outsourced by TNCs are contract manufacturing and farming, services, franchising and licensing. In toys, garments, footwear and electronics in particular, contract manufacturing was stated to represent more than 50% of global trade. The advantages of transnationals outsourcing some of their operations are that they introduce modern technological developments to the developing country, thereby increasing competitiveness, bring in much-needed foreign exchange, increase the skills of local personnel and upgrade them with modern techniques.
Developing country policymakers need to look at these operations which are termed Non-Equity Modes (NEMs) of international production as these are among the methods TNCs use to work with other countries without owning a stake in those companies.
Finally, the report also details the pluses and minuses of such NEMs. They can make a substantial contribution to increasing employment and can support long-term industrial development by building productive capacity through technology dissemination and domestic enterprise development and by helping developing countries gain access to global value chains. They can also pose a risk as employment in contract manufacturing can be cyclical and easily displaced.
There are also concerns that transnational corporations could use NEMs to circumvent social and environmental standards and the report advices that developing countries need to mitigate the risk of remaining locked into low value added activities and becoming overly dependent on TNC-owned technologies and TNC-governed global value chains if they want to ensure long-term industrial development.
The report recommends action in four areas for developing countries to benefit from NEMs.
1) They need to be included in the overall national development strategies, aligned with trade, investment and technology policies and addressing risks of dependency on NEMs.
2) Governments must ensure availability of attractive business partners by supporting efforts to build domestic productive capacity.
3) Promotion and facilitation of NEMs require a strong and enabling legal and institutional framework and the involvement of investment promotion agencies in attracting TNC partners.
4) Government policies need to address the negative consequences and risks posed by NEMs by strengthening the bargaining power of the local NEM partners, safeguarding competition, protecting labour rights and the environment.
Governments wanting to attract foreign investment need to adapt their investment promotion policies to changing times and attracting TNC partnerships is also an important area for consideration.
(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)