World Investment Report 2011 Unctad

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EMBARGO

The contents of this Report must not bequoted or summarized in the print,

broadcast or electronic media before

26 July 2011, 17:00 hours GMT

U n i t e d n a t i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t

WORLD

INVESTMENTREPORT

NoN-equity Modes of iNterNatioNal ProductioN aNd develoPMeNt

2011


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentii

UNITED NATIONS PUBLICATIONSales No. E.11.II.D.2

ISBN 978-92-1-112828-4Copyright United Nations, 2011

All rights reserved

Printed in Switzerland

NOTE

The Division on Investment and Enterprise o UNCTAD is a global centre o excellence, dealing with issues related

to investment and enterprise development in the United Nations System. It builds on three and a hal decades o

experience and international expertise in research and policy analysis, intergovernmental consensus-building, and

provides technical assistance to developing countries.

The terms country/economy as used in this Report also reer, as appropriate, to territories or areas; the designations

employed and the presentation o the material do not imply the expression o any opinion whatsoever on the part

o the Secretariat o the United Nations concerning the legal status o any country, territory, city or area or o its

authorities, or concerning the delimitation o its rontiers or boundaries. In addition, the designations o country groups

are intended solely or statistical or analytical convenience and do not necessarily express a judgment about the stage

o development reached by a particular country or area in the development process. The major country groupings used

in this Report ollow the classication o the United Nations Statistical Oce. These are:

Developed countries: the member countries o the OECD (other than Chile, Mexico, the Republic o Korea and Turkey),plus the new European Union member countries which are not OECD members (Bulgaria, Cyprus, Latvia, Lithuania,

Malta and Romania), plus Andorra, Bermuda, Liechtenstein, Monaco and San Marino.

Transition economies: South-East Europe and the Commonwealth o Independent States.

Developing economies: in general all economies not specied above. For statistical purposes, the data or China do not

include those or Hong Kong Special Administrative Region (Hong Kong SAR), Macao Special Administrative Region

(Macao SAR) and Taiwan Province o China.

Reerence to companies and their activities should not be construed as an endorsement by UNCTAD o those

companies or their activities.

The boundaries and names shown and designations used on the maps presented in this publication do not imply

ocial endorsement or acceptance by the United Nations.

The ollowing symbols have been used in the tables:

Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have been omitted

in those cases where no data are available or any o the elements in the row.

A dash () indicates that the item is equal to zero or its value is negligible.

A blank in a table indicates that the item is not applicable, unless otherwise indicated.

A slash (/) between dates representing years, e.g., 1994/95, indicates a nancial year.

Use o a dash () between dates representing years, e.g. 19941995, signies the ull period involved, including

the beginning and end years.

Reerence to dollars ($) means United States dollars, unless otherwise indicated.

Annual rates o growth or change, unless otherwise stated, reer to annual compound rates.

Details and percentages in tables do not necessarily add to totals because o rounding.

The material contained in this study may be reely quoted with appropriate acknowledgement.


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iii

PREFACE

Global oreign direct investment (FDI) has not yet bounced back to pre-crisis levels, though some

regions show better recovery than others. The reason is not nancing constraints, but perceived risks and

regulatory uncertainty in a ragile world economy.

The World Investment Report 2011 orecasts that, barring any economic shocks, FDI fows will

recover to pre-crisis levels over the next two years. The challenge or the development community is to

make this anticipated investment have greater impact on our eorts to achieve the Millennium Development

Goals.

In 2010 or the rst time developing economies absorbed close to hal o global FDI infows.

They also generated record levels o FDI outfows, much o it directed to other countries in the South. This

urther demonstrates the growing importance o developing economies to the world economy, and o

South-South cooperation and investment or sustainable development.Increasingly, transnational corporations are engaging with developing and transition economies

through a broadening array o production and investment models, such as contract manuacturing

and arming, service outsourcing, ranchising and licensing. These relatively new phenomena present

opportunities or developing and transition economies to deepen their integration into the rapidly evolving

global economy, to strengthen the potential o their home-grown productive capacity, and to improve their

international competitiveness.

Unlocking the ull potential o these new developments will depend on wise policymaking and

institution building by governments and international organizations. Entrepreneurs and businesses in

developing and transition economies need rameworks in which they can benet ully rom integrated

international production and trade. I commend this report, with its wealth o research and analysis, to

policymakers and businesses pursuing development success in a ast-changing world.

BAN Ki-moonSecretary-General o the United Nations


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentiv

ACKNOWLEDGEMENTS

The World Investment Report 2011(WIR11) was prepared by a team led by James Zhan. The team

members include Richard Bolwijn, Quentin Dupriez, Masataka Fujita, Thomas van Gien, Michael Hanni,

Kalman Kalotay, Joachim Karl, Ral Krger, Guoyong Liang, Anthony Miller, Haz Mirza, Nicole Moussa,

Shin Ohinata, Astrit Sulstarova, Elisabeth Tuerk, Jrg Weber and Kee Hwee Wee. Wolgang Alschner,

Amare Bekele, Federico Di Biasio, Hamed El Kady, Ariel Ivanier, Lizzie Medrano, Cai Mengqi, Abraham

Negash, Sergey Ripinski, Claudia Salgado, Christoph Spennemann, Katharina Wortmann and Youngjun

Yoo also contributed to the Report.

Peter Buckley served as principal consultant. WIR11 also beneted rom the advice o Ilan Alon, Mark

Casson, Lorraine Eden, Pierre Guislain, Justin Lin, Sarianna Lundan, Ted Moran, Rajneesh Narula, Pierre

Sauv and Timothy Sturgeon.

Research and statistical assistance was provided by Bradley Boicourt, Lizanne Martinez and Tadelle Tayeas well as interns Hasso Anwer, Hector Dip, Riham Ahmed Marii, Eleni Piteli, John Sasuya and Ninel Seniuk.

Production and dissemination oWIR11 was supported by Tserenpuntsag Batbold, Elisabeth Anodeau-

Mareschal, Sverine Excoer, Rosalina Goyena, Natalia Meramo-Bachayani, Chantal Rakotondrainibe and

Katia Vieu.

The manuscript was edited by Christopher Long and typeset by Laurence Duchemin and Teresita Ventura.

Sophie Combette designed the cover.

At various stages o preparation, in particular during the our seminars organized to discuss earlier drats o

the Report, the team beneted rom comments and inputs received rom Rol Adlung, Marie-Claude Allard,

Yukiko Arai, Rashmi Banga, Diana Barrowclough, Francis Bartels, Sven Behrendt, Jem Bendell, Nathalie

Bernasconi, Nils Bhinda, Francesco Ciabuschi, Simon Collier, Denise Dunlap-Hinkler, Kevin Gallagher,Patrick Genin, Simona Gentile-Ldecke, David Hallam, Georey Hamilton, Fabrice Hatem, Xiaoming He,

Toh Mun Heng, Paul Hohnen, Anna Joubin-Bret, Christopher Kip, Pascal Liu, Celso Manangan, Arvind

Mayaram, Ronaldo Mota, Jean-Franois Outreville, Peter Muchlinski, Ram Mudambi, Sam Muradzikwa,

Peter Nunnenkamp, Oah Obale, Joost Pauwelyn, Carlo Pietrobelli, Jaya Prakash Pradhan, Hassan

Qaqaya, Githa Roelans, Ulla Schwager, Emily Sims, Brian Smart, Jagjit Singh Srai, Brad Stillwell, Roger

Strange, Dennis Tachiki, Ana Teresa Tavares-Lehmann, Silke Trumm, Frederico Araujo Turolla, Peter Utting,

Kernaghan Webb, Jacques de Werra, Lulu Zhang and Zbigniew Zimny.

Numerous ocials o central banks, government agencies, international organizations and non-governmental

organizations also contributed to WIR11.

The nancial support o the Governments o Finland and Sweden is grateully acknowledged.


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vCONTENTS

TABLE OF CONTENTS

PagePREFACE ................................................................................................. iii

ACKNOWLEDGEMENTS ............................................................................ iv

ABBREVIATIONS .......................................................................................ix

KEY MESSAGES ........................................................................................x

OVERVIEW .............................................................................................. xii

CHAPTER I. GLOBAL INVESTMENT TRENDS .............................................. 1

A. GLOBAL TRENDS AND PROSPECTS: RECOVERY OVER THE HORIZON ...................2

1. Overall trends ..............................................................................................................................2a. Current trends ..........................................................................................................................................3b. FDI by sector and industry ......................................................................................................................8

c. FDI by modes o entry ...........................................................................................................................10

d. FDI by components ...............................................................................................................................11

e. FDI by special unds: private equity and sovereign wealth unds .........................................................13

2. Prospects ..................................................................................................................................16

B. FDI AS EXTERNAL SOURCES OF FINANCE TO DEVELOPING COUNTRIES .............21

C. FURTHER EXPANSION OF INTERNATIONAL PRODUCTION .................................24

1. Accelerating internationalization o rms ................................................................................24

2. State-owned TNCs ....................................................................................................................28a. The universe o State-owned TNCs ......................................................................................................28

b. Trends in State-owned TNCs FDI .........................................................................................................32c. Issues related to corporate governance ................................................................................................34

CHAPTER II. REGIONAL INVESTMENT TRENDS ........................................ 39

A. REGIONAL TRENDS .......................................................................................40

1. Arica ..........................................................................................................................................40a. Recent trends ........................................................................................................................................40

b. Intraregional FDI or development .........................................................................................................42

2. South, East and South-East Asia .............................................................................................45a. Recent trends ........................................................................................................................................45

b. Rising FDI rom developing Asia: emerging diversifed industrial patterns ...............................................47

3. West Asia ...................................................................................................................................52

a. Recent trends ........................................................................................................................................52b. Outward FDI strategies o West Asian TNCs .........................................................................................53

4. Latin America and the Caribbean .............................................................................................58a. Recent trends ........................................................................................................................................58

b. Developing country TNCs inroads into Latin America ..........................................................................60

5. South-East Europe and the Commonwealth o Independent States .....................................63a. Recent trends ........................................................................................................................................63

b EastSouth interregional FDI: trends and prospects .............................................................................65

6. Developed countries .................................................................................................................69a. Recent trends ........................................................................................................................................69

b. Bailing out o the banking industry and FDI ..........................................................................................71


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B. TRENDS IN STRUCTURALLY WEAK, VULNERABLE

AND SMALL ECONOMIES .................................................................... 74

1. Least developed countries .......................................................................................................74a. Recent trends ........................................................................................................................................74

b. Enhancing productive capacities through FDI .......................................................................................76

2. Landlocked developing countries ............................................................................................79a. Recent trends ........................................................................................................................................79

b. Leveraging TNC participation in inrastructure development .................................................................82

3. Small island developing States ................................................................................................85a. Recent trends ........................................................................................................................................85

b. Roles o TNCs in climate change adaptation ........................................................................................87

CHAPTER III. RECENT POLICY DEVELOPMENTS ....................................... 93

A. NATIONAL POLICY DEVELOPMENTS ................................................................94

1. Investment liberalization and promotion ..................................................................................952. Investment regulations and restrictions ...................................................................................96

3. Economic stimulus packages and State aid ............................................................................98

B. THE INTERNATIONAL INVESTMENT REGIME ..................................................100

1. Developments in 2010 ............................................................................................................100

2. IIA coverage o investment .....................................................................................................102

C. OTHER INVESTMENT-RELATED POLICY DEVELOPMENTS ................................103

1. Investment in agriculture ........................................................................................................103

2. G-20 Development Agenda ....................................................................................................104

3. Political risk insurance ............................................................................................................104

D. INTERACTION BETWEEN FDI POLICY AND INDUSTRIAL POLICY ......................105

1. Interaction at the national level ..............................................................................................105

2. Interaction at the international level .......................................................................................107

3. Challenges or policymakers ..................................................................................................109a. Picking the winner ............................................................................................................................109

b. Nurturing the selected industries .........................................................................................................109

c. Saeguarding policy space ..................................................................................................................110

d. Avoiding investment protectionism .....................................................................................................110

e. Improving international coordination ...................................................................................................110

E. CORPORATE SOCIAL RESPONSIBILITY ...........................................................111

1. Taking stock o existing CSR standards ................................................................................111a. Intergovernmental organization standards ..........................................................................................111

b. Multi-stakeholder initiative standards ..................................................................................................112

c. Industry association codes and individual company codes ................................................................1122. Challenges with existing standards: key issues ....................................................................113

a. Gaps, overlaps and inconsistencies ....................................................................................................113

b. Inclusiveness in standard-setting ........................................................................................................114

c. Relationship between voluntary CSR standards and national legislation ...........................................114

d. Reporting and transparency ................................................................................................................114

e. Compliance and market impact ..........................................................................................................114

. Concerns about possible trade and investment barriers ....................................................................115

3. Policy options ..........................................................................................................................117a. Supporting CSR standards development .............................................................................................117

b. Applying CSR to public procurement policy .......................................................................................117

c. Building capacity .................................................................................................................................117

d. Promoting CSR disclosure and responsible investment .....................................................................118

e. Moving rom sot law to hard law ........................................................................................................118


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viiCONTENTS

. Strengthening compliance promotion mechanisms among

intergovernmental organization standards ..........................................................................................118

g. Applying CSR to investment and trade promotion and enterprise development ................................119

h. Introducing CSR into the international investment regime ..................................................................119

CHAPTER IV. NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND

DEVELOPMENT ................................................................................ 123

A. THE GROWING COMPLEXITY OF GLOBAL VALUE CHAINS

AND TNC GOVERNANCE ................................................................... 124

1. TNC value chains and governance choices ...........................................................................124

2. Dening eatures o NEMs ......................................................................................................127

B. THE SCALE AND SCOPE OF CROSS-BORDER NEMs .........................................130

1. The overall size and growth o cross-border NEMs ...............................................................132

2. Trends and indicators by type o NEM ....................................................................................133

a. Contract manuacturing and services outsourcing ...............................................................................133b. Franchising .............................................................................................................................................138

c. Licensing ................................................................................................................................................139

d. Other modalities .....................................................................................................................................140

C. DRIVERS AND DETERMINANTS OF NEMs ......................................................142

1. Driving orces behind the growing importance o NEMs ......................................................142

2. Factors that make countries attractive NEM locations .........................................................144

D. DEVELOPMENT IMPLICATIONS OF NEMs .......................................................147

1. Employment and working conditions .....................................................................................147

2. Local value added ...................................................................................................................153

3. Export generation ....................................................................................................................155

4. Technology and skills acquisition by NEMs ...........................................................................1575. Social and environmental impacts .........................................................................................160

6. Long-term industrial capacity-building ...................................................................................161

E. POLICIES RELATED TO NON-EQUITY MODES OF INTERNATIONAL

PRODUCTION ............................................................................................................165

1. Embedding NEM policies in development strategies ...........................................................165

2. Domestic productive capacity-building .................................................................................166a. Entrepreneurship policy .......................................................................................................................167

b. Education .............................................................................................................................................167

c. Enhancing technological capacities ....................................................................................................167

d. Access to fnance ................................................................................................................................168

3. Facilitation and promotion o NEMs .......................................................................................169

a. Setting up an enabling legal ramework ..............................................................................................169b. The role o investment promotion agencies ........................................................................................169

c. Home-country policies ........................................................................................................................170

d. International policies ............................................................................................................................170

4. Addressing potential negative eects o NEMs ....................................................................171a. Strengthening the bargaining power o domestic frms ......................................................................171

b. Addressing competition concerns ........................................................................................................172

c. Labour issues and environmental protection ......................................................................................173

REFERENCES ....................................................................................... 177

ANNEX TABLES .................................................................................... 185

SELECTED UNCTAD PUBLICATIONS ON TNCS AND FDI ........................... 226


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentviii

Boxes

I.1. Why are data on global FDI infows and outfows dierent? ....................................................6I.2. FDI fows and the use o unds or investment ........................................................................12I.3. Forecasting global and regional fows o FDI .........................................................................17I.4 Eects o the natural disaster on Japanese TNCs and outward FDI ......................................19I.5. FDI and capital controls ...........................................................................................................23I.6. Recent trends in internationalization o the largest nancial TNCs in the world ..................26I.7. What is a State-owned enterprise: the case o France ..........................................................29II.1. The Arab Spring and prospects or FDI in North Arica .........................................................43II.2. Chinas rising investment in Central Asia ................................................................................66II.3. Russian TNCs expand into Arica ............................................................................................67II.4. Overcoming the disadvantages o being landlocked: experience o Uzbekistan in attracting

FDI in manuacturing ................................................................................................................81II.5. Natural resource-seeking FDI in Papua New Guinea: old and new investors ........................88II.6. TNCs and climate change adaptation in the tourism industry in SIDS .................................89

III.1. Examples o investment liberalization measures in 20102011 .............................................96III.2. Examples o investment promotion measures in 20102011 .................................................97III.3. Examples o new regulatory measures aecting established oreign investors

in 20102011 .............................................................................................................................98III.4. Examples o entry restrictions or oreign investors in 20102011 ........................................99III.5. EU FDI Policymaking ..............................................................................................................101III.6. WTO TRIMS Agreement .........................................................................................................108III.7. The 10 principles o the UN Global Compact .......................................................................112III.8. Impact investing: achieving competitive nancial returns while maximizing

social and environmental impact ...........................................................................................119IV.1. The evolution o retail ranchising in transition economies ..................................................127IV.2. Methodological note ..............................................................................................................131IV.3. The use o management contracts in the hotel industry ......................................................141IV.4 Employment impact in developing countries o NEMs in garment and

ootwear production ...............................................................................................................149IV.5. Labour conditions in Foxconns Chinese operations concerns and corporate

responses ...............................................................................................................................151IV.6. Cyclical employment in contract manuacturing in Guadalajara .........................................152IV.7. Value capture can be limited: iPhone production in China ...................................................156IV.8. Managing the environmental impact o contract arming .....................................................162IV.9. From contract manuacturing to building brands the Chinese white goods sector .........163IV.10. NEMs as catalysts or capacity-building and development .................................................164IV.11. Educational reorms in Viet Nam promote entrepreneurship ................................................167IV.12. Providing access to nance or SMEs engaging in ranchising activities ............................169IV.13. Pre-contractual requirements in ranchising ..........................................................................172


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ixABBREVIATIONS

ABBREVIATIONS

ASEAN Association o South-East Asian Nations

BIT bilateral investment treaty

BOO build-own-operate

BOT build-operate-transer

CIS Commonwealth o Independent States

COMESA Common Market or Eastern and Southern Arica

CSR corporate social responsibility

EAC East Arican Community

EMS electronics manuacturing services

FDI oreign direct investment

GCC Gul Cooperation Council

GFCF gross xed capital ormationGHG green house gas

IIA international investment agreement

IP intellectual property

IPA investment promotion agency

IPO initial public oering

ISDS investorstate dispute settlement

IT-BPO inormation technology and business process outsourcing

LDC least developed country

LLDC landlocked developing country

LNG liqueed natural gas

M&As mergers and acquisitionsMFN most avoured nation

MSI multi-stakeholder initiative

NEM non-equity mode

NIE newly industrializing economies

ODA ocial development assistance

OECD Organisation or Economic Co-operation and Development

PPM process and production method

PPP public-private partnership

QIA Qatar Investment Authority

R&D research and development

ROCE return on capital employed

RTAs regional trade agreementsSADC Southern Arican Development Community

SEZ special economic zone

SIDS small island developing States

SME small and medium-sized enterprise

SOE State-owned enterprise

SWF sovereign wealth und

TBT technical barriers to trade

TNC transnational corporation

TRIMs trade-related investment measures

TRIPs trade-related aspects o intellectual property rights

WIPS World Investment Prospects Survey


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentx

KEY MESSAGES

FDI TRENDS AND PROSPECTS

Global oreign direct investment (FDI) ows rose moderately to $1.24 trillion in 2010, but were still 15 per

cent below their pre-crisis average. This is in contrast to global industrial output and trade, which were back

to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to

$1.41.6 trillion, and approach its 2007 peak in 2013. This positive scenario holds, barring any unexpected

global economic shocks that may arise rom a number o risk actors still in play.

For the frst time, developing and transition economies together attracted more than hal o global FDI ows.

Outward FDI rom those economies also reached record highs, with most o their investment directed

towards other countries in the South. In contrast, FDI infows to developed countries continued to decline.

Some o the poorest regions continued to see declines in FDI ows. Flows to Arica, least developedcountries, landlocked developing countries and small island developing States all ell, as did fows to South

Asia. At the same time, major emerging regions, such as East and South-East Asia and Latin America

experienced strong growth in FDI infows.

International production is expanding, with oreign sales, employment and assets o transnational

corporations (TNCs) all increasing. TNCs production worldwide generated value-added o approximately

$16 trillion in 2010, about a quarter o global GDP. Foreign aliates o TNCs accounted or more than 10

per cent o global GDP and one-third o world exports.

State-owned TNCs are an important emerging source o FDI. There are at least 650 State-owned TNCs,

with 8,500 oreign aliates across the globe. While they represent less than 1 per cent o TNCs, their

outward investment accounted or 11 per cent o global FDI in 2010. The ownership and governance o

State-owned TNCs have raised concerns in some host countries regarding, among others, the level playing

eld and national security, with regulatory implications or the international expansion o these companies.

INVESTMENT POLICY TRENDS

Investment liberalization and promotion remained the dominant element o recent investment policies.

Nevertheless, the risk o investment protectionism has increased as restrictive investment measures and

administrative procedures have accumulated over the past years.

The regime o international investment agreements (IIAs) is at the crossroads . With close to 6,100 treaties,

many ongoing negotiations and multiple dispute-settlement mechanisms, it has come close to a point

where it is too big and complex to handle or governments and investors alike, yet remains inadequate to

cover all possible bilateral investment relationships (which would require a urther 14,100 bilateral treaties).

The policy discourse about the uture orientation o the IIA regime and its development impact is intensiying.

FDI policies interact increasingly with industrial policies, nationally and internationally. The challenge is

to manage this interaction so that the two policies work together or development. Striking a balance

between building stronger domestic productive capacity on the one hand and avoiding investment and

trade protectionism on the other is key, as is enhancing international coordination and cooperation.

The investment policy landscape is inuenced more and more by a myriad o voluntary corporate social

responsibility (CSR) standards. Governments can maximize development benets deriving rom these

standards through appropriate policies, such as harmonizing corporate reporting regulations, providing

capacity-building programmes, and integrating CSR standards into international investment regimes.


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xiKEY MESSAGES

NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT

In todays world, policies aimed at improving the integration o developing economies into global value chains

must look beyond FDI and trade. Policymakers need to consider non-equity modes (NEMs) o international

production, such as contract manuacturing, services outsourcing, contract arming, ranchising, licensing,

management contracts, and other types o contractual relationship through which TNCs coordinate the

activities o host country rms, without owning a stake in those rms.

Cross-border NEM activity worldwide is signifcant and particularly important in developing countries. It

is estimated to have generated over $2 trillion o sales in 2009. Contract manuacturing and services

outsourcing accounted or $1.11.3 trillion, ranchising $330350 billion, licensing $340360 billion, and

management contracts around $100 billion. In most cases, NEMs are growing more rapidly than the

industries in which they operate.

NEMs can yield signifcant development benefts. They employ an estimated 1416 million workers in

developing countries. Their value added represents up to 15 per cent o GDP in some economies. Theirexports account or 7080 per cent o global exports in several industries. Overall, NEMs can support long-

term industrial development by building productive capacity, including through technology dissemination

and domestic enterprise development, and by helping developing countries gain access to global value

chains.

NEMs also pose risks or developing countries. Employment in contract manuacturing can be highly cyclical

and easily displaced. The value added contribution o NEMs can appear low i assessed in terms o the

value captured out o the total global value chain. Concerns exist that TNCs may use NEMs to circumvent

social and environmental standards. And to ensure success in long-term industrial development, developing

countries need to mitigate the risk o remaining locked into low-value-added activities and becoming overly

dependent on TNC-owned technologies and TNC-governed global value chains.

Policy matters. Maximizing development benets rom NEMs requires action in our areas. First, NEM

policies need to be embedded in overall national development strategies, aligned with trade, investment

and technology policies and addressing dependency risks. Second, governments need to support eorts

to build domestic productive capacity to ensure the availability o attractive business partners that can

qualiy as actors in global value chains. Third, promotion and acilitation o NEMs requires a strong enabling

legal and institutional ramework, as well as the involvement o investment promotion agencies in attracting

TNC partners. Finally, policies need to address the negative consequences and risks posed by NEMs by

strengthening the bargaining power o local NEM partners, saeguarding competition, protecting labour

rights and the environment.


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxii

OVERVIEW

FDI TRENDS AND PROSPECTS

FDI recovery to gain momentum in 2011

Global oreign direct investment (FDI) infows rose modestly by 5 per cent, to reach $1.24 trillion in 2010.

While global industrial output and world trade are already back to their pre-crisis levels, FDI fows in 2010

remained some 15 per cent below their pre-crisis average, and nearly 37 per cent below their 2007 peak.

UNCTAD predicts FDI fows will continue their recovery to reach $1.41.6 trillion, or the pre-crisis level,

in 2011. They are expected to rise urther to $1.7 trillion in 2012 and reach $1.9 trillion in 2013, the peak

achieved in 2007. The record cash holdings o TNCs, ongoing corporate and industrial restructuring, rising

stock market valuations and gradual exits by States rom nancial and non-nancial rms shareholdings,built up as supporting measures during the crisis, are creating new investment opportunities or companies

across the globe.

However, the post-crisis business environment is still beset by uncertainties. Risk actors such as the

unpredictability o global economic governance, a possible widespread sovereign debt crisis and scal and

nancial sector imbalances in some developed countries, as well as rising infation and signs o overheating

in major emerging market economies, may yet derail the FDI recovery.

Emerging economies are the new FDI powerhouses

Developing economies increased urther in importance in 2010, both as recipients o FDI and as outward

investors. As international production and, recently, international consumption shit to developing and

transition economies, TNCs are increasingly investing in both eciency- and market-seeking projects inthose countries. For the rst time, they absorbed more than hal o global FDI infows in 2010. Hal o the

top-20 host economies or FDI in 2010 were developing or transition economies.

FDI outfows rom developing and transition economies also increased strongly, by 21 per cent. They now

account or 29 per cent o global FDI outfows. In 2010, six developing and transition economies were

among the top-20 investors. The dynamism o emerging-market TNCs contrasts with the subdued pace

o investment rom developed-country TNCs, especially those rom Europe. Their outward investment was

still only about hal o their 2007 peak.

Services FDI subdued, cross-border M&As rebound

Sectoral patterns.

The moderate recovery o FDI infows in 2010 masks major sectoral dierences. FDI inservices, which accounted or the bulk o the decline in FDI fows due to the crisis, continued on its downward

path in 2010. All the main service industries (business services, nance, transport and communications and

utilities) ell, although at dierent speeds. FDI fows in the nancial industry experienced one o the sharpest

declines. The share o manuacturing rose to almost hal o all FDI projects. Within manuacturing, however,

investments ell in business-cycle-sensitive industries such as metal and electronics. The chemical industry

(including pharmaceuticals) remained resilient through the crisis, while industries such as ood, beverages

and tobacco, textiles and garments, and automobiles, recovered in 2010. FDI in extractive industries (which

did not suer during the crisis) declined in 2010.

Modes o entry.The value o cross-border M&A deals increased by 36 per cent in 2010, but was still only

around one third o the previous peak in 2007. The value o cross-border M&As into developing economies


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xiiiOVERVIEW

doubled. Greeneld investments declined in 2010, but registered a signicant rise in both value and number

during the rst ve months o 2011.

Components o FDI. Improved economic perormance in many parts o the world and increased prots o

oreign aliates lited reinvested earnings to nearly double their 2009 level. The other two FDI components

equity investment fows and intra-company loans ell in 2010.

Special unds. Private equity-sponsored FDI started to recover in 2010 and was directed increasingly

towards developing and transition economies. However, it was still more than 70 per cent below the peak

year o 2007. FDI by sovereign wealth unds (SWFs) dropped to $10 billion in 2010, down rom $26.5 billion

in 2009. A more benign global economic environment may lead to increased FDI rom these special unds

in 2011.

International production picks up

Indicators o international production, including oreign sales, employment and assets o TNCs, showed

gains in 2010 as economic conditions improved. UNCTAD estimates that sales and value added o oreignaliates in the world reached $33 trillion and $7 trillion, respectively. They also exported more than $6

trillion, about one-third o global exports. TNCs worldwide, in their operations both at home and abroad,

generated value added o approximately $16 trillion in 2010 about a quarter o total world GDP.

State-owned TNCs in the spotlight

State-owned TNCs are causing concerns in a number o host countries regarding national security,

the level playing eld or competing rms, and governance and transparency. From the perspective o

home countries, there are concerns regarding the openness to investment rom their State-owned TNCs.

Discussions are underway in some international orums with a view to addressing these issues.

Today there are at least 650 State-owned TNCs, constituting an important emerging source o FDI. Theirmore than 8,500 oreign aliates are spread across the globe, bringing them in contact with a large number

o host economies. While relatively small in number (less than 1 per cent o all TNCs), their FDI is substantial,

reaching roughly 11 per cent o global FDI fows in 2010. Refecting this, State-owned TNCs made up 19

o the worlds 100 largest TNCs.

State-owned TNCs constitute a varied group. Developing and transition economies are home to more than

hal o these rms (56 per cent), though developed countries continue to maintain a signicant number o

State-owned TNCs. In contrast to the general view o State-owned TNCs as largely concentrated in the

primary sector, they are diversied and have a strong presence in the services sector.

Uneven perormance across regions

The rise o FDI to developing countries masks signicant regional dierences. Some o the poorest regionscontinued to see declines in FDI fows. Flows to Arica, least developed countries (LDCs), landlocked

developing countries (LLDCs) and small island developing States (SIDS) continued to all, as did those

to South Asia. At the same time, major emerging regions, such as East and South-East Asia and Latin

America, experienced strong growth in FDI infows.

FDI fows toArica ell by 9 per cent in 2010. At $55 billon, the share o Arica in total global FDI infows

was 4.4 per cent in 2010, down rom 5.1 per cent in 2009. FDI to the primary sector, especially in the oil

industry, continued to dominate FDI fows to the continent. It accounted or the rise o Ghana as a major

host country, as well as or the declines o infows to Angola and Nigeria. Although the continuing pursuit o

natural resources, in particular by Asian TNCs, is likely to sustain FDI fows to sub-Saharan Arica, political

uncertainty in North Arica is likely to make 2011 another challenging year or the continent as a whole.


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxiv

Although there is some evidence that intraregional FDI is beginning to emerge in non-natural resource

related industries, intraregional FDI fows in Arica are still limited in terms o volume and industry diversity.

Harmonization o Aricas regional trade agreements and inclusion o FDI regimes could help Arica achieve

more o its intraregional FDI potential.

Infows to East Asia, South-East Asia and South Asia as a whole rose by 24 per cent in 2010, reaching

$300 billion. However, the three subregions experienced very dierent trends: infows to ASEAN more than

doubled; those to East Asia saw a 17 per cent rise; FDI to South Asia declined by one-ourth.

Infows to China, the largest recipient o FDI in the developing world, climbed by 11 per cent, to $106 billion.

With continuously rising wages and production costs, however, oshoring o labour-intensive manuacturing

to the country has slowed down, and FDI infows continue to shit towards high-tech industries and services.

In contrast, some ASEAN member States, such as Indonesia and Viet Nam, have gained ground as low-

cost production locations, especially or low-end manuacturing.

The decline o FDI to South Asia refects a 31 per cent slide in infows to India and a 14 per cent drop in

Pakistan. In India, the setback in attracting FDI was partly due to macroeconomic concerns. At the sametime, infows to Bangladesh, an increasingly important low-cost production location in South Asia, jumped

by 30 per cent to $913 million.

FDI outfows rom South, East and South-East Asia grew by 20 per cent to about $232 billion in 2010. In

recent years, rising FDI outfows rom developing Asia demonstrate new and diversied industrial patterns.

In extractive industries, new investors have emerged, including conglomerates such as CITIC (China) and

Reliance Group (India), and sovereign wealth unds, such as China Investment Corporation and Temasek

Holdings (Singapore). Metal companies in the region have been particularly active in ensuring access to

overseas mineral assets, such as iron ore and copper. In manuacturing, Asian companies have been

actively taking over large companies in the developed world, but ace increasing political obstacles. FDI

outfows in the services sector have declined, but M&As in such industries as telecommunications have

been increasing.

FDI fows to West Asia in 2010 continued to be aected by the global economic crisis, alling by 12 per cent,

but they are expected to bottom out in 2011. However, concerns about political instability in the region are

likely to dampen the recovery.

FDI outfows rom West Asia dropped by 51 per cent in 2010. Outward investment rom West Asia is mainly

driven by government-controlled entities, which have been redirecting some o their national oil surpluses to

support their home economies. The economic diversication policies o these countries has been pursued

through a dual strategy: investing in other Arab countries to bolster their small domestic economies; and

also investing in developed countries to seek strategic assets or the development and diversication o

the industrial capabilities back at home. Increasingly this policy has been pursued with a view to creating

productive capabilities that are missing at home, such as motor vehicles, alternative energies, electronics

and aerospace. This approach diers rom that o other countries, which have generally sought to develop

a certain level o capacity at home, beore engaging in outward direct investment.

FDI fows to Latin America and the Caribbean increased by 13 per cent in 2010. The strongest increase

was registered in South America, where the growth rate was 56 per cent, with Brazil particularly buoyant.

FDI outfows rom Latin America and the Caribbean increased by 67 per cent in 2010, mostly due to large

cross-border M&A purchases by Brazilian and Mexican TNCs.

Latin America and the Caribbean also witnessed a surge o investments by developing Asian TNCs

particularly in resource-seeking projects. In 2010, acquisitions by Asian TNCs jumped to $20 billion,

accounting or more than 60 per cent o total FDI to the region. This has raised concerns in some countries

in the region about the trade patterns, with South America exporting mostly commodities and importing

manuactured goods.


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xvOVERVIEW

FDI fows to transition economies declined slightly in 2010. Flows to the Commonwealth o Independent

States (CIS) rose marginally by 0.4 per cent. Foreign investors continue to be attracted to the ast-growing

local consumer market, especially in the Russian Federation where fows rose by 13 per cent to $41 billion.

In contrast, FDI fows to South-East Europe dropped sharply or the third consecutive year, due partly tosluggish investment rom EU countries.

SouthEast interregional FDI is growing rapidly. TNCs based in transition economies and in developing

economies have increasingly ventured into each others markets. For example, the share o developing host

countries in greeneld investment projects by TNCs rom transition economies rose to 60 per cent in 2010

(up rom only 28 per cent in 2004), while developing-country outward FDI in transition economies increased

more than ve times over the past decade. Kazakhstan and the Russian Federation are the most important

targets o developing-country investors, whereas China and Turkey are the most popular destinations

or FDI rom transition economies. Such SouthEast interregional FDI has beneted rom outward FDI

support rom governments through, among others, regional cooperation (e.g. the Shanghai Cooperation

Organization) and bilateral partnerships.

FDI ows to the poorest regions continue to all

In contrast to the FDI boom in developing countries as a whole, FDI infows to the 48 LDCs declined overall

by a urther 0.6 per cent in 2010 a matter o grave concern. The distribution o FDI fows among LDCs

also remains highly uneven, with over 80 per cent o LDC FDI fows going to resource-rich economies in

Arica. However, this picture is distorted by the highly capital-intensive nature o resource projects. Some

40 per cent o investments, by number, were in the orm o greeneld projects in the manuacturing sector

and 16 per cent in services.

On the occasion o the 2011 Fourth United Nations Conerence on the Least Developed Countries, UNCTAD

proposed a plan o action or investment in LDCs. The emphasis is on an integrated policy approach to

investment, technical capacity-building and enterprise development, with ve areas o action: public-privateinrastructure development; aid or productive capacity; building on LDC investment opportunities; local

business development and access to nance; and regulatory and institutional reorm.

Landlocked developing countries (LLDCs)saw their FDI infows all by 12 per cent to $23 billion in 2010.

These countries are traditionally marginal FDI destinations, and they accounted or only 4 per cent o total

FDI fows to the developing world. With intensied SouthSouth economic cooperation and increasing

capital fows rom emerging markets, prospects or FDI fows to the group may improve.

FDI infows tosmall island developing States (SIDS) as a whole declined slightly by 1 per cent in 2010, to

$4.2 billion. As these countries are particularly vulnerable to the eects o climate change, SIDS are looking

to attract investment rom TNCs that can make a contribution to climate change adaptation, by mobilizing

nancial and technological resources, implementing adaptation initiatives, and enhancing local adaptive

capacities.

FDI to developed countries remains well below pre-crisis levels

In 2010, FDI infows in developed countries declined marginally. The pattern o FDI infows was uneven

among subregions. Europe suered a sharp all. Declining FDI fows were also registered in Japan. A

gloomier economic outlook, austerity measures and possible sovereign debt crisis, as well as regulatory

concerns, were among the actors hampering the recovery o FDI fows. Infows to the United States,

however, showed a strong turnaround, with an increase o more than 40 per cent.

In developed countries, the restructuring o the banking industry, driven by regulatory authorities, has

resulted in a series o signicant divestments o oreign assets. At the same time, it has also generated new

FDI as assets changed hands among major players. The global eorts towards the reorm o the nancial


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxvi

system and the exit strategy o governments are likely to have a large bearing on FDI fows in the nancial

industry in coming years.

The downward trend in outward FDI rom developed countries reversed, with a 10 per cent increase over

2009. However, this took it to only hal the level o its 2007 peak. The reversal was largely due to higher

M&A values, acilitated by stronger balance sheets o TNCs and historic low rates o debt nancing.

INVESTMENT POLICY TRENDS

National policies: mixed messages

More than two-thirds o reported investment policy measures in 2010 were in the area o FDI liberalization

and promotion. This was the case or Asia in particular, where a relatively high number o measures eased

entry and establishment conditions or oreign investment. Most promotion and acilitation measures were

adopted by governments in Arica and Asia. These measures included the streamlining o admissionprocedures and the opening o new, or the expansion o existing, special economic zones.

On the other hand, almost one-third o all new measures in 2010 ell into the category o investment-

related regulation and restrictions, continuing its upward trend since 2003. The recent restrictive measures

were mainly in a ew industries, in particular natural resource-based industries and nancial services. The

accumulation o restrictive measures over the past years and their continued upward trend, as well as

stricter review procedures or FDI entry, has increased the risk o investment protectionism.

Although numerous countries continue to implement emergency measures or hold considerable assets

ollowing bail-out operations, the unwinding o support schemes and liabilities resulting rom emergency

measures has started. The process advances relatively slowly. As o April 2011, governments are estimated

to hold legacy assets and liabilities in nancial and non-nancial rms valued at over $2 trillion. By ar thelargest share relates to several hundred rms in the nancial sector. All this indicates a potential wave o

privatizations in the years to come.

The international investment regime: too much and too little

With a total o 178 new IIAs in 2010 more than three new treaties per week the IIA universe reached

6,092 agreements at the end o the year. This trend o treaty expansion is expected to continue in 2011,

the rst ve months o which saw 48 new IIAs, with more than 100 IIAs currently under negotiation. How

the FDI-related competence shit rom EU member States to the European level will aect the overall IIA

regime is still unclear (EU member States currently have more than 1,300 BITs with non-EU countries). At

least 25 new treaty-based investorState dispute settlement cases were initiated in 2010 and 47 decisions

rendered, bringing the total o known cases to 390, and those closed to 197. The overwhelming majority othese cases were initiated by investors rom developed countries, with developing countries most oten on

the receiving end. The 2010 awards urther tilted the overall balance in avour o the State, with 78 cases

won against 59 lost.

As countries continue concluding IIAs, sometimes with novel provisions aimed at rebalancing the rights and

obligations between States and rms, and ensuring coherence between IIAs and other public policies, the

policy discourse about the uture orientation o the IIA regime and how to make IIAs better contribute to

sustainable development is intensiying. Nationally, this maniests itsel in a growing dialogue among a broad

set o investment stakeholders, including civil society, business and parliamentarians. Internationally, inter-

governmental debates in UNCTADs 2010 World Investment Forum, UNCTADs Investment Commission

and the joint OECD-UNCTAD investment meetings serve as examples.


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xviiOVERVIEW

With thousands o treaties, many ongoing negotiations and multiple dispute-settlement mechanisms,

todays IIA regime has come close to a point where it is too big and complex to handle or governments

and investors alike. Yet it oers protection to only two-thirds o global FDI stock and covers only one-th o

possible bilateral investment relationships. To provide ull coverage a urther 14,100 bilateral treaties wouldbe required. This raises questions not only about the eorts needed to complete the global IIA network, but

also about the impact o the IIA regime and its eectiveness or promoting and protecting investment, and

about how to ensure that IIAs deliver on their development potential.

Intensiying interaction between FDI policies and industrial policies

FDI policies increasingly interact with industrial policies, nationally and internationally. At thenational level,

this interace maniests itsel in specic national investment guidelines; the targeting o types o investment

or specic categories o oreign investors or industrial development purposes; investment incentives related

to certain industries, activities or regions; and investment acilitation in line with industrial development

strategies. Countries also use selective FDI restrictions or industrial policy purposes connected to the

protection o inant industries, national champions, strategic enterprises or ailing domestic industries intimes o crisis.

At theinternational level,industrial policies are supported by FDI promotion through IIAs, in particular whenthe respective IIA has sector-specic elements. At the same time, IIA provisions can limit regulatory space

or industrial policies. To avoid undue policy constraints, a number o fexibility mechanism have been

developed in IIAs, such as exclusions and reservations or certain industries, general exceptions or national

security exceptions. According to UNCTAD case studies o reservations in IIAs, countries are more inclined

to preserve policy space or the services sector, compared to the primary and manuacturing sectors.

Within the services sector, most reservations exist in transportation, nance and communication.

The overall challenge is to manage the interaction between FDI policies and industrial policies, so as to

make the two policies work or development. There is a need to strike a balance between building strongerdomestic productive capacity on the one hand and preventing investment and trade protectionism on the

other. Better international coordination can contribute to avoiding beggar thy neighbour policies and

creating synergies or global cooperation.

CSR standards increasingly inuence investment policies

Over the past years, corporate social responsibility (CSR) standards have emerged as a unique dimension

o sot law. These CSR standards typically ocus on the operations o TNCs and, as such, are increasingly

signicant or international investment as eorts to rebalance the rights and obligations o the State and

the investor intensiy. TNCs in turn, through their oreign investments and global value chains, can infuence

the social and environmental practices o business worldwide. The current landscape o CSR standards is

multilayered, multiaceted, and interconnected. The standards o the United Nations, the ILO and the OECDserve to dene and provide guidance on undamental CSR. In addition there are dozens o international

multi-stakeholder initiatives (MSIs), hundreds o industry association initiatives and thousands o individual

company codes providing standards or the social and environmental practices o rms at home and abroad.

CSR standards pose a number o systemic challenges. A undamental challenge aecting most CSR

standards is ensuring that companies actually comply with their content. Moreover, there are gaps, overlaps

and inconsistencies between standards in terms o global reach, subjects covered, industry ocus and

uptake among companies. Voluntary CSR standards can complement government regulatory eorts, but

they can also undermine, substitute or distract rom these. Finally, corporate reporting on perormance

relative to CSR standards continues to lack standardization and comparability.


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxviii

Governments can play an important role in creating a coherent policy and institutional ramework to address

the challenges and opportunities presented by the universe o CSR standards. Policy options or promoting

CSR standards include supporting the development o new CSR standards; applying CSR standards to

government procurement; building capacity in developing countries to adopt CSR standards; promotingthe uptake o CSR reporting and responsible investment; adopting CSR standards as part o regulatory

initiatives; strengthening the compliance promotion mechanisms o existing international standards; and

actoring CSR standards into IIAs. The various approaches already underway increasingly mix regulatory

and voluntary instruments to promote responsible business practices.

While CSR standards generally aim to promote sustainable development goals, in the context o international

production care needs to be taken to avoid them becoming barriers to trade and investment. The objective

o promoting investment can be rhymed with CSR standards. Discussions on responsible investment are

ongoing in the international community; or example, in 2010, G-20 leaders encouraged countries and

companies to uphold the Principles or Responsible Agricultural Investment (PRAI) that were developed by

UNCTAD, the World Bank, IFAD and FAO, requesting these organizations to develop options or promoting

responsible investment in agriculture.

NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT

International production, today, is no longer exclusively about FDI on the one hand and trade on the other.

Non-equity modes (NEMs) o international production are o growing importance, generating over $2

trillion in sales in 2010, much o it in developing countries. NEMs include contract manuacturing, services

outsourcing, contract arming, ranchising, licensing, management contracts and other types o contractual

relationships through which TNCs coordinate activities in their global value chains (GVCs) and infuence the

management o host-country rms without owning an equity stake in those rms.

From a development perspective, both NEM partnerships and oreign aliates (i.e. FDI) can enable hostcountries to integrate into GVCs. A key advantage o NEMs is that they are fexible arrangements with

local rms, with a built-in motive or TNCs to invest in the viability o their partners through dissemination o

knowledge, technology and skills. This oers host economies considerable potential or long-term industrial

capacity building through a number o key channels o development impact such as employment, value

added, export generation and technology acquisition. On the other hand, by establishing a local aliate

through FDI, a TNC signals its long-term commitment to a host economy. Attracting FDI is also the better

option or economies with limited existing productive capacity.

NEMs may be more appropriate than FDI in sensitive situations. In agriculture, or example, contract arming

is more likely to address responsible investment issues respect or local rights, livelihoods o armers and

sustainable use o resources than large-scale land acquisition.

For developing country policymakers, the rise o NEMs not only creates new opportunities or productive

capacity building and integration into GVCs, there are also new challenges, as each NEM mode comes with

its own set o development impacts and policy implications.

The TNC make or buy decision and NEMs as the middle-ground option

Foremost among the core competencies o a TNC is its ability to coordinate activities within a global value

chain. TNCs can decide to conduct such activities in-house (internalization) or they can entrust them to

other rms (externalization) a choice analogous to a make or buy decision. Internalization, where it has a

cross-border dimension, results in FDI, whereby the international fows o goods, services, inormation and

other assets are intra-rm and under ull control o the TNC. Externalization results in either arms-length

trade, where the TNC exercises no control over other rms or, as an intermediate middle-ground option,


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xixOVERVIEW

in non-equity inter-rm arrangements in which contractual agreements and relative bargaining power

condition the operations and behaviour o host-country rms. Such conditioning can have a material

impact on the conduct o the business, requiring the host-country rm to, or example, invest in equipment,

change processes, adopt new procedures, improve working conditions, or use specied suppliers.

The ultimate ownership and control conguration o a GVC is the outcome o a set o strategic choices

by the TNC. In a typical value chain, a TNC oversees a sequence o activities rom procurement o inputs,

through manuacturing operations to distribution, sales and atersales services. In addition, rms undertake

activities such as IT unctions or R&D which support all parts o the value chain.

In a ully integrated company, activities in all these segments o the value chain are carried out in-house

(internalized), resulting in FDI i the activity takes place overseas. However, in all segments o the value chain

TNCs can opt to externalize activities through various NEM types. For example, instead o establishing a

manuacturing aliate (FDI) in a host country, a TNC can outsource production to a contract manuacturer

or permit a local rm to produce under licence.

The TNCs ultimate choice between FDI and NEMs (or trade) in any segment o the value chain is based onits strategy, the relative costs and benets, the associated risks, and the easibility o available options. In

some parts o the value chain NEMs can be substitutes or FDI, in others the two may be complementary.

NEMs are worth more than $2 trillion, mostly in developing countries

Cross-border NEM activity worldwide is estimated to have generated over $2 trillion o sales in 2010. O

this amount, contract manuacturing and services outsourcing accounted or $1.11.3 trillion, ranchising

or $330350 billion, licensing or $340360 billion, and management contracts or around $100 billion.

These estimates are incomplete, including only the most important industries in which each NEM type is

prevalent. The total also excludes other non-equity modes such as contract arming and concessions,

which are signicant in developing countries. For example, contract arming activities by TNCs are spread

worldwide, covering over 110 developing and transition economies, spanning a wide range o agricultural

commodities and accounting or a high share o output.

There are large variations in relative size. In the automotive industry, contract manuacturing accounts

or 30 per cent o global exports o automotive components and a quarter o employment. In contrast,

in electronics, contract manuacturing represents a signicant share o trade and some three-quarters o

employment. In labour-intensive industries such as garments, ootwear and toys, contract manuacturing

is even more important.

Putting dierent modes o international production in perspective, cross-border activity related to selected

NEMs o $2 trillion compares with exports o oreign aliates o TNCs o some $6 trillion in 2010. However,

NEMs are particularly important in developing countries. In many industries, developing countries account

or almost all NEM-related employment and exports, compared with their share in global FDI stocks o 30per cent and in world trade o less than 40 per cent.

NEMs are also growing rapidly. In most cases, the growth o NEMs outpaces that o the industries in which

they operate. This growth is driven by a number o key advantages o NEMs or TNCs: (1) the relatively low

upront capital expenditures required and the limited working capital needed or operation; (2) reduced risk

exposure; (3) fexibility in adapting to changes in the business cycle and in demand; and (4) as a basis or

externalizing non-core activities that can oten be carried out at lower cost by other operators.

NEMs generate signifcant ormal employment in developing countries

UNCTAD estimates that worldwide some 1821 million workers are directly employed in rms operating

under NEM arrangements, most o whom are in contract manuacturing, services outsourcing and ranchising


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxx

activities. Around 80 per cent o NEM-generated employment is in developing and transition economies.

Employment in contract manuacturing and, to a lesser extent, services outsourcing, is predominantly

based in developing countries. The same applies in other NEMs, although global gures are not available;

in Mozambique, or instance, contract arming has led to some 400,000 smallholders participating in globalvalue chains.

Working conditions in NEMs based on low-cost labour are oten a concern, and vary considerably

depending on the mode and the legal, social and economic structures o the countries in which NEM

rms are operating. The actors that infuence working conditions in non-equity modes are the role o

governments in dening, communicating and enorcing labour standards and the sourcing practices o

TNCs. The social responsibility o TNCs has extended beyond their own legal boundaries and has pushed

many to increase their infuence over the activities o value chain partners. It is increasingly common or

TNCs, in order to manage risks and protect their brand and image, to infuence their NEM partners through

codes o conduct, to promote international labour standards and good management practices.

An additional concern relates to the relative ootlooseness o NEMs. The seasonality o industries,

fuctuating demand patterns o TNCs, and the ease with which they can shit NEM production to other

locations can have a strong impact on working conditions in NEM rms and on stability o employment.

NEMs oten make an important contribution to GDP

The impact o NEMs on local value added can be signicant. It depends on how NEM arrangements t into

TNC-governed GVCs and, thereore, on how much value is retained in the host economy. It also depends

on the potential or linkages with other rms and on their underlying capabilities.

In eciency seeking NEMs, such as contract manuacturing or services outsourcing, it is possible or value

capture in the host economy to be relatively small compared to the overall value creation in a GVC, when

the scope or local sourcing is limited and goods are imported, processed and subsequently exported, as is

oten the case in the electronics industry, or example. Although value captured as a share o nal-productsales price may be limited, it can nevertheless represent a signicant contribution to the local economy,

adding up to 1015 per cent o GDP in some countries.

Local sourcing and the overall impact on host-country value added increases i the emergence o contract

manuacturing leads to a concentration o production and export activities (e.g. in clusters or industrial

parks). The greater the number o plants and the more numerous the linkages with TNCs, the greater will

be the spillover eects and local value added. In addition, clustering can reduce the risk o TNCs shiting

production to other locations by increasing switching costs.

NEMs can generate export gains

NEMs are inextricably linked with international trade, shaping global patterns o trade in many industries.In toys, ootwear, garments, and electronics, contract manuacturing represents more than 50 per cent o

global trade. NEMs can thus be an important route-to-market or countries aiming at export-led growth,

and an important initial point o access to TNC governed global value chains, beore gradually building

independent exporting capabilities. Export gains can be partially oset by higher imports, reducing net

export gains, where local value added is limited, especially in early stages o NEM development.

NEMs are an important avenue or technology and skills building

NEMs are in essence a transer o intellectual property to a host-country rm under the protection o a

contract. Licensing involves a TNC granting an NEM partner access to intellectual property, usually with

contractual conditions attached, but oten with some training or skills transer. International ranchising


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World Investment Report 2011: Non-Equity Modes of International Production and Developmentxxii

policymakers: rst, how to integrate NEM policies into the overall context o national development strategies;

second, how to support the building o domestic productive capacity to ensure the availability o attractive

business partners that can qualiy as actors in global value chains; third, how to promote and acilitate

NEMs; and ourth, how to address negative eects o NEMs.

NEM policies appropriately embedded in industrial development strategies will:

ensure that eorts to attract NEMs through building domestic productive capacity and through

acilitation and promotion initiatives are directed at the right industries, value chains and specic

activities or segments within value chains;

support industrial upgrading in line with a countrys development stage, ensuring that rms move to

higher value-added stages in the value chain, helping local NEM partners reduce their technology

dependency, develop their own brands, or become NEM originators in their own right.

An important element o industrial development strategies that incorporate NEMs are measures to prevent

and mitigate impacts deriving rom the ootlooseness o some NEM types, balancing diversication and

specialization. Diversication ensures that domestic companies are engaged in multiple NEM activities,

both within and across dierent value chains, and are connected to a broad range o NEM partners.

Specialization in particular value chains improves the competitive edge o local NEM partners within those

chains and can acilitate, in the longer term, upgrading to segments with greater value capture. In general,

measures should aim at maintaining and increasing the attractiveness o the host country or TNCs and

improve the stickiness o NEMs by building up local mass, clusters o suppliers, and the local technology

base. Continuous learning and skills upgrading o domestic entrepreneurs and employees are also important

to ensure domestic rms can move to higher value-added activities should oreign companies move low

end production processes to cheaper locations.

Improving the capacity o locals to engage in NEMs has several policy aspects. Pro-active entrepreneurship

policies can strengthen the competitiveness o domestic NEM partners and range rom ostering start-ups

to promoting business networks. Embedding entrepreneurship knowledge into ormal education systems,

combined with vocational training and the development o specialized NEM-related skills is also important.

A mix o national technology policies can improve local absorptive capacity and create technology clusters

and partnerships. Access to nance or domestic NEM partners can be improved through policies reducing

borrowing costs and the risks associated with lending to SMEs, or by oering alternatives to traditional

bank credits. Facilitation eorts can also include initiatives to support respect or core labour standards and

CSR.

Promoting and acilitating NEM arrangements depends, rst, on clear and stable rules governing the

contractual relationships between NEM partners, including transparency and coherence. This is important,

as NEM arrangements are oten governed by multiple laws and regulations. Conducive NEM-specic

laws (e.g. ranchising laws, rules on contract arming) and appropriate intellectual property (IP) protection

(particularly relevant or IP-intensive NEMs such as licensing, ranchising and oten contract manuacturing)

can also help. While the current involvement o investment promotion agencies in NEM-specic promotion

is still limited, they could expand their remit beyond FDI to promote awareness o NEM opportunities,

engage in matchmaking services, and provide incentives to start-ups.

To address any negative impacts o NEMs, it is important to strengthen the bargaining power o local NEM

partners vis--vis TNCs to ensure that contracts are based on a air sharing o risks and benets. The

development o industry-specic NEM model contracts or negotiation guidelines can contribute to achieving

this objective. I TNCs engaged in NEMs acquire dominant positions, they may be able to abuse their

market power to the detriment o their competitors (domestic and oreign) and their own trading partners.

Thereore, policies to promote NEMs need to go hand in hand with policies to saeguard competition. Other

public interest criteria may require attention as well. Protection o indigenous capacities and traditional


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xxiiiOVERVIEW

activities, that may be crowded out by a rapid increase in market shares o successul NEMs, is essential.

In the case o contract arming or instance, policies such as these would result in model contracts or

guidelines supporting smallholders in negotiations with TNCs; training on sustainable arming methods;

provision o appropriate technologies and government-led extension services to improve capacities o

contract armers; and inrastructure development or improving business opportunities or contract armers

in remote areas. I contract arming was given more pride o place in government policies, direct investment

in large-scale land acquisitions by TNCs would be less o an issue.

Finally, home-country initiatives and the international community can also play a positive role. Home-country

policies that specically promote overseas NEMs include the expansion o national export insurance

schemes and political risk insurance to also cover some types o NEMs. Internationally, while there is

no comprehensive legal and policy ramework or ostering NEMs and their development contribution,

supportive international policies range rom relevant WTO agreements and, to a limited extent, IIAs, to sot

law initiatives contributing to harmonizing the rules governing the relationship between private NEM parties

or guiding them in the crating o NEM contracts.

* * *

Foreign direct investment is a key component o the worlds growth engine. However, the post-crisis recovery

in FDI has been slow to take o and is unevenly spread, with especially the poorest countries still in FDI

recession. Many uncertainties still haunt investors in the global economy. National and international policy

developments are sending mixed messages to the investment community. And investment policymaking is

becoming more complex, with international production evolving and with blurring boundaries between FDI,

non-equity modes and trade. The growth o NEMs poses new challenges but also creates new opportunities

or the urther integration o developing economies into the global economy. The World Investment Report

2011 aims to help developing-country policymakers and the international development community navigate

those challenges and capitalize on the opportunities or their development gains.

Geneva, June 2011 Supachai PanitchpakdiSecretary-General o the UNCTAD


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Global oreign direct investment (FDI) ows rose moderately to $1.24 trillion in 2010, but were still15 per cent below their pre-crisis average. This is in contrast to global industrial output and trade,which were back to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.41.6 trillion, approaching its 2007 peak in 2013. This positivescenario holds, barring any unexpected global economic shocks that may arise rom a number orisk actors still in play.

For the frst time, developing and transition economies together attracted more than hal o globalFDI ows. Outward FDI rom those economies also reached record highs, with most o theirinvestment directed towards other countries in the South. Furthermore, interregional FDI betweendeveloping countries and transition economies has been growing rapidly. In contrast, FDI inowsto developed countries continued to decline.

Some o the poorest regions continued to see declines in FDI ows. Flows to Arica, least developedcountries, landlocked developing countries and small island developing States all ell, as did owsto South Asia. At the same time, major emerging regions, such as East and South-East Asia andLatin America, experienced strong growth in FDI inows.

International production is expanding, with oreign sales, employment and assets o transnationalcorporations (TNCs) all increasing. TNCs production worldwide generated value added oapproximately $16 trillion in 2010 about a quarter o global GDP. Foreign afliates o TNCsaccounted or more than one-tenth o global GDP an

World Investment Report 2011 Unctad

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