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					Study Tour for Russian Member Universities of
                the Vi Network
 (State University Higher School of Economics Moscow, Moscow, State
  Institute of International Relations (MGIMO) and St. Petersburg State
                                  University)




         Foreign direct investment
                          16 April 2010
                  Kalman Kalotay, UNCTAD/DIAE
                    Outline

 Introduction to UNCTAD/DIAE
 I. Basic concepts
 II. Why FDI?
 III. The “big picture”
 IV. Regional trends
 V. FDI in the Russian Federation
 VI. The global crisis and FDI


                                     2
           Introduction to UNCTAD/DIAE
                     Who are we?
 Division on Investment and Enterprise: focal point
  within the United Nations Secretariat for all matters
  related to foreign direct investment and
  transnational corporations.

 History:   the     Programme     on   Transnational
  Corporations was carried out by the United Nations
  Centre on Transnational Corporations (1975–1992)
  and the Transnational Corporations and Management
  Division of the United Nations Department of
  Economic and Social Development (1992–1993).
                                                 3
  1993: transfer to UNCTAD (est. 1964).
           How do we carry out our work?
 Forum for consensus building (meetings)
 Research and analysis
       Data collection and analysis of new trends (World Investment
       Reports, investment trends monitor)
       Policy research on development questions
       Publications (Transnational Corporations journal, UNCTAD Current
       Studies on FDI and Development etc.)
 Technical cooperation and capacity building
       Assistance in negotiating bilateral investment treaties
       Assisting in drafting investment laws
       Investment Policy Reviews
       Publishing investment guides
       Help in setting up Investment Promotion Agencies
       Assistance in enterprise development and business linkages


                                                                     4
    World Investment Reports: main source of data
                    and analysis
   2009: Agriculture
   2008: Infrastructure
   2007: Extractive Industries
   2006: FDI from Developing and Transition Economies
   2005: TNCs and the Internationalization of R&D
   2004: The Shift Towards Services
   2003: FDI Policies for Development
   2002: TNCs and Export Competitiveness
   2001: Promoting Linkages
   2000: Cross-border M&As
   1999: FDI and the Challenge of Development
   1998: Trends and Determinants
   1997: Competition Policy
   1996: Investment and Trade
   1995: TNCs and Competitiveness
   1994: TNCs and Employment
   1993: Integrated International Production
   1992: TNCs as Engines of Growth                      5
   1991: The Triad in FDI
I. Basic concepts
           What is foreign direct investment?
 Balance-of-payments concept
 Distinguish between portfolio and direct investment
   Portfolio investment: short-term oriented capital flows
    resulting in control of less than 10 per cent of the equity or
    voting shares in a foreign company.
   Direct investment: results in long-term relationship and a
    lasting interest and control of a resident in a foreign
    economy.
 FDI flows consist of three different components:
   Equity capital
   Reinvested earnings
   Intra-company loans                                       7
Different types of FDI (by motivation of investors)
 Natural resource-seeking
   Oil and gas extraction, mining, etc
 Market-seeking (horizontal FDI)
   Access a domestic or regional (EU, NAFTA, ASEAN)
    market
 Efficiency-seeking (vertical FDI)
   Specialize and divide production in line with the
    comparative advantages of different locations; export-
    oriented FDI
 Strategic-asset seeking (primarily through M&As)
                                                             8
        Modes of entry of FDI projects

Main modes:
  Greenfield investment
  Acquisition
  Merger
Subsidiary modes:
  Joint venture
  Expansion investment


                                         9
II. Why FDI?
                   FDI is as important as trade
                        Exports and sales in $ trillions
35
           Exports of foreign affiliates                          31.8
           World exports                                                              30.3
30
           Sales of foreign affiliates

25


                                                                               20.0
20
                                                           17.3


15



10

                                                                         6.7
                                               6.0   5.8
 5                                       4.4
            2.4   2.5
                                1.5
     0.6
 0                                                                                           11
           1982                       1990                 2007                2008
 Foreign affiliates’ gross product vs. world GDP
                                     In $ trillions
70

     Gross product of foreign affiliates
                                                                         60.8
60
     World GDP                                           55.1


50



40



30

                                      22.1
20

              12.0
10
                                                6.3             6.0

     0.6                     1.5
 0                                                                              12
           1982                    1990               2007            2008
               Some benefits of FDI

 In contrast to other capital flows, FDI can bring
  additional benefits to a host economy:
   Access to international markets
   Access to foreign sources of supply
   Management know-how
   Transfer of knowledge and technology
   Employment creation and skills development
   Competition
   Relative stability compared to other flows (in case
    of crisis)
                                                      13
             Some related concerns
FDI is no panacea
Benefits are not automatic
Sovereignty issue
Anti-competitive practices
Transfer pricing/tax evasion
Environmental degradation
Footlooseness and lack of technology spillovers
Risk for excessive competition
Divestment in crisis
                                           14
III. The “big picture”
                  Rise until 2007 in global FDI
                                    $ billions




Global FDI declined from $2 trillion in 2007 to $1.7 trillion in 2008
Transition economies posted a new record high, with inflows reaching $114 billion, a
26% increase
                                                                               16
The FDI landscape has shifted in favour of
  developing and transition economies

                   Average 1999-2001        South-East     Developing   Average 2007-2008        South-East
      Developing
                                          Europe and the   economies                           Europe and the
      economies
                                               CIS            31%                                   CIS
         21%
                                               1%                                                   6%




                                                                                            Developed
                              Developed                                                     economies
                              economies                                                        63%
                                 78%




Developing and transition economies accounted for 43% in 2008 (31%
in 2007)
                                                                                                        17
       Top recipients of FDI inflows
Global FDI inflows, top 20 economies, 2007–2008
                    ($ billion)
                                                   The United States
                                                  remained the
                                                  largest recipient
                                                  country, followed by
                                                  France, China, the
                                                  United Kingdom,
                                                  and the Russian
                                                  Federation

                                                   Half of the top 20
                                                  recipients were
                                                  emerging
                                                  economies
                                                                    18
IV. South-East Europe
       and CIS
Eighth consecutive year of growth of FDI
           inflows in 2008…
   FDI inflows, by value and as a percentage of gross fixed capital
                       formation, 1995−2008




                                                                      20
              …but FDI declined in 2009
 Slowdown (and
  some decline) in
  the second half of
  2008                     FDI inflows of selected countries,
                                2008−2009, by quarter
                                  (Millions of dollars)

 Latest estimate
  for 2009:
    39% fall in the
     region, 41% in the
     Russian
     federation, 55% in
     Ukraine,
     compared to -39%
     globally


                                                           21
    FDI inflows in large recipient countries,
                      2008
   Russian Federation:
    a record level of $70
    billion; main targets:
    electricity generation,   Top 5 recipients of FDI inflows, 2007–2008
    real estate and                        (Billions of dollars)
    automotive industries

   Kazakhstan: a record
    level of $15 billion;
    main target: oil and
    gas projects

   Ukraine: more than
    $10 billion; main
    targets: acquisitions
    in banking and steel
    industries




                                                                    22
FDI outflows reached new highs in
   2008, but declined in 2009
FDI outflows of selected countries,   Russian TNCs dominated the
     2008−2009, by quarter
                                       region’s outward FDI. Main
          (Billions of dollars)        trends:
                                       First half of 2008:
                                        expansion,
                                           to seek new markets for
                                            their products abroad,
                                            and
                                           to gain access to
                                            technology
                                       Second half of 2008 and
                                        first quarter of 2009: some
                                        divestments; some
                                        acquisitions frozen or
                                        cancelled (in construction or
                                        automotive industry)
                                                                23
                               Prospects
 Decline of FDI inflows in the near
  future due to:
    The economic and financial crisis,
    A fall in commodity prices, and      Comparison of the results of
    The near exhaustion of major         WIPS 2008–2010 with WIPS
      privatization opportunities
                                                  2009–2011
                                              (Per cent of respondents)
 In the medium term, the outlook for
  investment in the region is rather
  positive

 Outward FDI is expected to slow
  down, although Russian TNCs are
  more optimistic about future plans
  than their foreign counterparts in
  developed countries




                                                                          24
V. FDI in the Russian Federation
     Inflows and outflows grew rapidly between 2002 and
                  2008, but declined in 2009
                                              (Millions of dollars)
80 000


70 000


60 000


50 000


40 000


30 000


20 000


10 000


     -
         1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003    2004   2005   2006   2007   2008   2009

                                                      FDI inflows       FDI outflows                               26
 However, devaluation of FDI stocks already showed a
               major problem in 2008
                                             (Millions of dollars)
600 000



500 000



400 000



300 000



200 000



100 000



      -
          1993   1994   1995   1996   1997    1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008

                                               Inward FDI stock       Outward FDI stock                       27
          Growth of FDI inflows was fast in international
                           comparison
                                          (Millions of dollars)
120 000




100 000




 80 000




 60 000




 40 000




 20 000




      -
          1993   1994   1995   1996   1997   1998    1999   2000    2001   2002   2003   2004   2005   2006   2007
                                                                                                               28    2008

                                 Brazil      China          India      Poland        Russian Federation
Cross-border M&As, 1991–2006: primary sector
                dominates
     Confirms natural resource seeking motives




                     21%




              11%


                                                     68%




                    Primary   Secondary   Tertiary

                                                           29
      Evolution of industry composition in the Russian
                         Federation
                    Share of selected industries in total M&A sales of the Russian Federation, 1991-2006
                                                            (Per cent)


70%

60%


50%


40%


30%

20%


10%


0%
                1991–1995                                       1996–2000                                  2001–2006

          Mining and petroleum          Food, beverages and tobacco         Coke and petroleum     Metals
          Motor vehicles                Transport and telecom               Finance
                                                                                                                       30
   Cross-border M&As, 1991–2006: countries of origin
• Old EU members dominate (UK, DE), but developing countries are second
  (CN, IN), and other developed countries third (US)



                                               3%


                              27%




                                                                54%

                            16%




                   Other economies             Old EU members
                   Other developed economies   Developing economies   31
                     Rise and decline of source countries
•        Rise of resource-seeking China
•        Decline and recovery of resource-seeking India
•        Rise and decline of the round-tripping hub of Cyprus
•        Rise (BP-TNK) and decline of the United Kingdom

                     Share of selected countries in the cross-border sales of the Russian Federation, 1991-2006
                                                              (Per cent)

45%

40%

35%

30%

25%

20%

15%

10%

    5%

    0%
                    1991-1995                                    1996-2000                                     2001-2006
                                                                                                                           32
                                China   India   Germany    Netherlands       Cyprus   United Kingdom   United States
Growth of outward FDI flows was even more impressive
        than of inflows: proof of leapfrogging
                                              (Millions of dollars)
 60 000



 50 000



 40 000



 30 000



 20 000



 10 000



       -



- 10 000
           1993   1994   1995   1996   1997   1998   1999   2000     2001   2002   2003   2004   2005   2006   2007   2008
                                                                                                                        33
                                  Brazil        China        India          Poland         Russian Federation
Despite devaluation in 2008, Russian outward stock is
              bigger than that of China
                                         (Millions of dollars)
   400 000



   350 000



   300 000



   250 000



   200 000



   150 000



   100 000



    50 000



         -
             1993   1994   1995   1996      1997   1998    1999    2000   2001   2002   2003   2004   2005   2006   2007   2008
                                                                                                                    34
                                   Brazil          China          India      Poland        Russian Federation
Is the Russian Federation and outlier in the investment
                development path? I.
                              Outward per inward FDI stocks
 1.60


 1.40


 1.20


 1.00


 0.80


 0.60


 0.40


 0.20


 0.00
         1993   1994   1995   1996   1997   1998    1999    2000   2001   2002   2003   2004   2005   2006   2007    2008

 -0.20
                                                                                                                    35
                                 Brazil     China          India     Poland      Russian Federation
Is the Russian Federation and outlier in the investment
                development path? II.
                                        FDI outflows per inflows
 1.00


 0.90


 0.80


 0.70


 0.60


 0.50


 0.40


 0.30


 0.20


 0.10


 0.00
        1993   1994   1995   1996   1997   1998    1999    2000   2001   2002   2003   2004   2005   2006   2007
                                                                                                                   362008
                               Brazil      China          India      Poland       Russian Federation
VI. Impact of the global crisis
            on FDI
               To recall:
In 2008, the crisis ends a global FDI boom
          in developed countries
                 $ billions




                                             38
                                                  38
Cross-border M&As declined strongly in wake of
                 the crisis
                    Value of global cross-border M&As, 1988-2009a




            a   Data for 2009 are estimated by annualizing data for the first half of 2009.

 The value of cross-border M&As declined by 35% in 2008 to $673 billion, and
 plummet further by 76% in the 1st half of 2009
                                                                                              39
       All components of FDI (equity, reinvested
     earnings, intra-company loans) have declined
        Global FDI inflows by component, 2000–2009                                            In late 2008 and
                            ($ million)                                                      the first few months
1900
                                                                                             of 2009, significant
1700                                                                                         declines were
1500

1300
                                                                                             recorded in all three
1100                                                                                         components of FDI
900

700
                                                                                             inflows: equity
500                                                                                          investments, intra-
300
                                                                                             company loans and
100

-100
                                                                                             reinvested earnings
            2004           2005           2006          2007           2008           2009


                                                                                              Decline in equity
             Equity investment          Reinvested earnings          Intra company loans
                                                                                             investments is
 a   Data for 2009 are estimated by annualizing data for the first half of 2009 .            particularly large
                                                                                                           40
                 FDI estimate for 2009
 World: -39%
Developed countries: -41%
Developing countries: -35%
Transition economies: -39%

US: -57%
Japan: -53%
South Africa: -25%
Brazil: -41%
Mexico: -41%
Turkey: -56%
China: -3%
Hong Kong (China): -43%
India: -19%
Malaysia: -67%
Russian Federation: -41%
Ukraine: -55%                           41
Poland: -19%
   Effects of the crisis on different types of FDI

 The most directly affected types of investment so far
  have been market-seeking projects, especially those
  aimed at developed countries

 Resource-seeking FDI projects could suffer, at least in
  the short-term, from the decline in world demand

 The impact of the crisis on efficiency-seeking projects
  is more ambiguous: risk aversion versus cost
  efficiency
                                                    42
   Channels of transmission of the crisis to FDI
                     flows
 Reduced access to finance: negatively affected
  TNCs’ capacity to invest, both internally and externally
  (more than 40 % decline in stock markets)
 Gloomy prospects (recession): reduced firms’
  propensity to invest for further expansion of production
  capacities
 Risk aversion: Investment plans scaled back due to a
  high level of perceived risks and uncertainties, in order
  to develop resilience to possible “worst-case”
  scenarios regarding financial and economic conditions

                                                     43
Reasons for the sharp impact of the financial and
     economic crisis on TNCs’ FDI plans
100

 80


 60

 40

 20

  0
          Financial crisis and      Global economic         Exchange rate
             credit crunch             downturn              fluctuations

IMPACT:      Very negative       Negative   None      Positive   Very positive

                                                                            44
Somewhat better prospects for TNCs’ FDI
          plans after 2009




                                     45
              Global FDI Prospects, 2009-2011




($ billion)




Global FDI flows are expected to fall further to below $1.2
trillion in 2009
With a slow recovery in 2010 (to a level up to $1.4 trillion)
Gaining momentum in 2011 (approaching $1.8 trillion) 46
  Thank you very much for your
           attention
• Questions?




                                 47

				
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