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UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

World Investment Report 2006 FDI from Developing and Transition Economies: Implications for Development

CHAPTER VI NATIONAL AND

INTERNATIONAL POLICIES

United Nations

New York and Geneva, 2006

CHAPTER VI

NATIONAL AND INTERNATIONAL POLICIES

Preceding chapters of this WIR have shownthat the volume, nature and impact of outward FDIare influenced by government policies in variousways. The patterns of FDI today reflect theparticular institutional and policy context in whichthe investing firms have evolved and developedtheir ownership advantages. Some companiesexpanded internationally as a safeguard againstlocal market volatili ty, while others venturedabroad when protection under the import-substitution era came to an end and they becameexposed to international competition. In othercases, FDI has been the direct result of activeencouragement by the home-country government.Moreover, some large outward investors are State-owned, reflecting the priorities and strategies oftheir owners.

Corporate decisions are affected by the legalframework governing international capital flowsas well as by proactive policy measures to assistcompanies in their internationalization process.Therefore, there is considerable scope forgovernments to influence outward FDI, rangingfrom general policies aimed at creating acompetitive business environment in the home (orhost) country to specific measures directlyconcerning FDI.

In a globalizing world economy, accessinginternational markets, sources of supply andknowledge networks becomes increasinglyimportant. Outward FDI represents one way fora country and its firms to connect with the globalproduction system. Other ways includeinternational trade, licensing, migration and inwardFDI. Moreover, the degree to which the homeeconomy can benefit from outward FDI depends

not least on the extent of investing firms’commercial and technological l inks to othereconomic sectors of the home country (chapter V).Consequently, policies specifically dealing withoutward FDI need to be carefully coordinated, notonly with other policies aimed at promotinginternationalization (through, for example, trade,migration and inward FDI), but also with broaderpolicy areas that may foster growth and upgradingof domestic enterprises. As summarized by onescholar (Dunning 2005, p. 15): “FDI policies are onlyas effective as are the general macroeconomic andmicroeconomic policies of which they are part”.

However, there is no “one-size-fits-all”policy to apply to outward FDI. While importantlessons can be drawn from the experiences of othercountries, governments need to tailor theirapproaches to the specific conditions prevailingin their countries. Policies need to reflect acountry’s stage of development, comparativeadvantages, geopolitical position, structure andcapabilities of the business sector, and, of course,the government’s overall development strategy. Asdiscussed below, there is significant variation inthe way countries address outward FDI. Manydeveloping countries have retained restrictions oncapital outflows, but there is a trend towards greateropenness. In fact, a growing, albeit still smallnumber of developing economies are nowimplementing active policies to promote outwardFDI. Moreover, as countries that have traditionallybeen capital importers emerge as significant sourcesof FDI, their emphasis in international investmentnegotiations may shift , which would haveimplications for policy-making at bilateral, regionaland multilateral levels.

202 World Investment Report 2006. FDI from Developing and Transition Economies: Implications for Development

The expansion of FDI from developing andtransition economies is also influencing policiesin recipient countries. Throughout the world, thenewly emerging sources of FDI are attractingincreasing attention, raising both expectations andconcerns.

This chapter considers the policyimplications of outward FDI from developing andtransition economies at both national andinternational level. The analysis draws on theexisting literature, a large number of country casestudies, and information obtained throughUNCTAD surveys of governments, trade promotionorganizations and investment promotion agencies.It begins by reviewing the role of home-countrygovernments in promoting the benefits of outwardFDI, distinguishing between general and specificpolicies. The second section focuses on theresponses of host economies. The third sectionturns to implications for international rule makingand the fourth section analyses the role of corporatesocial responsibility in the context of FDI fromdeveloping countries. The final section concludes.

A. The role of home-country policies

Policies that aim at furthering the objectivesof a home country via FDI are of two kinds:general and specific to outward FDI , and theyrequire an appropriate institutional framework tosupport their implementation. General policiescover a wide range of areas that influence thecompetitiveness of firms, which is not only a basisof sustainable economic development but also akey determinant of outward FDI and its relatedimpacts. Specific policies on outward FDI reflecta government’s overall stance on internationa-lization through FDI; they include measures torestrict, facilitate or promote such investment, aswell as to maximize associated benefits. At earlystages of development, there may be little attentiongiven to specific policies on outward FDI, but theneed for this grows as countries develop. To date,relatively few developing and transition economieshave adopted an explicit policy relating to outwardFDI, but there are signs that this is changing.

Based on assessments of the likely impactof outward FDI in different industries andactivities, a government may design its general and

specific policies with a view to fostering FDI thatis beneficial to the home economy. Effectiveimplementation of such an approach requiresawareness of the evolving corporate strategies andlocational determinants of FDI. To the extent thatoutward FDI contributes to structural trans-formation of the economy, governments may alsoneed to implement policies that support local firmsand individuals in coping with necessaryadjustments.

1. Competitiveness policies andoutward FDI

Outward FDI may help enhance thecompetitiveness of firms (chapter V). However,whether active promotion of outward FDI iswarranted still deserves careful consideration. Mostdeveloping countries have not yet reached a stageat which a proactive approach to outward FDI isfeasible or desirable. Instead, for many low-incomecountries the focus may rather be on theenhancement of domestic firms’ capabilities. Thus,specific policies on outward FDI should bepositioned within a national strategy aimed atenhancing international competitiveness.

Among the factors affecting nationalcompetitiveness, human resources and techno-logical capabilities are fundamental. This meansthat well-crafted education and science andtechnology policies are of crucial importance.Firms are the major carriers and creators of nationalcompetitiveness, and governments need to createa favourable business environment, with well-functioning factor and product markets, stableeconomic, social and political conditions, soundlegal and regulatory institutions (including tax,regulatory, liability and IPR policies as well as theirimplementation), and good infrastructure.

Policymakers should ensure that the businessclimate encourages entrepreneurship and promotesprivate investment, not just in fixed assets, but alsoin R&D and training. The lack of a sound businessenvironment may weaken the foundation of thecompetitiveness of domestic firms. Furthermore,if firms have the capabilities to invest abroad, apoor domestic business climate may even lead themto relocate, thus further weakening nationalcompetitiveness. Indeed, in certain circumstances,outward FDI can be a means to escape from thedomestic business environment rather than a wayto create value for the home economy (chapter IV).

203CHAPTER VI

Economic openness can improve welfare andeconomic performance. The role of economicopenness in promoting national competitivenesshas been increasingly acknowledged, with mostperceived benefits coming from trade, inward FDIand migration (see e.g. WIR95, WIR01, WIR02).In the context of developing countries, however,outward FDI as a contributing factor tocompetitiveness has not yet received much attention(chapter V).

Globalization opens up new channels throughwhich developing countries can enhance theircompetitiveness, including via outward FDI.However, realizing such opportunities is not easy.It requires appropriate policy responses at bothnational and international levels. A number ofdeveloping-country firms, especially in Asia, haveclimbed the value chain, internationalized andestablished competitive positions in a range ofindustries (chapter III). The fact that four fifthsof the top TNCs from the developing world are ofAsian (mostly East and South-East Asian) originpartly reflects the effectiveness of industrialpolicies, based on a competitive and outward-oriented approach, in promoting industrialcompetitiveness (Amsden 1989, Wade 1990,Johnson 1982, 1995, Woo-Cumings 1999, Lall2001, UNIDO 2002).1

Accordingly, policies on outward FDI maybe best positioned within a framework aimed atenhancing industrial competitiveness. Such aframework comprises various key components:

• SME policy. Policymakers need to supportentrepreneurship and foster the creation ofstart-up SMEs, especially in knowledge-basedindustries. In terms of enterprise development,countries can make up for the lack ofentrepreneurial talents and start-up candidatesthrough the promotion of new industries andthe creation of “seed companies”. Spin-offsfrom public research institutes or from leadinguniversities may also be encouraged (see e.g.WIR05), backed by relevant financialinstitutions.

• Trade policy. The role of export promotionin enhancing industrial competitiveness iswidely acknowledged. It can be done throughvarious institutional arrangements, forinstance, by making customs handling moreefficient, establishing EPZs and strengtheningthe trade infrastructure (WIR02).

• Inward FDI policy. Investment liberalizationand targeted promotion is important forattracting desired forms of FDI. The challengeis to ensure that foreign affiliates becomeembedded in the host economy in a way thathelps domestic enterprises to developcompetitive capabilities (WIR01). Export-oriented FDI (WIR02) or FDI that helpsstrengthen infrastructure services (WIR04)may be particularly relevant from thisperspective.

• Outward FDI policy. In general, FDI from adeveloping country takes place once domesticenterprises have reached a certain level ofdevelopment. For the majority of developingcountries, whose firms and industries are stillat an early stage of development, a specificpolicy on outward FDI may be premature.Instead, a focus on more general policiesrelated to the promotion of industrialcompetitiveness may be more important.

The role of these policies needs to be definedin the context of a country’s overall competi-tiveness or development strategy. Indeed, byapplying policy instruments and institutions ininnovative ways, developing countries can try tocompensate for their shortcomings as “latecomers”in technology and market sophistication (UNCTAD2005l). Traditionally, little attention has been paidto policies specifically related to outward FDI. Withthe rise of TNCs from developing and transitioneconomies it is becoming increasingly relevant toconsider the usefulness of such policies, taking dueaccount of the particular situations of differentindustries and countries.

2. Policies specific to outward FDI

There is increasing recognition that FDIoutflows represent one more way of strengtheningthe competitiveness of firms. However, fewdeveloping countries have explicit policies dealingwith outward FDI. Some countries have takenmajor steps in establishing specific organizationsto actively support the internationalization of theirfirms through FDI, but overall , i t remains arelatively new area for most governments indeveloping and transition economies. Concernsrelated to the risk of capital flight or “hollowingout” have to be weighed against the potential gainsthat can be achieved through better linkages to


global markets and production systems. Thissection takes stock of these trends and considerspossible options available to countries with regardto outward FDI policies.

a. More countries remove barriers tooutward FDI

In determining the degree of openness tooutward FDI, policymakers have to balance theneed for the State to “control” the cross-border flowof capital outflows and the need of firms tointernationalize. An excessive and/or non-transparent regulatory burden in the form of foreignexchange controls, approval procedures andreporting requirements may harm the internationalcompetitiveness of domestic enterprises. Indeed,excessive red tape and overly stringent exchangecontrols have been identified as obstacles to theinternationalization of firms. Countries have chosendifferent approaches to deal with this challenge,which reflects varying priorities and economicsituations. As of 2005, regulations concerningoutward FDI spanned the full spectrum – fromoutright bans in some countries to full liberalizationin others.

Most countries have at some stage exercisedcontrol over FDI outflows through various rulesand regulations to mitigate potentially negativeeffects from such investments. In particular,

restrictions have been used to avoid adverse effectson the balance of payments. Even most of thedeveloped countries with relatively liberal homeeconomies imposed licensing requirements foroutward investment until the 1980s in order to beable to stop certain projects without imposing atotal ban on outward FDI. Such restrictions werelifted as the international capital markets becamemore integrated, and concerns about detrimentaleffects on balance of payments diminished.2 Today,Germany,3 Japan,4 Poland and the United States5

retain certain limited controls on such capital flows(IMF 2005b). These typically have a narrow focuson FDI in sensitive activities (arms andammunition), or are politically motivated.

Among developing countries, restrictions onoutward FDI have mainly been used to reduce therisk of capital flight and to secure sufficient accessto foreign exchange (see WIR95, p. 308). Thedecision to introduce such controls may not havebeen intended to restrict outward FDI, even if thiswas the effect. Exchange controls may have beenestablished to encourage reinvestment by foreigninvestors in the host country, or in response to crisissituations where the risk of large-scale capital flightmight have been apparent. Countries generallybecome less concerned with controls on capitaloutflows once they have developed an adequatecurrent-account surplus (box VI.1).6

Many developed countries have used capitalcontrols in the past, but have largely abandonedthem. In developing countries, however, their useremains widespread. This box discusses why thereis such a divergence and how these controls relateto outward FDI.

Capital controls are a set of diverse legaland regulatory measures used by nationalauthorities to influence the volume, compositionand pattern of international capital flows. Theycan be direct or market-based (i.e. price-based)in nature. Direct controls limit directly the sizeof the capital flows to which they are appliedthrough quotas, licensing requirements or outrightprohibitions. Market-based controls work on pricesignals, discouraging capital flows subject to thecontrols by increasing their cost. Capital controlsusually distinguish between different categoriesof inflows and outflows, and between residentsand non-residents, and are generally used in a

Box VI.1. Controls on international capital flows

targeted manner with specific rules for differentcategories. Controls are often used in variouscombinations and may be adjusted over time; insome cases they have been utilized only forseveral months, but in others for a matter of yearsor even decades. The intensity of restrictions andthe extent of their application to different typesof flows vary greatly from country to country.

Many developed and developing countrieshave used capital controls over the past 50 to 100years. Developed countries, however, generallyliberalized capital-account transactions (in thebalance of payments) during the 1970s and 1980s,and usually find little need for them today.Developing countries and economies in transitionhave also moved in the direction of liberalizingsuch transactions since the late 1980s, but manystill retain various controls (Helleiner 1997, p.9; UNCTAD 2005d). In a number of cases,restrictions on outward FDI have been

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The stringency and nature of restrictionsdiffers by region and country. As of 2005, just over60% of developing countries applied some formof outward FDI controls, with a lower incidencein Latin America and the Caribbean and Asia andOceania than in Africa. In South-East Europe andthe CIS, companies are commonly required tonotify the authorities of FDI transactions.7 Such

notification systems are also applied by severalcountries for statistical and other purposes. Duringthe past decade, the share of countries exercisingcontrols on outward FDI declined especially inSouth-East Europe and the CIS and among the newmembers of the European Union (figure VI.1). InAfrica or Asia and Oceania no clear trend in thatdirection was noticeable, while in Latin America

Box VI.1. Controls on international capital flows (concluded)

Source: UNCTAD.

a For 32 economies the nature of restrictions was not specified.

maintained. Of the 155 developing economiessurveyed by the IMF in 2005 (IMF 2005b), 78economies (40 in Africa, 23 in Asia and 15 inLatin America and the Caribbean) had restrictivemeasures. In terms of their nature, 40 wereapproval requirements combined with variouskinds of restrictions (quantitative, sectoral and/or duty to declare, report, notify or register).a

Their wider use by developing countries isrelated to some characteristics that oftendistinguish them from developed countries:scarcity of foreign exchange; weaker financialsystems and regulations; more common use offixed exchange rates; and greater vulnerabilityto internationally and domestically generatedeconomic volatility. In general, developingcountries control their capital account (and notonly outward FDI transactions) to a much greaterextent than developed countries.

The use of capital controls may havevarious objectives, including to increase economicpolicy autonomy (especially monetary policy);to facilitate exchange-rate management or supporta fixed exchange rate; to promote financialstability (including through prudential regulation)by reducing vulnerability to potentially volatilecapital flows or currency speculation; to addressan exchange rate or financial crisis; and todiscourage certain types of inflows and outflowsthat are considered undesirable or potentiallydestabilizing. Common to all these objectives isthe focus on supporting the effectiveness ofdomestic monetary policy, reinforcing exchange-rate management and safeguarding domesticfinancial stability.

Capital controls are often designed todiscourage large short-term inflows (particularlyshort-term external borrowing) or to reducecapital flight. Many developing countries withbinding foreign-exchange gaps often attempt to

conserve scarce foreign exchange by limitingcapital outflows, (including outward FDI) untilthis constraint has been overcome. In China, Indiaand the Republic of Korea, for example, controlshave been greatly reduced only in recent years,resulting in the proliferation of outward FDI.

Limited empirical research on theeffectiveness of capital controls suggests a mixedrecord. In some cases, they appear to haveachieved a degree of success in meeting theiraims, although their effectiveness may becompromised over time as economic agents seekto circumvent them (Ariyoshi et al. 2000). Theyappear to be more effective when supported bybroader, sound economic policies.

The use of capital controls also entailspotential costs, including the risk of discouraginglegitimate and desirable transactions, theadministrative costs of enforcement, higher costsof accessing international capital markets,potential for corruption when administrativedecisions determine access to foreign exchange,promotion of inefficient or unsound policies ifcontrols are used to sustain inappropriate policies,and the possibility of inhibiting the developmentof the financial sector and risk-management skillsof economic actors.

A cost-benefit assessment of capital controlsis hard to make. For example, it is difficult toquantify the value of sustaining financial stability,reducing (perhaps avoiding) the impact of acurrency crisis or maintaining exchange ratestability. This depends in part on the nationalpriorities of a country. The costs that may arisewill depend on specific country conditions andthe nature of the controls envisaged. Policymakerstherefore need to take into account their specificsituation, policy priorities and developmentstrategies when deciding whether to use capitalcontrols and, if so, how to design and implementthem.


and the Caribbean, the percentage of countriesusing such controls increased somewhat.

It is not possible, on the basis of theinformation available, to assess the stringency ofthe controls that are retained by many developingcountries. Restrictions may be more or lessrigorous, involve a rather straightforward approvalsystem, or apply only to FDI going to particulardestinations. Developing countries withconsiderable outflows of FDI, despite the existenceof controls, include Brazil, China, Malaysia, thePhilippines, the Republic of Korea and South Africa(box VI.2).

Moreover, a number of countries in LatinAmerica (e.g. Chile, Costa Rica, Mexico) and Asia(e.g. Hong Kong (China), Singapore, the UnitedArab Emirates) have completely liberalized FDIoutflows (table VI.1). Several African countrieshave also removed their restrictions on outwardFDI. Taiwan Province of China was among the firstdeveloping economies to initiate a process ofdismantling barriers to outward FDI (WIR95).8

Today, overseas direct investors from TaiwanProvince of China that require foreign exchangeof more than $50 million within one year needapproval from the competent authority; for a capitalflow of less than that amount, only a post-

investment report (within six months) isrequired. With regard to investments inmainland China, however, an advanceapplication is always required. Other examplesof gradual outward FDI liberalization includeSingapore – which today has no restrictionson outward FDI – and the Republic of Korea,which still retains some controls (box VI.3).The removal of barriers to capital outflows hasbeen paralleled by increased outward flowsfrom many economies. For example, in theRepublic of Korea and Taiwan Province ofChina, the relaxation of controls led tosignificant outward investment in the late 1980s(Kumar 1995; WIR95, p. 324).

Only a few countries, such as Nepal andSierra Leone, apply an outright (complete orpartial) ban on outward FDI (IMF 2005b).However, more than 40 countries require theirfirms to obtain an approval, authorization ora licence from their Central Bank or Ministryof Finance before investing abroad. In somecases, approval is based on subjective criteriasuch as national interests,9 while in others itdepends on the value of a project.10 In mostcountries, restrictions on outward FDI apply

to all sectors and industries without discrimination.However, there are exceptions. For instance, theRepublic of Korea requires prior notification toand approval by the Ministry of Finance andEconomy for domestic financial institutions toinvest in businesses other than financial and forany resident to invest abroad in banking andinsurance.11

Finally, with a view to ensuring that FDIbrings benefits to the home economy, somecountries have imposed requirements upon firmsthat invest abroad. Serbia and Montenegro and VietNam, for example, both require the submission ofreports on company activities or operationsoverseas, financial statements, the repatriation ofdividends and profits and payment of taxes oncorporate profits.12

Whether or not restrictions on outward FDIare efficient, they do little to address the problemsrelated to the possible job losses and structuralchanges that may result from outward FDI. Littleis known about the counterfactuals to outward FDI.Would the enterprises be able to survive and thriveeven if they were not allowed to undertake theirforeign investments, or would they just becomeweaker in comparison with those competitors thatare allowed to invest abroad? Thus, for countries

Figure VI.1. Share of countries with controls onoutward FDI or notification requirements, by

region, 1996-2005a

(Per cent)

Source: UNCTAD, based on IMF, Annual Report on ExchangeArrangements and Exchange Restrictions (from 1996 to2005), Washington, DC.

a To ensure comparability over time, 157 countries for whichinformation was available for the full period 1996-2005 havebeen included in this figure. Developed countries here includeEU-25 for the full period.

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Box VI.2. South Africa’s outward FDI policy: emphasis on Africa

South Africa is the major source of outwardFDI from Africa. The evolution of its post-apartheid policies governing such investmentreflects the Government’s objective to integratethe country into the region and the world and toplay a leading role in regional development.

Over the past decade, South Africaselectively, but progressively, liberalized itsoutward FDI policies (Rumney 2005, p. 5). Untillimits on outward FDI were eventually abolishedin October 2004, the Government consistentlyallowed greater investments into Africa than intoother parts of the world (box table VI.2.1). Evenafter October 2004, firms are required to obtainapproval from the South African Reserve Bank.Requests for approval are considered on the basisof the likely impact of their investment abroadon the home economy’s balance of payments. TheBank reserves the right to intervene in capitaloutflows for very large investments in order tomanage potential adverse effects on the foreign-exchange market.

The observed involvement of South AfricanState-owned enterprises in infrastructure projectsthroughout Africa partly reflects the country’scommitment to promoting the NEPAD process(chapter III). Eskom, a State-owned energycompany, has invested in a number of joint-venture projects in Angola, Botswana, theDemocratic Republic of the Congo, Lesotho andNamibia. The national oil company, PetroSA, hasinterests in Algeria, Gabon and Nigeria, whileTransnet, a State-owned enterprise intransportation, has invested in Madagascar, theUnited Republic of Tanzania and Zambia. Theseinstitutions not only provide finance, they alsounderwrite risk. In addition, the IndustrialDevelopment Corporation supports industrialdevelopment in the Southern African region bytaking up equity stakes in overseas projects. Ithas equity interest in 89 projects and exportfinance transactions in 28 African countries(www.idc.co.za). The Development Bank of SouthAfrica is engaged in the financing ofinfrastructure projects.

Source: UNCTAD.

Box table VI.2.1. South Africa’s gradual easing of restrictions on outward FDI

Year Change in policy

Pre-1996 Firms were permitted to invest only in Lesotho, Namibia and Swaziland.1997 Investments of up to 50 mill ion rand were allowed in countries of the Southern African Development

Community (SADC) and up to 30 mill ion rand elsewhere.1998 Limits increased to 250 mill ion rand in SADC and 50 mill ion rand elsewhere, although for approved

projects 55 mill ion rand could be invested.1999 Limits increased to 750 mill ion rand in SADC and 500 mill ion rand in other African countries.2002 Limits increased to 2 bil l ion rand in Africa and 1 bil l ion rand elsewhere.Early 2004 Limits increased to 2 bil l ion rand for each new and approved investment into Africa and 500 mill ion

rand for investments outside Africa. Consideration was to be given to requests by firms to uti l ize theirlocal cash holdings to finance up to 20% of the excess costs of the new investment if the overall costof the investment exceeded the respective l imits. The remainder was to be financed through foreignborrowing, the terms of which had to be disclosed to the South African Reserve Bank.

October 2004 Limits on outward FDI were abolished.

Source: UNCTAD, based on IMF 2005b.

Table VI.1. Economies with no controls on outward FDI, 2005

Region Economy

Developed countries Australia, Austria, Belgium, Canada, Czech Republic, Cyprus, Denmark, Estonia, Finland, France,Greece, Hungary, Iceland, Ireland, Israel, Italy, Luxembourg, Malta, Netherlands, New Zealand,Norway, Portugal, San Marino, Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom.

Africa Angola, Botswana, Democratic Republic of the Congo, Egypt, Gambia, Kenya, Liberia, Mauritius,Nigeria, Uganda, Zambia.

Latin America and Antigua, Bolivia, Chile, Costa Rica, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, the Caribbean Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, Venezuela.Asia and Oceania Brunei Darussalam, Cambodia, Hong Kong (China), Indonesia, Iraq, Jordan, Kuwait, Maldives,

Micronesia, Oman, Palau, Qatar, Saudi Arabia, Singapore, Timor-Leste, United Arab Emirates,Yemen.

South-East Europe and CIS Armenia, Bosnia and Herzegovina, Croatia, Georgia, Kyrgyzstan, Romania.

Source: UNCTAD, based on IMF 2005b.


that have reached a certain level of development,and have domestic firms that could benefit frominvesting abroad, overly stringent restrictions onoutward FDI may be counterproductive. However,there could be a need for policies targeting thosegroups in society that might be affected as a resultof outward investment (section VI.A.3).

b. Active promotion of outward FDI

As highlighted in the previous chapter(section A), FDI can generate various benefits forthe home economy. It may lead to an upgradingof jobs and productivity in the TNC’s home countrythat focuses on more advanced activities – more

Box VI.3. The gradual liberalization of outward FDI policies in the Republic of Korea

Outward FDI from the Republic of Korearemained insignificant until the mid-1980s, beingoriginally discouraged by the Government, exceptfor the purpose of securing a stable supply of rawmaterials or facilitating exports. As the economydeveloped, the Government’s policies on suchFDI gradually changed. Four stages can bedistinguished in this process.

Stage 1 (1968-1974)Investing abroad was first permitted in

1968, leading some firms to venture abroad inthe early 1970s, mainly in forestry, manufacturingand trading. However, given the concern overchronic current-account deficits the Governmentmaintained various restrictions on outward FDIto mitigate the risk of capital flight.

Stage 2 (1975-1980)During this period, the Government

established guidelines for approval andmonitoring of outward FDI. Prior authorizationof investment projects was required and strictqualification requirements enforced. Applicationsfor outward FDI projects were approved only forthe following purposes: when they were expectedto develop and import raw materials which couldnot be sourced domestically; to relievebottlenecks in exports; secure a fishery area; orrelocate an industry abroad to enable it to regainits international competitiveness.

Stage 3 (1981-1990)In 1981, the procedure for investing abroad

was simplified. Restrictions on investorqualifications were eased and the requirement forprior authorization of investment plans wasabolished. However, it was not until 1987 that

Source: UNCTAD, based on ESCAP 1998, Moon 2005 and information from the Government of the Republic of Korea.

a Foreign affiliates with financial assistance of less than $100 million from the parent company were required tofinance 10% of that amount. If financial support from the parent company exceeded $100 million, the foreign affiliatewas required to raise 20% through self-financing. This requirement was later abolished.

b There are some exceptions. Prior notification to and approval by the Ministry of Finance and Economy are requiredfor domestic financial institutions to invest in any other business and for any resident to invest abroad in banking andinsurance business, and for investments of more than $10 million by financially vulnerable companies.

a liberalization began in earnest. The emergenceof a current-account surplus led to an easing offoreign exchange constraints on outward FDI.Moreover, since traditional labour-intensiveindustries were losing competitiveness due torising wages and an appreciating currency,relocation of production to lower-cost locationsoffered one way to cope with increasingcompetition. The Government established asystem whereby firms were allowed to investabroad in projects of less than $1 million simplyby notifying the Bank of Korea. Both theapplication procedure and investor qualificationswere further simplified.

Stage 4 (1991-present)Despite a current-account deficit in 1991,

and the lackluster performance of some outwardFDI projects, liberalization continued. In 1994-1995, for projects up to a certain size, outwardinvestors were required simply to obtain acertificate from foreign exchange banks.However, as a prudential measure, a self-financing requirement was introduced in October1995, but later abolished.a From 1996, FDI waspermitted in all business categories and the yearafter, procedures were transferred to thenotification (reporting) system for all FDI projectsfrom the authorization (permission) system. SinceApril 1999, regardless of project size, priornotification to and approval by a foreign exchangebank is the only requirement for overseasinvestments.b With burgeoning foreign exchangereserves and an appreciating currency, theGovernment has now begun actively to promoteoutward FDI.

209CHAPTER VI

capital- and skill-intensive jobs – and typically payhigher salaries. Moreover, i t may secure rawmaterial sources and bring in new knowledge andvaluable new technologies, both when the outwardinvestment is of a “strategic asset-seeking” typeand when there is no explicit motive to accesstechnology: the mere presence in a foreign marketis likely to generate various knowledge spilloversback to the home country. Indeed, as noted earlierdeveloping home countries potentially have moreto gain from outward FDI, especially in terms ofaccessing technology. However, certain localcapabilities are needed in the investing firm toexploit foreign technologies. Indeed, the level ofabsorptive capacity in the domestic enterprisesector is an aspect that should influence the extentto which governments engage in active outwardFDI promotion.

In general, countries should reach a certainlevel of development before undertaking outwardFDI-enhancing measures. Many of the low-incomecountries may be well-advised to create a generallymore conducive business environment for theirfirms. This may involve measures such as reducingred tape, improving access to skilled labour,developing the basic infrastructure and improvingaccess to finance. For example, a survey of Chineseinvestors found that the main impediments tooutward expansion were related to limits on foreignexchange, a lengthy application process, limitedsources of finance, and costs associated withprocedures and regulations (Yao and He 2005).

Several developing countries, mostly in Asia,have not only liberalized their outward FDIpolicies, but are also actively encouraging theirfirms to internationalize through FDI. A numberof them now view outward FDI as an importantvehicle to strengthen the competitiveness of theirfirms and industries. Similar trends are alsoapparent in other developing regions.13 Recentofficial policy statements indicate that outward FDIpromotion has become a priority for somegovernments, implying that the traditional, cautiousattitude towards FDI is changing.

• Singapore declared 2004 as the year ofinternationalization (UNCTAD 2006, p. 13).The Government has implemented a range ofmeasures to facili tate the internationalexpansion of its public as well as privatecompanies.

• China’s “going global” strategy outlined in2000 is among the most explicit policy

initiatives taken by a developing country toboost FDI overseas (box VI.4).

• The Prime Minister of India has specificallystated that: “Our Government will remove allbarriers to growth and encourage Indiancompanies to go global”.14

• According to the Deputy Prime Minister ofThailand, “It is critical that the broadeningand deepening of competitive edge be pursuedin multiple dimensions... In the context ofAsia, I am referring to the “Pan-Asia supercompanies”... Some Thai companies are nowon the Pan-Asian track, partnering up withmultinationals from other Asian countries”(Attapich and Uruyos 2005, p. 27).

• In his budget speech in 2001, South Africa’sMinister of Finance recognized: “The globalexpansion of South African firms holdssignificant benefits for the economy –expanded market access, increased exports andimproved competitiveness”.15

• The Government of Brazil in 2003 urged itsbusiness people to “abandon their fear ofbecoming multinational businesspersons”.16

Indeed, it has set as a target for the country“to have 10 really transnational companies bythe end of President Lula’s term of office”.17

(i) Main instruments used to promoteoutward FDI

Initial efforts by developing countries topromote internationalization of their firms throughFDI may start small and proceed on an incrementalbasis. A first step may be to dismantle artificialbarriers to outward FDI, including relaxing controlsand raising financial limits for investments abroad.Once a country decides to use outward FDI as astrategic tool to integrate with global markets andproduction systems, the next promotional steps arelikely to involve measures linked to provision ofinformation, matchmaking and related services.Some governments may also decide to offer certaintypes of incentives and insurance coverage.

• Dissemination of information on actual orpotential investment opportunities viapublications, databases, face-to-face contactsand seminars may be particularly relevant forpromoting FDI from developing economieswith nascent private business support services.Smaller and inexperienced potential investorsare likely to benefit most from such support.


• Countries such as Malaysia, Mexico, Republicof Korea,18 Singapore and Thailand providematch-making services that include invitinginvestors to participate in official missions

to targeted countries to find investmentopportunities and meet with high-levelgovernment officials. The Thai Board ofInvestment, for example, has set up countrydesks (dealing with China, Japan, the United

Box VI.4. China’s “going global” strategy

Source: UNCTAD.

a As of February 2006, China had concluded BITs with 116 countries and is actively participating in various regionaleconomic integration initiatives.

b The EIBC arranges “special loans for overseas investments” through its export credit plan and accelerates the processof project screening. The NDRC works with other agencies to improve the risk control mechanism for overseasinvestment.

c See MOFCOM website (www.mofcom.gov.cn/aarticle/b/bf/200605/20060502256191.html).

China’s “going global” strategy wasenvisaged in the mid-1990s and formally adoptedin 2000. Today, it is an integral part of thecountry’s overall strategy of economic openness.

The essence of the strategy is to promotethe international operations of capable Chinesefirms with a view to improving resource allocationand enhancing their international competitiveness.It covers three areas: overseas investment byChinese firms, overseas construction contractingand international service provision. The Ministryof Commerce (MOFCOM) is responsible forimplementing and coordinating the strategy.Another central Government agency involved inthe implementation of the strategy is the NationalDevelopment and Reform Commission (NDRC).

Overseas investment has become the focalpoint of the “going global” strategy. In recentyears, outward FDI has increasingly beenencouraged through provision of informationabout foreign locations, the granting of incentivesand a gradual relaxation of foreign exchangecontrols. A supporting mechanism with theparticipation of various departments of the centralGovernment is being set up. The Government alsofacilitates and protects overseas investments ofChinese firms by actively participating in variousbilateral and multilateral initiatives.a

China’s policy on outward FDI has becomeincreasingly formalized in a series of regulations,such as:

• 2004 Interim Administrative Measures on theApproval of Overseas Investment Projects(NDRC)

• 2004 Circular on the Supportive Credit Policyon Key Overseas Investment ProjectsEncouraged by the State (NDRC and theExport-Import Bank of China)

• 2005 Provisions on Issues Concerning theApproval of Overseas Investment and

Establishment of Enterprises (MOFCOM).• Various other regulations and circulars on

foreign currency management, statistics,performance assessment and State-owned assetmanagement.

A selective support policy has been adoptedto encourage outward FDI. In October 2004, theNDRC and the Export-Import Bank of China(EIBC) issued a circular to promote (i) resourceexploration projects to mitigate the domesticshortage of natural resources, (ii) projects thatpromote the export of domestic technologies,products, equipment and labour, (iii) overseasR&D centres to utilize internationally advancedtechnologies, managerial skills and professionals,and (iv) M&As that could enhance theinternational competitiveness of Chineseenterprises and accelerate their entry into foreignmarkets. To promote these selected types of FDIthe Government offers preferential credit andother incentives.b

The “going global” strategy appears to havecontributed to the expansion of outward FDI fromChina. A recent survey conducted by the AsiaPacific Foundation of Canada and the ChinaCouncil for the Promotion of International Tradefound it to be the second most important drivingforce behind Chinese outward FDI today (AsiaPacific Foundation of Canada 2005). At the sametime the effectiveness of the strategy may havebeen hampered by certain government regulations.For example, in a 2005 survey of Chinesecompanies, the approval process was found tobe unnecessarily complicated, while restrictionson the use of foreign exchange were consideredtoo stringent (Yao and He 2005). The decisionby the State Administration of Foreign Exchangeto abolish quotas on the purchase of foreignexchange for overseas investment on 1 July 2006may be an important step in addressing suchconcerns.c

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States, Europe and the Association ofSoutheast Asian Nations) to help interestedThai overseas investors find partners in thesehost countries.

• Some developing economies offer trainingservices to actual and potential outwardinvestors. Various technical services, such asorganizing investment missions, provision oflegal assistance, consultancy services andfeasibili ty studies, are also sometimesprovided.

• Some countries, including Singapore, theRepublic of Korea and Mexico, have created“comfort zones” in host countries – a novelapproach to facilitate outward FDI. An often-cited case is the China-Singapore SuzhouIndustrial Park. The idea was to offer a one-stop point of access to various governmentministries as well as Singapore-styleeducation, health and recreation facilities, andan international school. Similar parks weresubsequently set up in India and Indonesia.19

Similarly, to support SMEs’ efforts topenetrate IT markets abroad, the Governmentof the Republic of Korea operates overseasIT support centres (“iParks”), which offermarketing, legal and financial administrativeservices. The iParks also host seminars onregulations, patents and initial public offerings(IPOs).20 By December 2005 eight iParks hadbeen established in China, Japan, Singapore,the United Kingdom and the United States,which hosted a total of 67 residentcompanies.21

• Incentives can be used to reduce the cost ofoutward investment projects, and they mayalso influence a firm’s locational as well asoperational decisions. They take variousforms, including preferential loans, equityfinance, export credits and tax incentives. Asin the case of incentives used to attract inwardFDI, questions about their cost-effectivenesscan arise. Incentives can distort the allocationof resources and imply a drain on scarcepublic resources. Before granting anyincentives, countries should seek to assesswhether such incentives are warranted in termsof priority and associated costs and benefits.Few such evaluations of outward FDIincentives are available, but a survey inMalaysia found that incentives were of limitedimportance to the investors that responded(Zainal 2005).22 A review of the use ofvarious incentives by developing countries

that actively promote outward FDI confirmsthat governments assess the usefulness ofincentives in different ways. In general, theyare most frequently used by countries indeveloping Asia (box VI.5) and only rarelyin Latin America or Africa.23

• Investment insurance is increasingly used tofacilitate outward FDI. Insurance is providedmainly against political risk, and includescoverage for currency transfer restrictions,expropriation, war and civil disturbance andbreach of contract.

Political risk – the risk to a project due toadverse government actions24 – is becoming agrowing concern for TNCs from developingcountries, and perceptions of this risk are inhibitingFDI. While developed-country firms have longbeen aware of how to mitigate such risk, mostdeveloping-country TNCs are only just beginningto realize the potential pitfalls from failing toappreciate its importance.

The market for political risk insurance indeveloping countries is still small. This is because,first , significant South-South FDI is a recentphenomenon, and as a result, demand for politicalrisk insurance from developing-country TNCs hasbeen limited. There has been a general lack ofawareness of the product, differing levels of riskperception and cost considerations that haveaffected demand. Second, on the supply side, thenumber of public political risk insurance providersin developing countries is limited, compared withdeveloped countries, and there have been fewprivate firms or agencies offering such insurance.Traditionally focusing on trade, export creditagencies (ECAs) in developing countries have notyet fully developed political risk insurance servicesfor investors and their capacity to underwrite islimited.

There are, however, indications that concernsabout political risk and awareness of risk mitigatorsare growing as investors from developing countriesseek out business opportunities in other developingcountries (box VI.6). This has led to a growingnumber of developing-country ECAs that offerpolitical risk insurance, and these institutions areaiming to strengthen their programmes. At the endof 2005, there were 17 ECAs based in developingcountries that were full members of the BerneUnion, the international organization for the exportcredit and insurance industry. Another 17 agenciesbased in developing countries are members of the


Prague Club, an informal network for agencies thatdo not yet meet the membership requirements forthe Berne Union.25 In addition, foreign privateproviders and brokers of political risk insuranceare increasingly looking to enter countries wherethe insurance industry is being deregulated.

(ii) Agencies promoting outward FDI

Countries differ considerably in theirinstitutional set-up for implementing policies aimedat promoting outward FDI. While most developingcountries do not have designated agencies for thispurpose, a few governments have created various

Box VI.5. Incentives for outward FDI: Asian examples

Source: UNCTAD.a Its firms can claim capital allowances for approved expenditure on plant and equipment used in overseas subsidiaries.b Capital losses from the sale of shares can be deducted from the investor’s other income, and double deduction of

certain expenditures (e.g. feasibility studies, establishment of overseas office) is also allowed. Tax exemption isgranted for gains from investment in shares, dividends from foreign investment and interest from convertible loans.Various forms of personal and family support is also given. .

c For example, the EIBC Bank led a group of banks that agreed to lend $6 billion to China’s National PetroleumCorporation (CNPC) when it sought a stake in the Russian oil company, Yukos.

d See www.mofcom.gov.cn/aarticle/b/bf/200605/20060502256191.html.e See www.exim.go.th, accessed in April 2006.

Singapore offers various grants, loans,tax incentives, and equity financing to promoteoutward FDI (UNCTAD 2005b). Under itsInternationalization Road-mapping Program, amaximum of 70% of the costs of a project of acertain size can be borne by InternationalEnterprise Singapore. Equity financing isprovided for overseas expansion that matches 1Singapore dollar (S$) for every S$2 raised fromthird-party investors. A double deduction of upto S$200,000 per approval is permitted againstthe income of approved expenditures incurred ininitiating and developing outward FDI. Taxexemption is allowed on 50% of the qualifyingoverseas income that exceeds a predeterminedbase.a A minimum loan of S$200,000 can helpimprove companies’ access to offshore financingfor investment. The Local Enterprise Finance(Overseas) scheme offers a number of fiscalincentives, such as tax exemption for up to 10years.b

Malaysia grants tax exemption onremittances from income earned overseas, andtax deduction for “pre-operating expenses”(Ragayah 1999, p. 470). Investors can also deductcosts incurred in acquiring foreign-ownedcompanies.

As part of its Overseas Investment PolicyPackage, the Republic of Korea has announcedthat more support will be offered to companiesexpanding abroad, including via FDI. Measuresinclude an export insurance fund and credit riskcover. In addition, the EXIM Bank provides loans

which can cover up to 80% (90% for SMEs) ofthe funds required for investment projects.

China offers medium- and long-term loanson preferential terms as well as investmentinsurance (UNCTAD 2005l). It allows foreigninvesting firms to retain all the foreign exchangethey earn within five years of theirestablishment, after which they pay income taxand submit 20% of their stipulated foreignexchange quota (Giroud 2005, p. 25). The EIBC(Bank of China) and other State-owned bankshave played a key role in financing some of themost highly publicized recent deals (Antkiewiczand Whalley 2006).c In late 2005, the Ministryof Finance established a special fund to supportChinese enterprises’ overseas investments andother international operations by providing directgrants and subsidies for interest payments.d

Through its EXIM Bank, Thailand grantslong-term loans of up to 85% of the cost ofconstruction work to contracting parties in foreigncountries who engage Thai firms, and short- tomedium-term credit to be used as working capitalfor work under contract.e Long-term credits areavailable to support Thai investors’ overseasinvestment projects. The EXIM Bank also extendsloans for overseas FDI projects and arrangessyndicated loans for capital-intensive projects.As part of the so-called Kitchen of the Worldprogramme, Thai investors who wish to open Thairestaurants in foreign countries can also benefitfrom special loans (UNCTAD 2005i).

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bodies that specialize in providing different supportto firms wishing to invest/expand abroad.Singapore stands out with the most sophisticatedset of such policies that are integrated into broaderefforts to promote competitiveness (box VI.7).Active promotion of outward FDI involves a seriesof policy instruments and agencies – public as wellas private (box VI.8). The most important publicbodies in this respect include: trade promotionagencies, investment promotion agencies (IPAs)and export credit and insurance agencies.

As exports and FDI represent alternativeways of serving foreign markets, some countrieshave added outward FDI promotion to the tasksof their trade promotion organizations (TPOs). AnUNCTAD survey of TPOs conducted in early 2006found that this is relatively common in developedcountries (table VI.2). It also found that a numberof developing and transition economies – includingBrazil, Georgia, Jamaica, Kenya, Morocco, Omanand Singapore – are adopting a similar approach,and several others are planning to do so. While thenature of the support offered by TPOs for outwardFDI promotion differs, market information andmatch-making services of some kind are the mostcommonly offered (table VI.3).

In some developing countries, investmentpromotion agencies (IPAs) responsible forattracting inward FDI, like some TPOs, have alsobecome involved in the promotion of outward FDI,such as the Economic Development Board (EDB)in Singapore (box VI.5), the Foreign InvestmentAgency of Viet Nam, and the Malaysian IndustrialDevelopment Authority (MIDA).

Another key agency deployed by developingcountries to increase their outward FDI is aspecialized ECA, such as an Export-Import (EXIM)bank or other financial institution that can provideinsurance cover and extend credit to overseasinvestors. Such agencies typically provide short-term export credit insurance and credit facilities(such as letters of credit) as well as medium- andlong-term insurance, credit and guaranteeprogrammes that are similar to those provided bytheir private-sector counterparts in advancedcountries. In some countries, such as Malaysia,Thailand26 and Turkey, the EXIM Bank is a keyagency for the promotion of outward FDI. TheEXIM Bank in Malaysia, for example, explicitlysupports Malaysian companies, especially thosein labour-intensive industries, to relocate tocountries where labour is cheaper (box VI.9). The

Box VI.6. Political risk insurance as a tool for promoting South-South investment

Political risk insurance is becoming betterknown in the developing world as a riskmitigation tool. Developing-country TNCs areimproving their management expertise and accessto a variety of financial and risk managementtools that help them capitalize on growthopportunities in developing and transitioneconomies. The experience of Investcom HoldingLLC (Investcom) offers an insight into howcompanies from developing countries may usepolitical risk insurance to seize growthopportunities in operating environments that maybe perceived by other investors as toochallenging.

Investcom is a telecommunicationscompany based in Lebanon. It recently mergedwith MTN Group Ltd. (South Africa). Thecompany’s portfolio of investments now spansunderserved markets in countries such asAfghanistan, Guinea and Yemen. Its keyadvantage is its knowledge of working inenvironments seen by United States or European

telecom companies as being too difficult, riskyor remote. During the civil war in Lebanon,Investcom learnt some valuable lessons, whichmade it better equipped to invest in what wereperceived as high-risk places.

Risk mitigation and access to financinghave been critical to the management of itsinvestments in difficult environments. Thecompany has used political risk insurance not onlyto manage its non-operational risks but also toobtain the needed finance. It has partnered withMIGA – a World Bank institution that providespolitical risk insurance for the private sector –for three of its investments in West Asia andAfrica.

It is a major benefit of political riskinsurance that it can be used as collateral to obtainbank loans. In the case of Investcom, while thecompany would have contemplated takingpolitical risk insurance in the countries it wasplanning to invest in, the fact that it couldleverage the guarantee to obtain funds from bankswas the deciding factor.

Source: MIGA.


Table VI.2. TPOs and outward FDI promotion: results from a survey

TPOs that TPOs that promote exports TPOs that promote exportspromote exports and that are planning to start and that do not plan

Region and outward FDI promoting outward FDI to promote outward FDI

Developed countries Austria, France, Hungary, Czech Republic, Lithuania Latvia, Malta, United KingdomItaly, Japan, Norway,Slovenia, Spain (Catalonia)

Developing economies Brazil, Jamaica, Kenya, Belize, Botswana, Fiji, Argentina, Chile, Cook Islands, Cuba,Morocco, Oman, Singapore Mongolia, United Republic Dominica, Hong Kong (China),

of Tanzania Mozambique, Nepal, TurkeySouth-East Europe

and CIS Georgia Bulgaria Croatia, Serbia and Montenegro

Source: UNCTAD survey of TPOs, January-March 2006.

Box VI.7. Singapore’s outward FDI promotion strategy

Until the mid-1990s, FDI from Singaporewas relatively insignificant, heavily concentratedin adjacent Malaysia, and focused on themanufacturing and financial services sectors. Topromote outward FDI, in 1994 the Governmentintroduced a regionalization strategy with twodistinct objectives: to facilitate FDI bySingaporean enterprises and to transformSingapore into a regional headquarters for TNCsoperating in Asia. The strategy sought toconsolidate Singapore’s comparative advantagesin the region, attract high value-added industriesto Singapore, and develop the internationalcompetitiveness of Singaporean firms. The threemain agencies directly involved are: InternationalEnterprise Singapore (IE Singapore), theEconomic Development Board (EDB) and theStandards, Productivity and Innovation Board(SPRING). In addition, government-linkedcompanies (GLCs) have assumed an importantrole.

IE Singapore’s mission is to help Singapore-based enterprises grow and internationalizesuccessfully. In Singapore as well as in 37overseas centres it provides various services,including market information and assistance inbuilding up business capabilities and in findingoverseas partners. Its Regionalization FinanceScheme assists local SMEs to set up overseasoperations and offers fixed rate loans foracquiring fixed assets for overseas projects. Theseoverseas operations must complement theactivities of the Singapore operations and resultin economic spin-offs for Singapore. TheOverseas Investment Incentive of IE Singaporeprovides a three-year support programme toencourage local companies to make overseasinvestments that will generate benefits for

Singapore, such as the enhancement of operationsin Singapore, and the creation or acquisition ofnew markets overseas that will increaseproduction and export sales and services ofcompanies from Singapore. The Enterprise Fundcan also help find customized financial solutionsto overseas investors.

The EDB was established in 1961 as a one-stop IPA to assist foreign firms in their operationsin Singapore. While its main focus is still inwardFDI, since 1993 the agency has a divisionspecifically for promoting the regionalization ofSingaporean firms. Among other things, it offersan Approved Foreign Loan Incentive to helpimprove companies’ access to offshore financing.The Expansion Incentive for Partnershipsprovides tax exemption on 50% of the qualifyingoverseas income with a view to assistingSingaporean companies in establishingcompetence and conducting regional activities.The EDB also has an investment arm that actsas the “visible hand” of the Government forpromoting productivity, innovativeness andcompetitiveness of local companies.

SPRING’s mission is to enhance thecompetitiveness of local enterprises, particularlySMEs. It nurtures a pro-business environment thatencourages enterprise formation and growth,facilitates the growth of industries, enhancesproductivity, innovation and capabilities ofenterprises, and helps improve access to marketsand business opportunities.

There is generally no restriction on usingfinancial support from IE Singapore, EDB andSPRING for overseas operations or marketexpansion, as long as the core and highest valueactivities remain in Singapore.

Source: UNCTAD, based on Toh 2006 and UNCTAD 2005b.

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EXIM Bank in Turkey, contributed to the initialwave of Turkish FDI into the Balkans, the RussianFederation and Central Asia (Erdilek 2005, p. 14).In India, the EXIM Bank originally proposed thecreation of an automatic approval system, and hassince supported over 120 ventures in more than40 countries (Subramanian 2005).

Relatively li t t le is known about theeffectiveness of individual policy instruments, asthere have been few serious evaluations. However,all promotional measures involve costs of somekind. Every country therefore needs to determinethe optimal level and form of support to outwardFDI in the context of its particular situation. The

Box VI.8. Private sector assistance to overseas investment - some examples

In some countries, such as India, Malaysia(box VI.9), South Africa, Thailand, Turkey andViet Nam, there are instances of the private sector(e.g. business councils, business consortia andchambers of commerce) offering relevant services.

• The Federation of Indian Chambers ofCommerce helps Indian businesses improvetheir competitiveness and enhance their globalreach through research, interactions at thehighest political level and global networking.India’s Joint Business Councils have alsoopened up business opportunities abroad. Suchcouncils have been established in over 69countries, including Australia, China, Japan,the Republic of Korea and the United States.The Councils meet regularly to promote two-way trade and investment.

• The South African Institute of InternationalAffairs publishes an annual Business in Africa

Report, which tracks the experiences ofcompanies’ investments in Africa and providespolicy recommendations. The Chambers ofCommerce and Industry in South Africa alsohelp in facilitating business opportunities andactivities in a regional context and furtherafield.a

• In Thailand, the Federation of Thai Industriesand the Thailand Board of Trade have recentlybecome active in promoting Thai businessesabroad (Brimble and Sibunruang 2005, p. 13).

• In Turkey, Bilateral Business Councils offerinformation, organize meetings and providevarious financial support to outward investors(Erdilek 2005, p. 15).

• The Viet Nam Chamber of Commerce andIndustry offers various programmes includinga comprehensive support services for foreigninvestment missions.

Source: UNCTAD.a See www.saiia.org.za and www.chamsa.org.za/policy.html.

Table VI.3. Services offered by TPOs promoting outward FDI

Information Match-making Feasibility Support InvestmentEconomy provision services Incentives studies Legal support to training guarantees

Austria X X X X XFrance X X X XHungary X X XItaly X X X X X XJapan X X X X XNorway X X X X XSlovenia X X X X XSpain (Catalonia) X X X X X X

Brazil X XJamaica X X X XKenya X X X XMorocco X XOman X X X X XSingapore X X X X X X

Georgia X X X

Source: UNCTAD survey of TPOs, January-March 2006.Note: Based on responses from those TPOs that stated that they promote outward FDI.


Box VI.9. Malaysia’s approach to outward FDI promotion

Malaysia has a range of agencies involvedin the promotion of competitiveness in generaland outward FDI in particular. The institutionsinvolved in facilitating overseas investment arethe EXIM Bank, the Malaysian Export CreditInsurance Berhad (MECIB); the Malaysian South-South Association (MASSA); as well as suchinstitutions under the Ministry of InternationalTrade and Industry (MITI), such as the MalaysiaExternal Trade Development Corporation(MATRADE) and the Small and MediumIndustries Development Corporation (SMIDEC).

The primary responsibility lies with theEXIM Bank. It provides financial and advisoryservices to Malaysian overseas investors.Financial support is granted through four kindsof facilities:

• The Overseas Project Financing Facilitysupports Malaysian investors undertakingprojects overseas (e.g. in manufacturing,infrastructure and other developmentalprojects);

• The Supplier Credit Facility aims to boostMalaysian exports to international markets;

• The Export Service Facility supportsMalaysian companies involved in providingconsultancy services in foreign countries inselected areas;

• The Export Credit Refinancing Scheme offerscompetitive interest rates and guarantees tolenders involved in high-value capital goodsand service activities.

MECIB provides export credit insuranceservices to Malaysian corporations for exportsas well as for their investments abroad. Forexample, its Overseas Investment Insuranceassists Malaysian companies in protecting theiroverseas investments and profits against transferrestrictions, expropriation, war and civildisturbances, and breach of contract.

Specific attention is given to South-Southrelations. For example, MASSA aims to promotebilateral trade and investment ties with otherdeveloping countries, through such activities as

organizing business forums/dialogue sessions,fact-finding, trade and investment missions abroadto developing countries, and information relatedto trade and investment opportunities indeveloping countries. MASSA’s investment arm,MASSCORP is a consortium of 85 Malaysianfirms from various industries that, among otherthings, also promotes overseas investment byMalaysian companies.

SMIDEC encourages SMEs to engage withthe international economy through cross-borderinvestments. It offers three main services: (i) theFunds for Cross-Border Investment inManufacturing programme, which was designedto facilitate relocation or expansion of MalaysianSMEs’ operations abroad;a (ii) overseasinvestment facilities (export credit insurance andgurantees); and (iii) the Malaysia-Singapore ThirdCountry Business Development Fund, whichassists firms from the two countries in identifyingbusiness opportunities in other countries,especially in South-East Asia. This Fund can alsounderwrite costs involved in conductingfeasibility studies, commissioning market orbusiness research, and organizing joint missions.

These three programmes are backed byother forms of institutional support, such asinvestment guarantee agreements negotiatedbetween Malaysia and 64 other countries. Theseagreements cover insurance against non-commercial risks such as expropriation and theyguarantee remittance of currency and profits –an area of major concern to potential investorsabroad.

All the above programmes are backed bya network of offices abroad, operated by theMITI, which are able to offer Malaysian firmsventuring abroad with various services. Firms canalso receive various financial and tax incentivesfor cross-border investment, including tax reliefon income earned outside Malaysia, taxdeductions for pre-operating expenses, andincentives for acquisition of foreign-ownedcompanies.

Source: UNCTAD, based on Zainal 2005.

a By end 2005, eight approvals had been granted to companies under this scheme, with funding of 54.6 million ringgit($14.4 million), mainly for expansion to lower-cost locations within the ASEAN region.

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impact of outward FDI depends in part on thespecific capabilities of the domestic enterprises:the stronger they are, the more likely that benefitsto overseas investors will generate spillovers toother domestic companies and institutions. For thesame reason, it may make sense for a governmentto concentrate (target) its support to industries andactivities in which the home country is particularlystrong. The initiative by the Republic of Korea toset up iParks, targeting IT firms in particular,illustrates this point. Meanwhile, special attentionmay be needed to support SMEs by providing themwith appropriate information, and helping them findpartners or investment opportunities.

c. Home-country measures to promoteSouth-South FDI

From the perspective of facilitating moreFDI, technology and related financial flows todeveloping countries, increased FDI fromdeveloping countries implies new opportunities for“South-South” cooperation. As noted in chapterIII, for many low-income countries, FDI from otherdeveloping countries accounts for the bulk of thecapital they receive. This is partly linked to thenature of the ownership-specific advantages of theTNCs involved (chapter IV), which sometimes givethem a competitive edge over developed-countryrivals when entering a particular host economy.This may be particularly true of intraregionalSouth-South investment, where developing-countryTNCs may benefit from close geographic andcultural proximity to the destination. But there isalso scope for policymakers to be proactive inencouraging South-South investment.

This point was recognized at the SecondSummit of the Group of 77 held in Doha, Qatarin June 2005, where investment was identified asone area of enhanced collaboration. To furtherexplore opportunities for such collaboration, thePlan of Action of the Summit, called on theChairman of the Group of 77, with the support ofUNCTAD and the Special Unit for South-SouthCooperation, to

“organize periodically a forum oninvestments among the countries of theSouth, for discussion and the publication ofsuccessful experiences among developingcountries in that field…” (para. 88).

A number of developing countries are alreadyexplicitly promoting South-South FDI. In SouthAfrica, the Government grants special treatment

to FDI going to the Southern African region, andencourages its State-owned enterprises (e.g.Transnet and Eskom) to invest in infrastructure inthat region (box VI.2).27 These and otherinvestments in the African region are supportedby institutions such as the Development Bank ofSouthern Africa and the Industrial DevelopmentCorporation of South Africa.

During the 1978-1992 period, India accordedspecial treatment to investments going to otherdeveloping economies (UNCTAD 2005i).Singapore has launched various programmes,including Regionalization 2000, aimed atencouraging intraregional FDI by Singaporeancompanies (UNCTAD 2005b). In Malaysia, theMalaysian South-South Corporation Berhad(MASSCORP) promotes bilateral trade andinvestment ties between countries in the South byserving as a platform and link between Malaysianbusinesses and other developing countries (boxVI.9, Zainal 2005).28 Intraregional South-SouthFDI is also promoted through various regionalintegration schemes (discussed in section C below).While most South-South FDI is intraregional innature, some Asian countries have adoptedmeasures to promote interregional investment,particularly between Asia and Africa (see, forexample, World Bank 2004, pp. 69-70).

There are also international organizationsthat provide political risk insurance to supportSouth-South FDI. Key among these is theMultilateral Investment Guarantee Agency (MIGA),which has witnessed an increase in its coverageof South-South investments. In fiscal year 2000,MIGA supported six South-South projects, whilein 2006, the agency issued guarantees worth morethan $291 million for 15 such projects. The bulkof the South-South investments originated fromcompanies in middle-income countries, forexample, a Malaysian firm investing in a housingproject in Ghana, and an Egyptian firm investingin the telecommunications industry in Bangladesh.Moreover, half of the investors investing indeveloping countries were from the same regionor geographically close, such as a South Africanfirm investing in Uganda, or a Colombian firminvesting in Ecuador. MIGA also increasesinsurance capacity and expertise in developingcountries through its work with local export creditagencies (box VI.10).

UNCTAD has been making efforts to enablethe sharing of experiences among variousinstitutions that can financially support South-


South trade and investment. Its proposal for thecreation of a network of EXIM banks anddevelopment finance institutions (DFIs) wasendorsed at the Doha High Level Forum on Tradeand Investment in December 2004, and the firstmeeting of the Global Network of Export-ImportBanks and Development Finance Institutions (G-NEXID) was held in Geneva in March 2006.29 G-NEXID is intended to boost agreements betweendeveloping-country EXIM banks and DFIs toreduce costs of trade between the world’s poorernations. It will spur cross-border investment, makefinancing more readily available to new andinnovative businesses and enable the growth ofniche markets. The network will allow developingcountries to learn from each other about effectivepractices for entering new markets, the financingof non-traditional goods and services, and risk-sharing methods for investments.30

3. Mitigating potential risksassociated with outward FDI

Even in countries that have gone far inliberalizing outward FDI, there are concerns relatedto the ultimate impact on the home economy(chapter V). Potential risks for the home economymay include export of jobs, hollowing out andbalance-of-payments problems. The expectedeffects depend on the motives for investing abroad,the conditions in the home economy and therelative position of the home country’s industrialsectors in global value chains. Most importantly,if the home country does not provide competitiveconditions for production, TNCs may decide torelocate the most attractive jobs to other countries.Thus, policies aimed at creating a favourablebusiness environment in the home country may bethe best way to secure benefits from outward FDI.

However, the increase in outward FDI mayresult in a loss of policy autonomy of the nationalgovernment, since TNCs may make reasonablycredible threats to move production if they findnational economic policies not conducive to theirrequirements. Indeed, possibilities of using transferpricing to shift profits (and tax revenue) out of thehome country may be strong enough to compel agovernment to adjust i ts policies. Moreover,competition between different countries may resultin industries being subject to only a minimum setof requirements, and costs if financing the publicsector, for example, may increasingly have to beborne by the less mobile tax base – consumers andwage earners rather than firms and capital owners.

There are various options at hand forcountries to address possible negative effects fromoutward FDI. Home-country policies might be usedto neutralize or alleviate the potential negativeeffects of the investment. For example, one concernin middle-income developing countries is that FDIaimed at seeking out lower-cost locations will havenegative effects on their domestic unskilled labour.In the Republic of Korea and in Turkey (Erdilek2005), the search for lower production costs hasindeed been a motive for overseas investments(chapter IV). In this process, low-paid jobs areshifted offshore, and the jobs that remain at hometypically are those that require higher skills. It maybe desirable, or even necessary, to introducepolicies targeting those groups in society that maylose out in this process. Adult education andtraining programmes, as well as programmes toencourage SME development are examples of

Box VI.10. MIGA’s assistance to exportcredit agencies

MIGA uses a range of reinsurance and co-insurance products with ECAs, partnering withthem to leverage each others’ guarantee capacitiesand to manage better the risk profiles of theirportfolios. MIGA’s partnership encourages otherinsurers to participate in projects they mightotherwise avoid insuring and to venture intofrontier markets. Insurers partnering with MIGAbenefit from the agency’s expertise in riskanalysis, claims management and recoveries.Through facultative reinsurance and itscooperative underwriting programmes, MIGA canform syndicates of private and public sectorinsurers in order to be able to support projectsthat exceed their individual capacity. With respectto South-South investments, in recent years it hasentered into a number of agreements andpartnerships with agencies such as IslamicCorporations for the Insurance of Investment andExport Credit, Export-Import Bank of Thailandand the Export Credit Guarantee Agency of India.

MIGA also provides technical assistanceand training to developing and transitioneconomies’ ECAs through seminars and trainingsessions. It has co-hosted with the Slovene ExportCorporation a seminar for Central and EasternEuropean agencies, and conducted trainingseminars for the staff of Sinosure, the ChineseECA, and local banks in China.

Source: MIGA.

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policy responses that support adjustments withoutobstructing the internationalization process.

In the Republic of Korea, the Governmenthas adopted several measures to counter the riskof industrial hollowing out. First, to balance orcomplement outward FDI by its firms, theGovernment actively promotes inward FDI,especially for its high-tech industries. Second,particular attention is given to supporting domesticindustries that produce parts and materials forexport to Korean firms that have shifted someproduction abroad. In this way, the Governmentaims at increasing trade surpluses through intra-firm trade between foreign affiliates and theirdomestic parent companies; i ts support totechnological development in strategic parts andmaterials is one example (Republic of Korea,MOCIE 2003). Third, concerted efforts are beingmade to expand and develop future growthindustries. The Government has selected 10 suchindustries and sources of technology with the aimof acquiring and developing world-classtechnologies and products in certain fields byfocusing on the development of new technologiesin high growth industries.31

B. Implications for host-country policies

Increased FDI from developing and transitioneconomies also has implications for recipientcountries. First, a larger number of sources of FDIimplies a more diverse set of countries forinvestment promotion agencies (IPAs) to target.For many low-income countries, South-South FDIalready accounts for a large share of their inflows(chapter III); this pattern may be accentuated inthe future. More potential sources of FDI may alsoprovide individual governments in developing hostcountries with greater bargaining power in theirrelations with TNCs from developed countries(Gelb 2005). The growth of South-North FDI isalso generating various responses in developedcountries. On the one hand, some countries aretaking active steps to present themselves asattractive locations for investments by TNCs basedin developing and transition economies. On theother hand, some stakeholders view the entry ofnew competitors as an unwelcome development,and are proposing various protective measures,especially when the TNCs have entered, or triedto enter, developed markets through M&As.

1. Host-country policies formaximizing the benefits fromSouth-South FDI

Given the possible effects of South-SouthFDI on recipient countries (discussed in chapterV), what kinds of policies would enable developinghost countries to maximize the net benefits? ShouldFDI from developing and transition economies beaddressed in a different way than FDI fromdeveloped countries, and if so why?

Given the diversity in terms of levels ofdevelopment, economic structure, industrialspecialization and geographic location of host andhome developing and transition economies in theuniverse of FDI, any discussion on the role of host-country policies needs to remain at a relativelygeneral level. Policies appropriate to an LDC arelikely to differ from those warranted in a middle-income country, because each will attract differentkinds of FDI, and because they are likely to havevery different levels of sophistication of their legaland institutional frameworks as well as theabsorptive capacity of their local enterprises. Itmay still be useful to consider what policy areasare particularly relevant in this context.

In principle, to benefit from inward FDI fromdeveloping and transition economies, policiesshould not differ significantly from those appliedto FDI from developed countries. Thus, the samebasic policy instruments can be used to attract,benefit from and mitigate costs associated withinward FDI, regardless of whether i t is fromdeveloped countries or from developing ortransition economies.

An important starting point for designingpolicies to optimize the benefits from inward FDIis to have a basic understanding of a country’scomparative advantage and development objectives.This helps in assessing what kind of FDI canrealistically be attracted as well as the possibleconsequences of potential inflows (WIR02). Asnoted in chapter III, low-income countries arerelatively more dependent on FDI from otherdeveloping countries, possibly indicating that suchinvestments are easier to attract at an early stageof development. Moreover, a large proportion ofthese flows is often intraregional in nature. In termsof an investment promotion strategy, i t maytherefore be rational for low-income countries topay particular attention to investors originatingfrom other developing countries within their own


region.32 Regional cooperation can be one elementof such a strategy (see section C below).

In terms of enhancing the positive impact ofinward FDI, host-country governments need toconsider the full range of policies that can influencethe behaviour of foreign affil iates, and theirinteraction with the local business environment.This requires taking into account the specificcharacteristics of different industries and activities.

Investment policy will need to consider theeconomy’s unique circumstances in terms of itsendowments, potential and prospects, preferablycompared with alternative locations. For developingcountries that are highly dependent on naturalresources, investment diversification is often animportant objective of investment policies. Thismay lead governments to give strategic emphasisto manufacturing activities, while considering howFDI from developing and transition economies cancontribute to such diversification. Focus may beplaced on labour-intensive and resource-basedprocessing, as well as export-oriented productionin relatively low-technology manufacturing.Investor targeting, in this context, requiresidentification of the main players in the relevantindustries and of their corporate strategies.

But FDI alone cannot ensure thedevelopment of productive capabilit ies; i t isimportant to pay attention to the amount and qualityof backward linkages between foreign affiliatesand domestic firms. Such linkages represent animportant channel through which intangible andtangible assets can be passed on to domesticenterprises. Host-country governments canintroduce various measures to encourage linkagesbetween domestic suppliers and foreign affiliatesand strengthen the likelihood of spillovers in theareas of information, technology and training(WIR01).

2. More FDI sources for IPAs totarget

Various studies have concluded that lack ofinformation on investment opportunities andknowledge of foreign cultures can be majorobstacles to the overseas expansion of firms fromemerging economies, especially SMEs (UNCTAD2005l). The activities of IPAs in host economiescan help bridge the information gap, and provideassistance to prospective investors.

Both developed and developing countries arealready actively seeking to attract FDI fromdeveloping and transition economies. An UNCTADsurvey conducted in February-March 2006 amongmembers of the World Association of InvestmentPromotion Agencies (WAIPA) shows that IPAsattach importance to these relatively new sourcesof investment. In fact, out of the 68 responses, 50IPAs (74%) stated that they target FDI fromdeveloping or transition economies (figure VI.2).The survey results confirm that developingcountries attach particular importance to FDI fromthe South. For example, 94% of the Africanrespondents target FDI from developing countries.However, even as many as 60% of developed-country IPAs participating in the survey also targetsuch FDI.

The most favoured target is China, mentionedby 72% of all IPAs that target FDI from developingor transition economies (figure VI.3), followed byIndia, Malaysia, the Republic of Korea and SouthAfrica in that order.33 Among developed-countryIPAs, China was the most commonly mentionedtarget source, followed by such other Asianeconomies as India, the Republic of Korea,Singapore and Taiwan Province of China. In thecase of IPAs based in developing and transitioneconomies, China and India remain in the first twopositions, followed by Malaysia, South Africa andthe Republic of Korea. Thus Malaysian and SouthAfrican investors are relatively more importanttargets for IPAs in the South than for IPAs in theNorth. The opposite is true for FDI from Singaporeand Taiwan Province of China.

Confirming the importance of intraregionalSouth-South FDI, there are distinct regionalvariations in IPA targeting. Among the developingAsian agencies, almost all (97%) the targetsmentioned are also in Asia. Similarly, in the caseof respondents from Latin America and theCaribbean, two thirds of the targets indicated arein Latin America and the Caribbean (figure VI.4).And while for African IPAs, developing Asia wasreported to be the most favoured target region(68%), a considerably higher share (31%) than forIPAs in other regions of the target countries werein Africa. In fact, the most often mentioned targeteconomies by IPAs in the developing world wereconsistently a country within their own region. ForAfrican IPAs, South Africa tops the list, while inLatin America and the Caribbean, Brazil is the mosttargeted source country.

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Figure VI.3. Developing and transition economies targeted by IPAs aspotential sources of FDI

(Percentage of IPAs)

Source: UNCTAD Survey of IPAs, February-March 2006.

Figure VI.2. Percentage of IPAs that target FDI from developing or transition economies,by region of IPAs



A number of IPAs have set up offices inselected developing and transition economies toattract FDI. About 40% of developed-country IPAshave at least one such office, while the share ofIPAs from developing countries is lower, rangingfrom 17% among IPAs in transition economies to25% for those in Latin America and the Caribbean.Among those IPAs that have offices in developingor transition economies, China has so far been thepreferred choice by both developed- anddeveloping-country IPAs. Other relatively popularsites include India, the Republic of Korea andSingapore (table VI.4).

Of all respondents, 41% stated that theytarget FDI from developing and transitioneconomies in particular industries, the main targetsbeing tourism (mentioned by 50% of the 28 IPAsthat target specific industries), followed by textilesand leather (46%), agriculture, forestry andfisheries (43%), information and communicationtechnology (ICT) (36%) and electronics andelectrical equipment (29%) (figure VI.5). Due tothe small number of respondents, only a tentativepicture can be drawn with regard to regionalpriorities. Developed-country IPAs seem to givepriority to the ICT industry, African IPAs focuson FDI in textiles and leather, while most of theIPAs in developing Asia and Oceania mentioned(together with tourism) agriculture, forestry andfisheries, which is somewhat surprising, given thatsector’s relatively low importance in global FDI.34

In general, IPAs do not discriminate betweeninvestments from developed or other countries.However, four IPAs in the UNCTAD surveyexpressed a preference for FDI from the latter. TheIPA from Afghanistan suggested that investmentfrom developing countries might be more relevantto its priority sectors, while the Solomon IslandsIPA indicated that it is able to attract only low tomedium levels of investment and that FDI fromdeveloping countries is geographically more easilyaccessible. Four IPAs offer preferential measuresfor FDI from developing countries and transitioneconomies:35 the Zanzibar Investment PromotionAuthority (United Republic of Tanzania) indicatedpreferential market access and other preferentialtreatment as specific measures, and the other threeIPAs cited regional agreements or economic andtrade agreements with developing countries.

3. Reactions to takeovers by TNCsfrom developing countries

Despite the rising interest among IPAs inattracting capital from the new sources of FDI, notall stakeholders in recipient economieswholeheartedly support such inflows. As part ofbroad concerns related to the most recent wave ofM&As (chapter I), the increased participation offirms from developing and transition economiesin this process has triggered reactions in some hostcountries. Many of the most controversial M&Ashave involved Chinese companies, but some

involved companies from Hong Kong(China), the Russian Federation,Taiwan Province of China and theUnited Arab Emirates. A few South-South deals have also provokedresistance in host countries.36

Two concerns have regularlysurfaced. The first is associated witha perceived loss of control over naturalor strategic assets, with implicationsfor national security. The second isrelated to the fear of job cuts,especially when cross-border M&Asinvolve TNCs from developingeconomies. A brief review of some ofthese transactions is illustrative.

The most controversial dealshave been associated with concernsrelated to national security. Fears havebeen especially pronounced when

Figure VI.4. Regional distribution of targeteddeveloping and transition economies by host region

(Per cent)


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bidding companies had close ties with their home-country government. Many of the Chinesecompanies that have made major bids on foreigncompanies are State-owned, or were founded bybranches of the Government.37 Moreover, nationalsecurity concerns have primarily involved M&Asor other forms of FDI in industries regarded asparticularly sensitive, such as:

• Oil, gas and other mining: e.g. China NationalOffshore Oil Corporation (CNOOC) (China)- Unocal (United States), Minmetals (China)- Noranda (Canada), Gazprom (RussianFederation) - Centrica (United Kingdom);

• ICT: e.g. Lenovo (China)-IBM (UnitedStates),38 Huawei and ZTE (both Chinese)investments in India;39

• Other infrastructure services: e.g. Dubai PortWorld (United Arab Emirates)-Peninsular &Oriental Steam Navigation (P&O) (UnitedKingdom); Hutchison Whampoa (Hong Kong,China)-container terminal in India.

The cases of CNOOC and Dubai Port Worldare illustrative. In July 2005, CNOOC announceda $18.5-billion bid for Unocal, the ninth largestoil firm in the United States. The proposed takeovertriggered concerns related to national security,unfair competition and the risk of technologyleakage (Antkiewicz and Whalley 2006). Due tostrong political opposition, the offer was eventuallywithdrawn and Unocal was taken over instead byChevron (United States). Some observers cautionedthat blocking the Chinese bid might have negativerepercussions in terms of the willingness of theChinese Government to invest in United Statesbonds or the risk of retaliation against United Statescompanies seeking to invest in China.40 In thesecond case, following the acquisition of P&O byDubai Port World (DPW), strong opposition in theUnited States was raised against the fact that DPWwould take over the management of six portterminals in the United States previously operatedby P&O. United States lawmakers and businessrepresentatives cited security concerns about an

Table VI.4. IPAs known to have offices in developing or transition economies

IPA Locations

Developed countriesITD Hungary Bosnia and Herzegovina, Brazil, Bulgaria, China, Croatia, India,

Indonesia, Iran, Kazakhstan, Kuwait, Romania, Russian Federation,Serbia and Montenegro, Turkey, Ukraine and Viet Nam

Invest Australia China and SingaporeInvest in Denmark China and IndiaInvest in France Agencya China, Hong Kong (China), India, Republic of Korea, Singapore,

Taiwan Province of ChinaInvest in Sweden Agency China, India, Republic of Korea and Taiwan Province of ChinaJapan External Trade Organization Brazil, China, Hong Kong (China), India, Republic of Korea,

Singapore and ThailandLatvian Investment and Development Agency China, Kazakhstan and Russian FederationMalta Enterprise Libya and United Arab EmiratesUK Trade and Investment China, Hong Kong (China), Mexico, Republic of Korea, Singapore,

South Africa and Taiwan Province of China

Developing countriesBancomext (Mexico) Argentina, Brazil, China, Colombia, Costa Rica, Guatemala,

Republic of Korea, Singapore and VenezuelaBotswana Export Development and Investment Authority South AfricaCORPEI (Ecuador) ChileInvestment Promotion Agency, Ministry of Commerce (China) HungaryMauritius Board of Investment IndiaNamibia Investment Centre Angola, India, Malaysia and South AfricaPhilippines Board of Investment, Department of China, Hong Kong (China), Indonesia, Malaysia, Republic of Korea, Trade and Industry Singapore, Taiwan Province of China and ThailandProexport (Colombia) Brazil, Chile, China, Costa Rica, Ecuador, Peru and VenezuelaSaudi Arabian General Investment Authority China and Singapore

South East Europe and CISArmenian Development Agency Russian Federation

Source: UNCTAD Survey, February-March 2006.a Based on information on the website of the Invest in France Agency.


Arab company’s taking over the running of theports.41 The strong reactions eventually led toDPW’s undertaking to sell those terminals to aUnited States company within six months.

Concerns over foreign takeovers have beenvoiced in other countries as well. For example, theattempted takeover by the Chinese metal firm,Minmetals, of the Canadian nickel and zincproducer, Noranda, led critics in that host countryto cite national security concerns as well as China’shuman rights record as reasons to stop thetransaction.42 Similarly, security concerns werebehind the decision of the Government of India toblock a bid in November 2005 by a subsidiary ofHutchison Whampoa (Hong Kong, China), for acontainer terminal in Mumbai.43 In the UnitedKingdom, when it became known that Gazprom(Russian Federation) was considering a bid forCentrica, the largest gas supplier in the UnitedKingdom, concerns there related to allowing aState-owned company to gain control over gasdistribution markets in Europe.44

The other main area of concern isemployment-related. Trade unions in both NorthAmerica and Europe have expressed fears thattakeovers could result in sharp reductions in theworkforce of the target firms. Takeover bids byHaier (China) of Maytag (United States), BenQ(Taiwan Province of China) of Siemens’ HandsetDivision (Germany), and Mittal Steel (Netherlands/United Kingdom) of Arcelor (Luxembourg) are allexamples over which such concerns have beenvoiced.

In June 2005, the Haier Group, a leadingmanufacturer of household appliances in China,participated in a bid for Maytag, the third-largestappliance maker in the United States. Haiereventually dropped its bid, and instead Maytag wastaken over by Whirlpool (United States), followingconcerns that Chinese ownership would reduce thenumber of manufacturing jobs in the United States.The fear of asset-stripping led Maytag employeesto favour takeover proposals by a United Statesfirm.45 When BenQ agreed to take over Siemens’

Figure VI.5. Target industries for IPAs promoting FDI from developing and transition economies(Per cent)


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loss-making handset division in June 2005,concerns were expressed by the labour union, IGMetall, that BenQ would cut jobs at its productionplant in Kamp-Lintfort. In the end, jobs at this plantwere secured until mid-2006.46

In 2005, Mittal Steel made a bid for Arcelor.Arguments against the transaction alluded to risksdue to the developing-country origins of thebidding company. Technically, Mittal Steel is nota developing-country TNC. It has its headquartersin the Netherlands, and its chairman and CEO,Lakshmi Mittal, resides in the United Kingdom.But of the nine-member Board of Directors, fiveare Indian citizens. At the same time, theGovernment of India made statements in favourof Mittal’s plans, indicating that it viewed thecompany as reflecting certain Indian interests.47

Although no concrete legislative steps were takento block the transaction, politicians as well as tradeunion representatives expressed reservations. Trade

unions from Belgium, France, Germany, Spain,Luxembourg and Italy unanimously declared thatthey strongly opposed the hostile takeover bid ofArcelor by Mittal.48 According to the FrenchMinister of Finance, Mittal was “free to do whatit wanted. We could only reiterate the deep concernof the French government”.49 In June 2006,however, the two companies eventually agreed toa merger valued at i26.9 billion.50

What are the implications of the recent inpolitical opposition to the M&As involving someTNCs from developing and transition economies?

As far as home countries are concerned, theownership issue is of particular relevance. First,the level of State ownership in an economy is apolitical decision at the national level. However,countries in which State-owned, or government-linked companies embark on internationalizationthrough FDI (including via M&As) need to be

Box VI.11. FDI and national security exceptions

In general, most States reserve the right torefuse certain M&As for national security reasons,either under international investment agreements(IIAs) to which they are party or under theirnational laws.

The majority of IIAs does not contain anational treatment obligation during the admissionperiod. Instead it is left to the host State eitherto admit FDI outright, admit it conditionally, orreject it. However, IIAs that contain a nationaltreatment obligation extending to the pre-establishment phase, typically apply public policyexceptions to filter out FDI that may pose a riskto their national security. The national securityexception in such IIAs is regularly part of broaderpublic policy exceptions that allow countries toblock a deal for public policy reasons. The mostcommonly used are exceptions to safeguard thenational security of a country, to protect publicorder and health, life and the environment.a Aconcern regarding these exceptions is that theycould be used to hinder free admission foreconomic reasons on the pretext of public policygrounds. According to one observer: “difficultiescan arise when a host State so interprets its vitalnational economic and security interests as tocreate a discriminatory regime for the exclusionof foreign investors from sectors where national

firms are under threat from foreign competition”(Muchlinski 1999, p. 175).

Public policy exceptions normally are notwell defined. However, differences exist betweennational security and other exceptions. Most ofthe latter exceptions, when included in IIAs, arenot self-judging, meaning that a country cannotfreely interpret the scope and application of theexception. National security exceptions aredifferent. They are usually self-judging and thehost State is the final interpreter of the law (i.e.only the host State can judge whether there is athreat to its essential security interests and howit should react to this menace).b However, anumber of IIAs limit the scope of application ofthe national security exception by enumeratingin an exhaustive list specific categories of casesin which the clause may be invoked (see, forexample, Article XIV bis of the GATS). Whereasthere exists jurisprudence for some public policyexceptions (such as environmental exceptions),this does not seem to be the case for nationalsecurity exceptions.

In the context of blocking foreigninvestments, national security exceptions relatemainly to economic activities in the militarysector, such as the trafficking of arms, ammunition

/...


Box VI.11. FDI and national security exceptions (concluded)

and any other transactions of goods, materials,services or technology for the supply of a militaryestablishment which can represent a threat tonational security (see, for example, NAFTAArticle 2102). Another instance can be investmentin infrastructure projects and other sectors thata country considers to be of strategic importance.Even the United States, which generally favoursa liberal approach towards FDI, has annexed longlists of sectors to its BITs and free tradeagreements (FTAs), making some sectors off-limits to foreign investors. Among the sectorswhere FDI is often barred are such diverseeconomic activities as nuclear energy or licencesfor broadcasting. Their inclusion in such negativelists may also reflect lobbying efforts by domesticinterest groups (Pollan 2006, p. 79).

Similarly to IIAs, national laws oftenexclude or limit foreign ownership in certainsectors to safeguard national security. Bosnia andHerzegovina, for example, limits foreignownership of enterprises engaged in theproduction and sale of arms, ammunition, orexplosives for military use and military equipmentto 49%. The investment code of the Philippinesenumerates in its List B a number of activities,which are defense-related such as the manufactureof firearms, ammunition, and lethal weapons.Investing in these areas by foreigners requiresspecial permission.

A prominent developed-country nationalsecurity exception is the United States’ “Exon-Florio provision” (Section 721 of the DefenseProduction Act), which allows the President ofthe United States to block an acquisition of aUnited States corporation by a foreigner if found

that “(1) there is credible evidence that the foreignentity exercising control might take action thatthreatens national security and (2) the provisionsof law, other than the International EmergencyEconomic Powers Act do not provide adequateand appropriate authority to protect nationalsecurity.”c The provision does not contain adefinition of the term “national security”, butmentions a number of factors that should beconsidered. The Committee on ForeignInvestments in the United States (CFIUS)supervises its application, and receivesnotifications by foreign companies (or thecompany which is to be acquired) prior to, orafter, the acquisition.d

Section 837(a) of the National DefenseAuthorization Act for Fiscal Year 1993, calledthe “Byrd Amendment,” amended the “Exon-Florio provision”. It requires an investigation incases where the buyer is controlled by or actingon behalf of a foreign government; and theacquisition “could result in control of a personengaged in interstate commerce in the U.S. thatcould affect the national security of the U.S.” Thisamendment has been of relevance in the contextof outward FDI from developing and transitioneconomies, in light of the prominent role thatState-owned companies or government-linkedcompanies play in some of these countries(chapter III).e

Between 1988 and 2005, a total of 1,593notifications were made to the CFIUS, 25investigations were initiated and only one case(China National Aero Tech’s bid for MAMCOManufacturing Inc. in 1990) was actually blocked(Graham and Marchick 2006, p. 57).

Source: UNCTAD.

a For exceptions to national security, see, for example, Article 18.2 of the United States model BIT, or Article 2102 ofthe NAFTA and Article 169 of the Economic Partnership Agreement between Japan and Mexico. For exceptionsrelating to the protection of human, animal or plant life or health, see, for example, Article 24 of the Energy CharterTreaty, or Article 13 of the Framework Agreement on the ASEAN Investment Area.

b The self-judging nature of national security exceptions also becomes evident in the message of the Unted StatesPresident to the Senate regarding the United States–Albania BIT: “Measures permitted by the provision on the protectionof a party’s essential security interests would include security-related actions taken in time of war or national emergency.Actions not arising from a state of war or national emergency must have a clear and direct relationship to the essentialsecurity interest of the party involved. Measures to protect a party’s essential security interests are of self judgingnature, although each party would expect the provisions to be applied by the other in good faith.” Seewww.wais.access.gpo.gov.

c See www.treas.gov/offices/international-affairs/exon-florio/.d CFIUS member agencies are: the Departments of Treasury (Chair), State, Defense, Justice, Commerce and Homeland

Security, as well as the National Security Council, National Economic Council, United States Trade Representative,Office of Management and Budget, Council of Economic Advisors and the Office of Science and Technology Policy.

e See www.treasury.gov/offices/international-affairs/exon-florio/.

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aware of the potential implications and reactionsin recipient countries. In some countries (e.g. theUnited States), the fact that a bidder is State-ownedsignificantly increases the chances that the dealwill go through a review process (box VI.11). Itis often feared that motives other than purelyeconomic ones drive ownership bids by State-owned companies, particularly if the M&As relateto energy, infrastructure services or other industrieswith a “security dimension”.

Secondly, whether private or State-owned,outward investors engaging in cross-border M&Asmay increasingly have to address issues related tocorporate governance. This is important, as thereare concerns in the North that the acquiring firmmay not comply with codes of corporategovernance and transparency to which companiesin the host economy largely adhere. Thirdly, andmore generally, firms need to be aware of thepolitical sensitivities involved in cross-borderM&As, and plan their transactions carefully, takingeconomic as well as non-economic aspects intoaccount.51

There may also be a case for ensuringreciprocity with a view to being able to undertakeM&As transactions in other countries. For example,in the case of the planned takeover of Unocal byCNOOC, a bill introduced in the United StatesSenate that specifically aimed “To prohibit themerger, acquisition, or takeover of UnocalCorporation by CNOOC Ltd. of China”, madereference to the fact that the Chinese Governmentwould not allow the United States Government orUnited States investors to acquire a controllinginterest in a Chinese energy company.52

From a host-country perspective, recentreactions may partly indicate that manystakeholders are not prepared for the upsurge inM&A activity involving the new sources of FDI.Business leaders, trade unions and policymakersin developed countries may expect to see more ofthese kinds of transactions in the coming years.Future responses will have to be carefully balanced.What is to be regarded as a threat to the nationalsecurity of a country is not well defined andtherefore largely up to each country to determine(box VI.11). At the same time, countries need tobe careful in their decisions, so as not to fuel a

trend of increased protectionism that would be inno country’s interest. In some developed hostcountries, there are fears that an increasedpoliticization of the process through which foreigntakeovers are scrutinized may lead to unwantedcosts and reduced benefits without actuallyimproving the ability to address national securityrisks (Graham and Marchick 2006).

There may be important benefits to a hostcountry from having more companies competingto acquire local assets. Indeed, some observers inthe relevant host countries have spoken out againststopping some of the deals reviewed above, andwarned that opposition to inward FDI may haveunwanted consequences. For example, it has beensuggested that blocking Huawei’s and ZTE’sinvestments in India might imply higher costs forthe local users of the kind of telecom equipmentthat the Chinese companies produce.53 Moreover,the business community in the United States hasdone little to oppose acquisitions by Asian firms.Local shareholders are likely to benefit from havingmore potential buyers of their assets. Moreover,many business executives may feel that more isat stake in investments going the other way. A morenegative stance towards inward FDI in the formof cross-border M&As might lead other countriesto retaliate, which could result in widespreadprotectionism.54

Important parallels can be drawn with thejob-related concerns noted above. In some cases,because of their roots in lower-cost locations,developing-country investors have in some casesbeen seen to present a greater risk of productionrelocation and job reduction for the host country.Such claims may be hard to substantiate.Companies involved in industries that face toughglobal competition are likely to be exposed tosimilar kinds of pressure to restructure andrationalize their operations. Thus it is unlikely thatthe nationality of the owner will have a majorinfluence on the employment effects of a givencompany. Rather, the employment impact wouldprimarily be determined by the competitiveness ofthe business unit concerned. It would beunfortunate if a developing-country origin wouldbe used to hamper the internationalization ofdeveloping-country firms.


C. Internationalagreements and FDI fromdeveloping and transition

economies

The expansion of FDI from developing andtransition economies also has implications for therole of international investment agreements (IIAs).The number of bilateral and regional agreementswith investment provisions continues to rise, inpart driven by increased negotiating activity amongdeveloping countries (chapter I). Such South-Southagreements may facilitate investment flows amongdeveloping countries. At the same time, thoseeconomies that are emerging as significant sourcesof FDI are finding themselves in a new situationin the context of negotiating IIAs. They now haveto consider not only the role of such agreementsin facilitating inward FDI, but also in creatingbetter opportunities for their own firms to expandabroad. In this section, particular attention is givento selected bilateral and regional agreements, whichare of potential relevance to FDI from developingand transition economies.

1. The growing role of IIAs

Many developing and transition economiesare actively contributing to the expansion of IIAsat the bilateral and regional level, partly becausethey view such agreements as helpful not only inattracting inward FDI, but also to facilitate theinternationalization of their firms.

The conclusion of bilateral investmenttreaties (BITs) traditionally involved a developedcountry on the one hand, and a developing countryon the other. In practice, the role of BITs was toprotect developed-country firms against politicalrisks, such as discrimination, expropriation andtransfer restrictions, while at the same time helpingdeveloping countries to attract more FDI. Doubletaxation treaties (DTTs) were concluded with theobjective of ensuring that TNCs (mainly fromdeveloped countries) would not be taxed twice forthe same business activity.55 With developingcountries emerging as capital exporters, thissimplified perspective is becoming increasinglycomplex. More and more countries find themselvesbeing both recipients and sources of FDI, whichmeans that they have to consider a wider spectrumof priorities when negotiating international

agreements. Many developing and transitioneconomies now explicitly mention the promotionof outward FDI as one of the reasons for thementering into BITs and DTTs.56

A growing number of bilateral IIAs – BITs,DTTs, free trade agreements (FTAs) or other formsof IIAs – are concluded between developingeconomies. As of end 2005, more than 1,100 suchSouth-South IIAs had been concluded, of whichthe number of DTTs had reached 399 – or 14% ofthe total number of DTTs, up from 10% in 1995.Developing Asia has signed the largest share ofDTTs, followed by Latin America and theCaribbean and Africa.57

By the end of 2005, the number of “South-South” BITs had grown to 644, representing 26%of the total number of BITs. Countries with largeFDI outflows, such as China, Malaysia and theRepublic of Korea, are among those with thehighest number of BITs. Moreover, China, Egyptand Malaysia have each signed more than 40 suchagreements with other developing economies. Asiancountries are parties to 68% of all South-SouthBITs, followed by countries in Latin America andthe Caribbean. But far from all outward FDI fromthe South is covered by BITs. In the case of FDIto other developing economies by nine southerneconomies that report outward FDI stock bydestination, only 20% was covered by a BIT inforce as of 2003. These economies represent about58% of the total outward FDI flows of developingcountries.58

Developing economies are also concludingFTAs among themselves (as well as with developedcountries). Many of these agreements includespecific investment provisions (chapter I). Theearliest “South-South” FTAs with substantiveinvestment provisions were concluded in LatinAmerica and the Caribbean: between Mexico andBolivia (1994), Colombia, Mexico and Venezuela(1994), Mexico and El Salvador, and Chile andMexico (1998), Chile and Central America (1999),Guatemala and Honduras (2000), and Mexico andUruguay (2003). More recently, other developingcountries have followed suit. Singapore has set upa network of FTAs aiming, inter alia, at liberalizingthe service sectors of its FTA partners and spurringthe growth of services and other creative industries.59

Similarly, the Republic of Korea has concluded anumber of FTAs, including with Chile (2004) andSingapore (2005), and is pursuing negotiations withmore than 20 economies and regional organizations,including India, Mexico and ASEAN.

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South-South bilateral IIAs cover a widerange of cooperation activities and areas, such astrade and labour, aimed at achieving relateddevelopment goals (UNCTAD 2005m). They differfrom other IIAs, not so much in their overallobjective, which is to promote and facili tateinvestment, but in terms of the depth and breadthof their coverage of investment issues (UNCTAD2005m, p. 31). South-South BITs generally do notgrant free access and establishment; they tend toexclude provisions prohibiting performancerequirements; and they limit transparencyrequirements to the stage following the adoptionof laws and regulations. Few specific South-Southfeatures are discernible in such IIAs, but they tendto address the development concerns of the partiesinvolved more prominently than IIAs in general(UNCTAD 2005m).

It is l ikely that increased FDI fromdeveloping and transition economies will generatea growing demand from the business communityin the home countries concerned for greaterprotection of their overseas investments. Ininterviews conducted in the context of thepreparation of this WIR, more BITs and DTTs werementioned by several TNCs from developing andtransition economies when asked how home-country governments could help facilitate theirinternational expansion through FDI. Most

respondents also assigned relatively greatimportance to both BITs and DTTs for theiroverseas investments.

The focus of developing-countrygovernments in BIT and DTT negotiations mayshift from an exclusive emphasis on inwardinvestment promotion to include protection ofoutward FDI. This has a number of implications.First , developing and transition economiesexporting FDI may become more interested inactively demanding higher standards of protectionfor outward investors. Secondly, the most-favoured-nation (MFN) clause may gain in importance fordeveloping countries, since it may provide theirinvestors with higher standards of protectionincluded in third-country BITs. Thirdly, developedcountries may face a higher risk of disputes frominvestors from developing and transitioneconomies. This might reinforce the alreadyexisting trend in some countries (e.g. Canada,United States) to refine the text of individual BITarticles and to review their BIT dispute settlementprovisions. The combination of more IIAs with adeveloping-country party and theinternationalization of TNCs from developing andtransition economies is already reflected in the risein the number of investment disputes involvingTNCs from these economies (box VI.12).

Box VI.12. Investment disputes involving investors from developing and transition economies

In the wake of rising FDI from developingand transition economies, and the expansion ofthe IIA universe (chapter I), several investmentdisputes have emerged with investors from theseeconomies as claimants.

By the end of 2005, 24 of the 226 knowntreaty-based investor-State disputes(approximately 10%) had been filed by investorsfrom a developing or transition economy. Withone known exceptiona, all were filed againstgovernments in other developing countries oreconomies in transition. The most cases have beenfiled against Chile (5), Argentina (3) and Peru(2). Claimants were predominantly from Chile(5), Argentina and the Russian Federation (3each), followed by investors from Malaysia, Peru,Singapore and Turkey (2 each). Of the 24disputes, 22 related to BITs; the remaining 2

Source: UNCTAD.

a There is only one known case involving an investor from a developing country and a government of a developedcountry: the often-cited “Mafezzini vs. Kingdom of Spain” case, which the Argentinean investor eventually won.

concerned the ASEAN Agreement for thePromotion and Protection of Investments.

From the information available, the casescover claims amounting to at least $1.1 billion.As of 1 May 2006, 18 disputes were stillpending, 2 had been won by the foreign investor,and 3 by the host country. The outcome of onedispute is unknown. Sectors involved in theseclaims include, motorway and road construction,chemical products, electricity distribution andtelecommunications. The IIA provisions mostfrequently invoked include the definition of“investment”, the principle of fair and equitabletreatment and expropriation.

Given that FDI from developing countriesand transition economies is growing rapidly,investor-State disputes involving investors fromthese economies might increase in the comingyears.


2. Regional economic integrationagreements and South-South FDI

Policy developments at the regional level arealso of potential relevance. This applies inparticular if the regional network of BITs isrelatively thin. As noted above, there is a strongregional dimension to outward FDI fromdeveloping economies in Africa, Asia and LatinAmerica (chapter III). In all these regions, variouspolitical initiatives have been taken to createregional trading blocs, often with importantimplications for investment. More research isneeded to assess the impact of regional integrationschemes on South-South FDI.

As of December 2005, at least 40 regionalSouth-South trade agreements had been concluded(UNCTAD 2005m), many of them after 1995, thusconstituting “a second wave of regionalism”(Cosbey 2004, p. 2).60 Such integration caninfluence FDI in different ways. First , byintegrating national economies the regional marketsize increases, making the region more attractiveto market-seeking FDI. Secondly, by removingbarriers to trade and investment among themembers of the integrating area, the scope forproduction specialization and efficiency-seekingFDI may expand. A larger regional marketcombined with easier trade across borders withinthe region can imply greater economies of scalefor producers based within the region, and may alsoattract new actors. Thus, regional integration mayin theory facilitate inflows of FDI from outside theregion, as well as intraregional flows.

But the extent to which regional integrationaffects FDI depends on several factors, includingthe size of the markets of the individual memberStates and the actual provisions of the agreements,and these can differ from one regional bloc toanother. While more and more regional agreementsare concluded in developing regions, not all of themdeal with investment. In fact many regional South-South agreements have rather modest investmentprovisions (UNCTAD 2005m, p. 26).

A few salient features of investment-relatedaspects of South-South regional economicintegration are worth noting. First, for some of theregional groupings, the amount of FDI in the South-South context remains small. In these cases,promotion of FDI from non-member States tendsto receive the most attention. Second, the rathermodest coverage of the investment provisions in

many South-South regional economic integrationagreements is partly explained by the economicand political diversity of the members. Third, aweak infrastructure connecting the production andtrade systems of the different members may limittheir ability to develop a larger regional marketand hamper any substantial intraregional FDI flows.

Among those regional agreements that dodeal with investment, some include provisions thatcan be seen as particularly relevant from theperspective of South-South FDI. Some agreementsseek to boost intraregional FDI by easing the entryof companies from other member States. Forexample, ASEAN provides national treatment toregional investors both pre- and post-establishment.Others, including the Andean Community,explicitly encourage the establishment of regionalTNCs – firms set up by investors from more thanone member State and that enjoy the right ofadmission in all member States. The chosenstrategies reflect the political and economic contextin which they were developed.

In ASEAN, the most important agreementsconcerning investment are the ASEAN Agreementfor the Promotion and Protection of Investments,its 1996 Protocol, and the Framework Agreementon the ASEAN Investment Area (AIA Agreement)(box VI.13). The first two agreements concerninvestment protection, and the AIA Agreement alsofocuses on facilitation, promotion and liberalizationof FDI. Few studies have assessed empirically theimpact of the AIA on intraregional FDI. Oneanalysis concluded that regional integration effortshad generated intra-bloc trade, but that the effecton intraregional investment had been insignificant(Stone and Jeon 2000). Another study found thatthe AIA has boosted the volume of intra-ASEANinvestment flows from Malaysia (Zainal 2005, p.9). During the period 2001-2003, 17% of FDIinflows into ASEAN came from within the region(ASEAN Secretariat 2005b).

The Andean Group was established in 1988with Bolivia, Colombia, Ecuador, Peru andVenezuela as founding members. In 1997, it becamethe Andean Community.61 The main provision ofdirect relevance to South-South FDI is definedunder Decision 292, which allows for the formationof Andean multinational enterprises. These aredefined as enterprises in which investors from twoor more Andean Community countries own morethan 60% of the equity capital. Such enterprisesenjoy national treatment in the public procurementof goods and services, the right to remit in freely

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convertible currencies all dividends that aredistributed, national treatment in tax matters, andthe right to establish branches in other membercountries.62 It is not known to what extent theDecision has contributed to the formation ofAndean multinational enterprises.

CARICOM was established in 1973, and nowincludes Antigua and Barbuda, the Bahamas,Barbados, Belize, Dominica, Grenada, Guyana,Haiti, Jamaica, Montserrat, Saint Kitts and Nevis,Saint Lucia, Saint Vincent and the Grenadines,Suriname and Trinidad and Tobago. CARICOM’sProtocol II (article 35b) establishes that membersshall not introduce any new restrictions relatingto the right of establishment of nationals of othermembers States except as otherwise provided inthe Agreement. It stipulates that regionalagreements on foreign investment should accordpreferential treatment to investors in the followingorder (article 35c): nationals of the host CARICOMcountry, nationals of other CARICOM countries,nationals of the source country, and finally thoseof other countries.63 However, some members haveyet to enact Protocol II.

MERCOSUR, comprising Argentina, Brazil,Paraguay and Uruguay,64 regulates intraregionalFDI in the Colonia Protocol – a protocol that has

not yet been ratified by any of the member States.Its article 2 provides for open admission ofinvestments from member States and containsnational treatment and most-favoured-nation (MFN)obligations. The protection of sensitive industriesis guaranteed by a negative list approach. Theannex to the Protocol contains a list of sectors thatare exempted from national and MFN treatment,most of which are key sectors for the memberStates’ economies. Common exemptions includeexploration of various minerals, certain publicutilities, telecommunications and mass media.65

There are significant FDI flows among the membercountries of MERCOSUR. For example, Argentinaand Brazil are among the main sources of FDI intoParaguay.

In Africa, COMESA is the largest tradingbloc, covering 20 member States with a combinedpopulation of over 374 million.66 It aims, amongother things, to establish “a secure investmentenvironment and the adoption of common sets ofstandards”.67 Member States have agreed to“accord fair and equitable treatment to privateinvestors, to adopt a program for the promotionof cross-border investment, to removeadministrative, fiscal and legal restrictions to intra-common market investment and to accelerate the

Box VI.13. The ASEAN Investment Area and South-South FDI

The original goal of the AIA Agreement wasto create a more liberal, attractive and competitiveinvestment area comprising about 530 millionpeople (article 3). Its coverage was later expandedby the Protocol to Amend the FrameworkAgreement on the ASEAN Investment Area (AIAProtocol 2001), which now covers manufacturing,agriculture, mining, forestry and fishery, andservices incidental to these industries. Originally,the first of two goals was to open all industriesto ASEAN investors by 2010 and to all investorsby 2020 (article 4(b)). The second was to grantnational treatment by 2010 to all ASEANinvestors and by 2020 to all investors (articles4(b) and 7(b)). Those deadlines were broughtforward. Consequently, reservations for ASEANinvestors in the manufacturing sector wereeliminated by January 2003.

This broad liberalization is subject toimportant exceptions. ASEAN member States canspecify industries and include them in a

Source: UNCTAD.a See www.aseansec.org/6460.htm.

“temporary exclusion list” or in a “sensitive list”.Industries and investment measures in thesensitive list are not subject to liberalization,while those in the temporary exclusion list areto be phased in at specific agreed dates. In a firstreview of the temporary exclusion list in 2003“[M]ember Countries opened up more industriesand granted more investment measures to foreigninvestment by phasing in the list of sectors andinvestment measures in the Temporary ExclusionList”.a The Agreement also contains a generalexception to the national treatment provision inarticle 13. A country can impose measures, whichdo not conform with the national treatmentobligation if it needs to protect national securityand public morals (article 13(a)); or to protecthuman, animal or plant life or health (article13(b)). But measures shall not be discriminatoryor constitute a disguised restriction on investmentflows. Finally, the Agreement only coversinvestment other than portfolio investment (article2(a)).


deregulation of the investment process”.68 Inprinciple COMESA’s FDI dimension is twofold:it envisages the establishment of COMESATNCs,69 and it aims to encourage and facilitateinvestment flows into the common market.70 Theregional TNCs are intended to be enterprises thatare able to compete internationally. However,progress has been hampered by lack of know-howand resources within the region. Member Statesare currently negotiating an Investment FrameworkAgreement for the COMESA Common InvestmentArea, with three negotiation rounds held in 2004and 2005. The Draft Agreement focuses onliberalization, protection and promotion ofinvestment and builds upon the FrameworkAgreement of the ASEAN Investment Area.71

However, it is too early to assess the likely outcomeof these negotiations.

The above review suggests that progress hasbeen made in a number of important regionalSouth-South agreements in terms of incorporatingprovisions that may support intraregional FDI.However, the impact of these provisions oninvestment patterns remains to be analyzed throughempirical studies. Additional research aimed atassessing the investment plans of individualcompanies may be able to shed light on theinteraction between regional integration and South-South FDI.

D. Corporate socialresponsibility and TNCs

from developing andtransition economies

Discussions pertaining to corporate socialresponsibility (CSR) have traditionally revolvedaround developed-country TNCs and theirbehaviour in developing countries. However asmore and more companies from developing andtransition economies expand overseas, theirmanagements too will become increasingly judgedon this basis. As noted in earlier chapters, asignificant share of the investment from theemerging sources of FDI originates from countriesthat may be characterized by relatively weak legaland regulatory frameworks. In such situations, CSRissues assume increased importance. A number ofdeveloping-country TNCs have alreadyincorporated CSR policies into their businessstrategies, some of them even becoming leaders

in this area (box VI.14). While adherence to variousCSR principles may require additional resources,it can also generate important advantages, not onlyfor host countries, but also for investing firms andtheir home economies.

There is no universally accepted definitionof CSR. According to the OECD, it relates to a setof policies often voluntarily adopted by anenterprise in order to reinforce the enterprise’sability “to comply with the law and with othersocietal expectations that might not be writtendown in law books” (OECD 2005, p. 3).72 At themost basic level, socially responsible businessbehaviour means refraining from doing harm. Themain areas considered under the umbrella of CSRinclude, in particular, environmental protection,human rights and labour practices (see WIR03, p.165).73 At the UNCTAD XI Conference in 2004,the economic development dimension wasintroduced in the discussion of corporateresponsibility (Sao Paulo Consensus, paragraphs45 and 58).

The main responsibility for ensuring thatcompanies comply with internationally agreedstandards and conventions rests with governments.Most international conventions contain obligationsfor States, but few legally binding obligations forTNCs (WIR03, p.166).74 Host and home States aretherefore obliged to create and implement a legalframework which adheres to standards ofinternational law and gives clear guidelines toTNCs on various social and environmental issues.At a minimum, TNCs should respect in good faiththe laws of their host countries without takingadvantage of weak legal and administrative systems(WIR03 , p. 165). In cases where the legalframework is inadequate, falls below internationallyagreed minimum standards or is completely absent,TNCs might even be expected to adhere tostandards higher than those stipulated by the hostcountry.75

According to one study, “there is no vastdifference in approaches to corporate responsibilitybetween companies in high-income OECDcountries and their emerging market peers”, but“[I]n most emerging markets there appears to bea substantial gap between companies that are doinga great deal and those that are doing lit t le ornothing” (OECD 2005, p. 4). Others claim that“generally the more developed the country thehigher incidence of policies in the area of CSR”(Welford 2005, p. 52), or they suggest that on thewhole TNCs from developing and transition

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economies have less experience with CSR thantheir Northern counterparts (Aykut and Ratha2004).76

Certain characteristics of FDI fromdeveloping and transition economies are worthrecalling. First, some TNCs are based in homecountries that lack a civil society that can freelyvoice its opinion (Smith 2003, p. 58). The practicesof TNCs in such situations are not subjected to thesame level of public scrutiny that has raised thelevel of awareness of CSR issues elsewhere. Thismakes it important for home-country governmentsto promote the adoption of universally recognizedCSR principles by their TNCs. Secondly, asignificant number of large TNCs from developingand transition economies are State-owned andactive in extractive industries (chapter III), whichraises potential issues related to corporate

governance and transparency. Thirdly, a relativelyhigh share of FDI from developing and transitioneconomies flows to other developing countries.

1. Multilaterally agreed CSRprinciples

International organizations, often incooperation with States or companies, also havean important role to play in facilitating consensus-building and promoting universally acceptedprinciples that can serve as guidelines for TNCsinvesting in other developing countries. Prominentinitiatives in this regard include the TripartiteDeclaration of Principles Concerning MultinationalEnterprises and Social Policy (MNE Declaration)of the International Labour Organization (ILO),

Box VI.14. Programmes to enhance the social impact of activities:the cases of Cemex and Petrobras

Some developing-country TNCs, such asCemex (Mexico) and Petrobras (Brazil), areamong the leaders in their respective industriesin terms of adopting CSR principles.

Cemex, a participant in the United Nations’Global Compact (see box VI.15) since 2004,supports a number of CSR initiatives. Itsinitiative, Patrimonio Hoy, provides low-incomefamilies with access to low-cost materials to buildor upgrade their homes. It addresses problemsrelated to the limited financing options availableto families that prevent them from residing in orimproving their dwellings. The company hasestablished 60 centres throughout Mexico thathave so far aided 103,000 families. BetweenPatrimonio Hoy and Piso Firme (a companyprogramme that has helped 200,000disadvantaged families replace dirt floors withconcrete ones), Cemex is making strides inMexico to end slum housing and unsanitaryconditions, which often have violent outcomes.Both programmes are also being implemented inColombia.

Cemex is also involved in a wide array ofcommunity development projects around theworld. It supports or leads educational initiativesin countries such as the Philippines (One Paper,One Pencil programme for children), Costa Rica(scholarships), Egypt (education for girls). Forthe programme in Egypt – part of the

Government’s plan to educate 500,000 girls inrural areas – Cemex has provided technicalassistance and helped in the construction ofschools since 2003. Other programmes includecentres for the disabled in Venezuela, mobilehealth diagnostic teams in Nicaragua, a labourrisk education programme in the DominicanRepublic, dental care for children in thePhilippines and a cultural centre in Colombia.

Another company that has acknowledgedthe importance of the social dimension in itsactivities is Petrobras (Brazil). Its operations span21 countries, many of which have unstable socialor political environments. In Brazil, the companyhas extensive programmes such as those relatingto poverty reduction, education, child labour andsexual abuse, and fundamental rights for peoplewith special needs. In a number of host countries,such as Angola, its CSR initiatives includereconstruction projects through humanitarianprogrammes related to schools, day-care centres,hospitals, rural communities, as well as supportsocio-cultural organizations. Petrobras alsosupports management training programmes todevelop skills for the oil industry. In Colombia,one of the company’s programmes includes thetraining of community health agents. In Nigeria,it has undertaken an HIV/AIDS preventioncampaign in 40 secondary schools in coordinationwith a local civil society organization.

Source: UN Global Compact.


the OECD Guidelines for Multinational Enterprises,the United Nations’ Global Compact, and CSRwork conducted by UNCTAD and the InternationalFinance Corporation’s Performance Standards onSocial and Environmental Sustainability (see alsoWIR03).

The ILO’s MNE Declaration is a non-bindinguniversal instrument that articulates a set ofprinciples to guide the global operations ofenterprises and their social policies.77 It aims toencourage TNCs to reinforce their positivecontributions to economic and social development,and to minimize and resolve any difficulties thatmight result from their operations. Its principlesprovide guidelines for general economic and socialpolicy, employment, working conditions, trainingand industrial relations.78 The principles areintended to inspire good CSR practices on the partof enterprises from both developing and developedcountries.

The OECD Guidelines for MultinationalEnterprises, originally adopted in 1976 and revisedin 2000, are a comprehensive and detailed CSRinstrument of interest to developed and developingcountries alike. The Guidelines providegovernment-backed recommendations coveringsuch broad areas as human rights, supply chainmanagement, labour relations, the environment,combating bribery, technology transfer, consumerwelfare and taxation. The 39 adhering Governments(the 30 OECD member States and Argentina,Brazil, Chile, Estonia, Israel, Latvia, Lithuania,Romania and Slovenia) have signed a formalcommitment to promote observance of theserecommendations by companies operating in orfrom their territories. The Guidelines are part ofa package of instruments that help to define bothcorporate and government responsibili t ies inrelation to international investment. The OECDis actively seeking to expand the list of non-member adherents.

The Global Compact was launched by theUnited Nations Secretary-General in 2000. It is theworld’s largest voluntary corporate citizenshipinitiative, with more than 3,200 businessparticipants and other stakeholders from 94countries. More than half of the Global Compact’sparticipating companies are based in developingcountries. Derived from universally agreedinternational declarations and conventions, its 10principles – in the areas of human rights, labourstandards, the environment and anti-corruption –enjoy political and social legitimacy virtually

everywhere in the world (box VI.15). Participantsare expected to both internalize the principleswithin the company’s strategies, policies andoperations and undertake projects to advance thebroader development goals of the United Nations.The Global Compact works closely with business,governments, labour, specialized United Nationsagencies, and civil society organizations, such asTransparency International in the field of anti-corruption and Amnesty International in the areaof human rights. Local networks, which carry themessage to the grassroots, have emerged in 53countries. The initiative has experienced strong andgrowing engagement by companies from economiessuch as Brazil, China, Egypt, India, Indonesia,Mexico, Pakistan, South Africa and Turkey.

In April 2006, the United Nations Secretary-General launched another initiative: the Principlesfor Responsible Investment (PRI). These Principlesprovide a framework for institutional investors –including asset owners and investment managers– to integrate consideration of environmental,social and governance issues into investmentdecision-making and ownership practices, a processwhich has been linked to better long-term financialreturns as well as a closer alignment between theobjectives of institutional investors and those ofsociety at large.79 Already in May 2006, investmentfunds representing more than $5 trillion in assetshad declared their support for these principles.

The International Finance Corporation (IFC)has developed environmental and social standardsthat are applied when the IFC makes an investment.In 2004-2005, the IFC conducted an extensiveconsultation process during the review of its 1998Safeguard Policies. Its standards were revised80

and served as the model for the Equator Principles– a voluntary set of guidelines for managingenvironmental and social issues in projectfinancing. The Principles were developed andadapted by leading financial institutions in 2003(box VI.16). Forty-one of the most importantinstitutions that finance projects in developingcountries have signed up to the Principles.Consequently, enterprises involved in such projects,as well as the projects themselves, are increasinglybeing measured against CSR principles andperformance.

UNCTAD’s work relating to corporateresponsibility has contributed to guidance oncorporate transparency in the areas ofenvironmental efficiency, corporate governance,and the social and economic impact of corporations

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on host countries. This work has been part of theintergovernmental consensus-building process ofthe Intergovernmental Working Group of Expertson International Standards of Accounting andReporting (ISAR).81

2. Benefits for TNCs from the Southfrom addressing CSR issues

There are more than ethical reasons for TNCsfrom developing and transition economies to payattention to CSR issues. Whereas it may in manyinstances incur costs for the company, it may stillbe money well spent, especially for thosecompeting head-on with developed-country firms.Moreover, for TNCs that invest in “high-riskzones”, where the regulatory framework is weakor absent, CSR behaviour becomes essential .Failure to adopt such behaviour may result in theTNC becoming embroiled in major governancefailures that lead to adverse, possibly catastrophic,social consequences for the host community, forwhich the firm in question may be held to blame.In this regard companies may need to ensure thattheir risk assessment procedures allow for theeffects of weak governance, by adhering to CSR

approaches to corporate policy-making anddecision-taking. This may include, for example,conforming with international CSR instruments andobeying national laws, ensuring that theirmanagement pays closer attention to auditing andother regulatory requirements, refraining fromimproper involvement in local politics, avoidingcorruption and speaking out about any wrongdoing(see also OECD 2006e).

In recent years, CSR issues have receivedgreater attention by corporate boards, with manycompanies deciding to pursue CSR policies.Adherence to accepted CSR principles has becomeso common among global firms that, in order tocompete successfully, TNCs from developing andtransition economies may also need to adopt similarpractices. Companies have done so not merely forpublic relations purposes; increasingly they alsorecognize that good practices might influencecorporate performance. In fact, some recentresearch suggests a positive link between CSRawareness and business performance. The so-calledbusiness case for CSR has been validated by anumber of studies (e.g. IFC et al. 2002).82 Someof them, such as the Responsible CompetitivenessIndex, indicate that increased competitiveness ispositively related to an improvement in corporate

Box VI.15. The 10 principles of the United Nation’s Global Compact

The Global Compact’s 10 principles in theareas of human rights, labour, the environmentand anti-corruption are based on universalconsensus and are derived from the UniversalDeclaration of Human Rights, the ILO’sDeclaration on Fundamental Principles and Rightsat Work, the Rio Declaration on Environment andDevelopment, and the United Nations ConventionAgainst Corruption. The Global Compact askscompanies to embrace, support and enact, withintheir sphere of influence, a set of core values inthe areas covered by the Compact:

Human Rights· Principle 1: Businesses should support and

respect the protection of internationallyproclaimed human rights; and

· Principle 2: make sure that they are notcomplicit in human rights abuses.

Labour Standards· Principle 3: Businesses should uphold the

freedom of association and the effective

Source: UN Global Compact.

recognition of the right to collectivebargaining;

· Principle 4: the elimination of all forms offorced and compulsory labour;

· Principle 5: the effective abolition of childlabour; and

· Principle 6: the elimination of discriminationin respect of employment and occupation.

Environment· Principle 7: Businesses should support a

precautionary approach to environmentalchallenges;

· Principle 8: undertake initiatives to promotegreater environmental responsibility; and

· Principle 9: encourage the development anddiffusion of environmentally friendlytechnologies

Anti-Corruption· Principle 10: Businesses should work against

all forms of corruption, including extortionand bribery.


responsibility practices (AccountAbility 2005).Increased awareness of CSR may enhance anenterprise’s long-term competitive position throughimprovements in access to finance, partners andmarkets, and a reduction of legal and operationalrisk.

Enhancing access to funding. Corporationsthat go public face increased pressure to adhereto responsible business practices in order not toundermine the performance of their initial publicofferings (IPOs). For example, the IPO of ChinaNational Petroleum Company (CNPC) on the NewYork Stock Exchange in 2000 was in part affectedby the company’s engagement in Sudan, which hadbeen criticized by human rights groups. Despitean effort to restructure the IPO, a smaller sum wasraised than originally expected. Moreover, CNPChas in the past been the subject of divestmentcampaigns.83 The tendency for investors to makeCSR considerations part of their investmentdecisions has gained importance in recent years.According to the 2005 United Nations GlobalCompact Shanghai Declaration, “the financialcommunity is increasingly connectingenvironmental, social and governance performanceto a company’s overall valuation, thereby placing

a premium on businesses that responsibly managesuch risks and opportunities.” As noted above, theCSR dimension is also assessed in the context ofproject financing by the IFC as well as variousdevelopment banks.

Cooperation with partners from developedcountries. During the past decade, developed-country firms have increasingly been pressured toimprove their performance on CSR issues. Indiverse industries they are increasingly heldresponsible for the behaviour of their businesspartners and for the entire value chain of whichthey are a part. Developing-country TNCs that aimto become members of these value chains, orotherwise partner with developed-country TNCs,need to be aware of the CSR dimension when theyare evaluated as potential business partners.

Market access. TNCs from developing andtransition economies that are entering developed-country markets, can expect to encounter the sameset of pressures from these markets that haveencouraged greater CSR practices amongdeveloped-country TNCs. The same degree ofresponsibility for supply chains that has beenapplied to developed-country enterprises can be

Box VI.16. The Equator Principles

The Equator Principles are a voluntary setof guidelines for managing environmental andsocial issues in project financing, developed byleading financial institutions with the IFC’s adviceand guidance. They apply to development projectsin all sectors.

As of April 2006, 41 financial institutionshad adopted the Principles, representing 80% ofglobal project financing.a The list includes fiveBrazilian financial institutions. While thecommitment given by these institutions is to applythe Equator Principles to projects with a totalcapital cost of $50 million or more, they are oftenapplied also to smaller projects, and sometimesalso in the context of advisory services.

Source: IFC.

a Total loans for project finance in 2005 amounted to $120.7 billion, of which $97.5 billion or 80% were provided bybanks participating in Equator. Current participants are: ABN Amro, Banco Bradesco, Banco do Brasil, Banco EspíritoSanto Group, Banco Itaú, Banco Itaú BBA, Bank of America, Bank of Tokyo Mitsubishi, Barclays, BBVA, BMOFinancial Group, Caja Navarra, Calyon, CIBC, Citigroup, Credit Suisse Grp, Dexia, Dresdner Bank, Eksport KreditFonden, FMO, HSBC, HVB Group, ING, JPMorgan Chase, KBC, Manulife Financial Corporation, MediocreditoCentrale, Millennium bcp, Mizuho Corporate Bank, Nedbank, Rabobank, Royal Bank of Canada, Royal Bank ofScotland, Scotiabank, Standard Chartered, Sumitomo Mitsui, Unibanco, Wells Fargo & Company, WestLB andWestpac.

In February 2006, the IFC’s Board approveda new set of environmental and social policiesfor the institution, which incorporated a set ofeight Performance Standards on Social andEnvironmental Sustainability, to be applied to allIFC investments. The financial institutionsadhering to the Equator Principles had constitutedan active stakeholder group during theconsultation process for the new policies, andindicated the intention to update the EquatorPrinciples once the new IFC policies werefinalized. This commitment led to the revisedEquator Principles, which became effective on1 July 2006.

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expected to be applied to TNCs from developingcountries.

Reduction of legal risk. Investments in hostcountries with a weak legal infrastructure canexpose a TNC to novel forms of legal risk. Onesignificant development is the emerging practiceof foreign direct liability litigation, which can allowa TNC to be held liable in one country for itsactions in another. At present, the main exampleof foreign direct liability is the use of the AlienTort Claims Act (ATCA) in the United States.84

The United Nations Special Representative onHuman Rights and TNCs has noted that, eventhough ATCA currently remains a limited tool, thereare reasons to believe that corporate liability maybecome an issue under domestic criminal law ina number of jurisdictions (United Nations 2006,para 63). The situation is still fluid “with someindication of a possible future expansion in theextraterritorial application of home countryjurisdiction over transnational corporations” (Ibid,para 64). These observations are of relevance alsoto TNCs from developing and transition economies.

Reduction of operational risk. Developing-country TNCs in the extractive sector are the mostlikely to invest in high-risk regions, which mayentail exposure to weak governance or evenconflict. On the one hand, TNCs that invest in suchplaces can provide new jobs and livelihoods forthe local population, thereby contributing to peace-building (Gerson 2000). On the other hand, suchFDI has sometimes aggravated or reignited conflict,directly or indirectly contributed to the violationof human rights, or prolonged autocraticgovernance (Collier and Hoeffler 2000, Campbell2002, United Nations Commission on HumanRights 2006). Enterprises investing in these areasshould be aware of the potential risks and benefits,and may find the adoption of CSR policies, inparticular in the field of human rights and anti-corruption, useful for enhancing the results of theoverall investment.

Thus there are several reasons fordeveloping-country companies as well asgovernments to consider ways of addressing theCSR dimension of international business. Ofcourse, the content of CSR and the emphasis placedon different issues may vary by country, industryand firm. Nevertheless, the promotion ofuniversally agreed principles could serve as auseful basis for further work in this field.

3. Encouraging good practices

Besides widely accepted CSR principles,such as those included in the Global Compact, anassessment of what is considered responsiblebehaviour needs to be analysed on a case-by-casebasis. Given that many issues related to CSR arecontextual, careful analysis is needed to definewhat standards and practices are the mostappropriate in each country. Host countries mayhave to examine their own governance structuresand systems, since the need for CSR often ariseswhen a State’s governance is weak or breaks down.

Home countries may seek to create a legaland institutional framework that promotesadherence by firms to widely recognized principlesof CSR. CSR awareness can also be enhanced byactive consumer organizations, trade unions,environmental groups and the media. Civil societyactions can induce companies to become sensitiveto stakeholder interests and to adjust internalprocedures accordingly. Governments can alsostimulate and facilitate dialogue between companiesand their external stakeholders (see also Hamannand Acutt 2003). Both home and host countrygovernments may also actively participate in theongoing formulation of new guidelines andvoluntary principles to ensure that standards beingformed adequately reflect their particular interests.

Some developing-country governments areacknowledging the link between CSR andcompetitiveness. According to the Deputy PrimeMinister of Malaysia (OECD 2005, p. 12):

“CSR helps improve financial performance,enhance brand image and increases theability to attract and retain the best workforce contributing to the market value of thecompany by up to 30 per cent. All of thesetranslate into better client and customersatisfaction, improved customer loyalty andultimately into lower cost of capital as aresult of better Risk Management. Finallyfrom a national standpoint, a good reputationfor CSR will help Malaysian companiescompete in world markets by resolving thepotential concerns end users may have indeveloped markets.”

A number of developing economies areestablishing a regulatory and cultural environmentthat supports CSR standards. Such initiatives aresometimes driven by governments and at other


times by business associations, non-governmentalorganizations or international organizations.

South African firms stand out in that theyare embedded in an environment that givesprominence to CSR issues. In South Africa, theState has played a crucial role in defining CSR andin motivating companies to adopt such practices(Hamann and Kapelus 2004, p. 89). In 1994, thefirst King Report on Corporate Governance waspublished, and was followed by public discussionwhich resulted in the report’s wide-rangingrecommendations being implemented in laws(Institute of Directors in Southern Africa 2002).In addition, in July 2004 the Johannesburg StockExchange (JSE) was the first on the continent tolaunch a socially responsible investment index.Companies applying to be listed on the index haveto meet 94 criteria related to environmental,economic and social sustainability (JSE 2005,Finlay 2004). They are regularly reviewed to assesstheir commitment to these criteria. The review alsoextends to the outward investment activities ofcompanies listed on the JSE, even though somesmall adjustments in the criteria are made for suchactivities. Nevertheless, a company should showfor all operations “that it applies a core set ofprinciples, which at least meet globally acceptedprinciples in relation to the relevant issues” (JSE2005, p.6).

Actors other than the State can also play animportant role in providing a conducive frameworkfor CSR. In South Africa, the African Institute ofCorporate Citizenship (AICC) is an NGOcommitted to promoting responsible businessbehaviour throughout Africa. Among its activitiesare the African Corporate Sustainability Forum (amulti-stakeholder platform), the Centre forSustainability Investing (aimed at the financialsector), and a competitiveness and innovationprogramme. In Latin America, the Ethos Institutein Brazil is a leader in this area, representing some900 companies that account for 30% of Brazil’sGDP and about 1.2 million employees. The Instituteis committed to helping companies become moresocially responsible. It focuses on activities suchas expanding the CSR movement in Brazil ,deepening CSR practices and developing CSRcriteria. Even though it currently works mainly inBrazil , i t explicitly refers to CSR also as aninternational issue. In Asia, the Asia Pacific CSRGroup was launched in July 2004, bringing togethernine country-level CSR organizations in theregion.85 Members of the Group engage in activelearning exchanges and practices, networking and

sharing of information. Its goals include therecognition of standards and benchmarks forcorporate governance and good business practicesin the fields of environmental protection andequitable human resource management.

In the case of FDI in extractive industries,there are various resources that can help bothcompanies and countries to address certain CSR-related issues, including ensuring the transparencyof revenue flows originating from extractiveindustries86 or dealing with human rights issueswhen confronted with weak governance.87

The participation of the TNCs themselves isan essential ingredient for the success of CSRinitiatives. CSR issues pose new challenges to someenterprises from developing countries, whereasothers have already incorporated them into theirstrategy.88 For future planning it is not enough toevaluate only the risk in a company’s undertakings,but also the risk a company’s actions can pose forother stakeholders. The emergence of newdeveloping-country TNCs and their participationin the global market will draw increasing attentionto this issue. Moreover, as highlighted in chapterV, developing-country TNCs can be an importantchannel to transmit CSR-related values andstandards to their home economies. Increasedawareness of CSR can be expected to benefit theTNCs, as well as their home and host countries.It is therefore important that CSR-related issuesbe seen as part of a broader set of policies thatsupport entrepreneurship, corporate governance andcompetitiveness.

E. Concluding remarks

In the context of FDI and development, thereare important interactions between corporatestrategies and public policies at the national andinternational levels. The rise of FDI fromdeveloping and transition economies is noexception. Proactive government policies can helpcountries – be they sources or recipients of suchinvestment – to benefit from such investmentactivity. By providing the appropriate legal andinstitutional environment, home-countrygovernments can create conditions that couldinduce their firms to invest overseas in ways thatcould benefit the home economy. Host-countrypolicies can similarly affect the volume and netimpact of inward FDI from developing andtransition economies. Indeed, the emergence of

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TNCs from these economies as key regional orglobal players in their industries is paralleled byimportant changes in policies governing FDI andrelated matters. Based on this chapter’s review ofthese changes, some general observations can bemade.

From a home-country perspective, more andmore developing and transition economies aredismantling barriers to outward FDI. While manyof them still have some forms of capital controlto mitigate the risk of capital flight or financialinstability, such a restriction is mostly aimed atlimiting international capital flows other than FDI.Only a handful of developing countries today haveoutright bans on outward FDI, as they areincreasingly recognizing its potential benefits. Anumber of governments, especially in developingAsia, are even using a variety of supportivemeasures to encourage their firms to invest abroad.Such measures include provision of information,match-making services, financial or fiscalincentives, as well as insurance coverage foroverseas investment. Given the relatively shortperiod of time that such measures have been inplace, little is known about their effectiveness infacilitating outward FDI and its associated potentialbenefits.

There is no one-size-fits-all policy that canbe recommended to deal with outward FDI. Everyhome country needs to adopt and implementpolicies that are appropriate to its specific situation.Whether a country will benefit by moving from“passive liberalization” to “active promotion” ofoutward FDI depends on many factors, includingthe capabilities of its enterprises and the links ofthe investing companies with the rest of theeconomy. Certain local capabilities are needed tobe able to successfully exploit the improved accessto foreign markets, resources and strategic assetsgained from outward FDI. Moreover, domesticenterprises will need a certain level of absorptivecapacity to benefit from outward FDI. In many low-income countries, it may therefore be more cost-effective to focus on creating a competitivebusiness environment at home than to promoteoutward FDI.

Nevertheless, for those countries that decideto encourage their firms to invest abroad, it isadvisable to incorporate policies dealingspecifically with outward FDI within a broaderpolicy framework aimed at promotingcompetitiveness. For example, given the importanceof generating domestic capabilities to benefit from

outward investment, i t is appropriate to linkpolicies on such investment with those relating toSME development, trade and innovation. Moreover,outward FDI is only one of several ways in whicha country and its firms can connect with the globalproduction system. Therefore, close coordinationwith policies aimed at attracting inward FDI,promoting imports or exports, migration andtechnology flows would also be advisable.

Among developing and transition economies,those in South, East and South-East Asia are thelargest users of measures to promote outward FDI.Several of these countries do this through tradepromotion organizations, IPAs, export creditagencies and/or EXIM banks. A variety of policyinstruments are applied in innovative ways, oftentargeting specific types of outward FDI. Somegovernments in Africa and Latin America have alsopublicly stressed the importance of outward FDI,but have rarely followed up with concretepromotional measures. Indeed, in many developingcountries, the promotion of investment overseasremains a sensitive matter.

Particular attention should be paid to the roleof outward FDI in the context of South-Southcooperation. Governments in Asia (e.g. Malaysia,India, Singapore) and Africa (e.g. South Africa)have outlined specific programmes to facilitateSouth-South investment. Some programmes areaimed at strengthening intraregional development(as in the case of infrastructure-related FDI bySouth African State-owned enterprises), and othersare interregional in scope. This is an area that couldbe further explored and supported through closercollaboration among developing-countryinstitutions. An interesting recent UNCTADinitiative in this area is the establishment of theG-NEXID network, aimed at promoting the sharingof experiences among EXIM banks fromdeveloping countries.

There are also implications for policy-makingin host countries. For example, the scope for South-South FDI has led many developing host countriesto adopt specific strategies to attract suchinvestment. In a 2006 UNCTAD survey of IPAs,more than 90% of all African respondents statedthat they currently target FDI from otherdeveloping countries, notably from within theirown region. Indeed, for African IPAs, South Africatops the list of developing home countries targeted,while in Latin America and the Caribbean, Brazilis the most targeted country. Meanwhile,developed-country IPAs also court investors from


the new home economies. A significant number ofsuch agencies have already set up local offices forthat purpose in countries such as Brazil, China,India, the Republic of Korea, Singapore and SouthAfrica. This growing diversity of potential sourcesof FDI may give recipient countries greaterbargaining power to the extent that they are ableto attract a larger number of investors to competefor existing investment opportunities.

Notwithstanding the interest in FDI fromdeveloping and transition economies, someobservers are less enthusiastic about the newinvestors. Some cross-border M&As bydeveloping-country TNCs that have close links withtheir respective governments have generatednational security concerns, and other deals haveprompted fears of job cuts. Countries in whichState-owned enterprises embark on internationa-lization through FDI need to be aware of thepotential sensitivities involved. In some countries,State ownership is seen as presenting an increasedrisk of a transaction being undertaken for other thanpurely economic motives. This applies in particularto energy, infrastructure services or other industrieswith a “security dimension”. Whether private orState-owned, outward investors from developingand transition economies that are anxious to tapthe markets and resources of developed countriesmay also have to address more fully issues relatedto corporate governance and transparency.

As far as recipient countries are concerned,business leaders, trade unions as well aspolicymakers should expect to see a continued risein transactions involving companies fromdeveloping and transition economies as buyers.There may be important benefits to a host countryfrom having more acquiring companies competingfor local assets. A negative stance vis-à-vis inwardFDI might result in higher prices for consumers,lower returns for shareholders and may generatea wider protectionist sentiment. Countries thereforeneed to be prudent in their use of legislation aimedat protecting national security interests so as notto fuel a spate of protectionism that would be inno country’s best interests.

Beyond the level of national policy-making,this chapter has noted that the interest ofdeveloping and transition economies ininternational investment agreements may also shift.Increased FDI from these economies is likely togenerate growing demand from the businesscommunity in the home countries concerned forgreater protection of their overseas investments.

As a consequence, in addition to using internationalagreements as a means to promote inward FDI,developing-country governments will increasinglyconsider using them to protect outwardinvestments. This may result in an additionalchallenge for developing country governments tobalance their need for regulatory flexibility withthe interest of their own TNCs investing abroad.

Finally, CSR issues are likely to becomemore important as companies in developing andtransition economies expand abroad. Discussionsrelated to CSR have traditionally revolved arounddeveloped-country TNCs and their behaviour indeveloping countries. The managements oflatecomer TNCs from developing and transitioneconomies will be exposed to similar issues. Whileadherence to various internationally adopted CSRstandards may entail costs for the companiesconcerned, i t can also generate importantadvantages, not only for the host country but alsofor the investing firms and their home economies.

In conclusion, policymakers in countries atall levels of development need to give greaterattention to the emergence of new sources of FDI.There is scope for further sharing of experiencesamong policymakers from developing andtransition economies with a view to maximizingthe developmental impact of this recentphenomenon. For example, South-Southcooperation may enhance the possibilities of cross-border investments contributing to developmentfor both host and home countries. From theperspective of FDI between developing andtransition economies on the one hand anddeveloped countries on the other, there is also aneed for dialogue, increased awareness andunderstanding of the factors driving this FDI andtheir potential impacts. UNCTAD and otherinternational organizations have an important roleto play in this context by providing analysis,technical assistance and, not least important,forums for exchanging of views and experiencesto foster consensus-building and help developingand transition economies realize the full benefitsfrom the rise of these newly emerging sources ofFDI.

Notes1 It seems that the more competitive and outward-oriented

the regime, the more dynamic is the technology upgradingprocess (Lall 2000).

2 Another reason may have been the publication of the earlyresearch results discussed in Section 3, which suggested

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that outward investment did not seem to pose any threatto home-country exports (Blomström and Kokko 1997).

3 In the case of Germany, the controls on outward FDI areimposed for security reasons on investments in certainpublic enterprises in Myanmar, in accordance with UnitedNations Security Council resolutions.

4 Outward direct investments in a limited number ofindustries, such as the manufacture of arms, require priornotice.

5 The United States imposes controls on certain investmentssuch as transactions with or involving Cuba and Cubannationals, the Islamic Republic of Iran, Iraq, the LibyanArab Jamahiriya, Myanmar and Sudan, and with personswho commit, threaten to commit or support terrorism.Its rules on export controls may also limit outward FDI.Although the purpose of these rules is to keep militarytechnologies outside the reach of potential enemies, theyalso limit certain kinds of civilian foreign investment.Recently, for example, this may have limited Boeing’sability to invest in production facilities in China.

6 Neither Taiwan Province of China nor the Republic ofKorea began liberalization in earnest until they hadaccumulated a sizeable current-account surplus.Moreover, during the Asian financial crises, a numberof countries restricted outward FDI and postponed thelifting of these restrictions until their balance-of-paymentssituation had improved.

7 For example, in Uzbekistan, the Agency for ForeignEconomic Relations must be notified of the registrationof an enterprise abroad (IMF 2005).

8 It began in 1962, when FDI was allowed, but stillsignificantly restricted. In 1979, restrictions were relaxedfurther and in 1987, foreign exchange controls wereeased, when a large reserve of foreign exchange had beenaccumulated. By 1995, approval was subject to a broadlist of national interest criteria, including those relatedto the acquisition of needed natural resources, parts andcomponents for domestic industries, for the improvementof regional trade imbalances, the encouragement oftechnical know-how through imports, and for assistancein domestic industrial restructuring (WIR95).

9 In the Bahamas, South Africa and the Solomon Islandsapproval for FDI projects takes into account the potentialimpact on the home economy, for example, as regardsexports of goods and services and the balance of payments(IMF 2005).

10 This applies, inter alia, to the Bahamas, Brazil,Cameroon, India, Lesotho, Malaysia, Namibia, thePhilippines, Swaziland and Turkey. For example, Indiaoffered an automatic clearance route for investments notexceeding $100 million in 1999, and any amount up to200% of their net worth in 2005 (UNCTAD 2005e, p.11).

11 It should be noted that controls on foreign investmentsof domestic financial institutions can be either prudentialrules or capital controls, depending on whether there isa differentiation between domestic and foreign activitiesof the regulated entities. Limits on investments by banksin non-financial enterprises are an internationally acceptedprudential rule. However, if only investments in non-financial enterprises abroad are limited or prohibited,it is considered a capital control.

12 UNCTAD Survey of Governments in developing countriesand in South-East Europe and the CIS, January-March

2006.13 Eritrea, for example, declared in its Macro-Policy of 1994

(item 15.2.d.) that it it will ”encourage Eritrean investmentabroad”. This may have been part of the country’sregional strategy to encourage its State-owned enterprisesand private investors to invest in neighbouring countriessuch as Ethiopia and the Sudan. To that end, it openedan account with the Bank of Ethiopia so that Eritreaninvestors in these countries could use it for letter of credittransactions.

14 Speech given by Prime Minister Manmohan Singh at “TheIndian CEO: Competencies for Success Summit”, 22January 2005 (www.ficci.com/media-room/speeches-presentations/2005/jan/jan22-ceo-pm.htm).

15 Budget Speech, Trevor A. Manuel, Minister of Finance,South Africa, 21 February 2001.

16 President Lula’s address at the Portuguese IndustrialAssociation, Lisbon, 11 July 2003.

17 Lecture given by the Minister for Development, Industryand Foreign Trade, Luiz Fernando Furlan, at FundacaoDom Cabral, 22 March 2003.

18 In the Republic of Korea, the Bank of Korea, the EXIMBank, the Center for Overseas Investment Services(COIS) in the Korean Trade-Investment PromotionAgency (KOTRA) all act as resource centres for theprovision of information. In addition, the COIS assistscompanies in identifying potential business opportunitiesand joint venture partners abroad.

19 The Singapore-led investors in the Singapore-SuzhouIndustrial Park, such as Temasek, downgraded theirinvolvement from 65% to 35% in 2001, in favour of alocal Chinese consortium, and they allowed commercialSingaporean consortia, including the real estatedevelopment consortium Ascendas, to take the lead.Ascendas is the lead partner not just in the InternationalTech Park in Bangalore, but also in more recentdevelopments such as Cyber Pearl and The V inHyderabad, and the International Tech Park in Chennai.

20 One of the programmes offered is called shared services,which is intended for all growth stages of IT SMEs.Various marketing and investor-relations programmeshave been widely used by companies trying to establisha presence in markets abroad (Ministry of Informationand Communication, Republic of Korea).

21 All resident companies at iParks are required to covertheir own expenses.

22 Among developed countries, there were similar responsesin Slovenia. In a survey, 70% of Slovenian firms coveredunder a special promotional programme during 2002-2004 (which offered financial grants to firms investingabroad) mentioned that they would have invested abroadeven without the public support (Svetlicic, 2005, p. 4).As a result, the Government decided to abolish theprogramme.

23 In Latin America and the Caribbean, the DominicanRepublic offers some loans, and Suriname offers equityfinance for outward FDI.

24 Such risk can take the form of outright or “creeping”expropriation, breach of contract, currencyinconvertibility and transfer restrictions, and war andcivil disturbance, including terrorism.

25 The Berne Union (officially the International Union ofCredit and Investment Insurers), is the leadingorganization for export credit and investment insurance


agencies aimed at facilitating cross-border trade and FDI.Its membership comprises private and public companiesas well as multilateral organizations. In 1993, the BerneUnion and the European Bank for Reconstruction andDevelopment began the Prague Club, a network forexchanging information for new ECAs in Central andEastern Europe that did not then meet the entrancerequirements for the Berne Union. The Prague Club’smembership later expanded to include agencies in Asiaand Africa, reaching a total of 30 members in 2006.

26 The EXIM Bank of Thailand encourages FDI thataugments foreign exchange income or savings bysupplementing commercial banks’ services that arelacking or not efficiently available; see: www.exim.go.th/eng/about_exim/vision_mission.asp.

27 For example, the State-owned company, Eskom, hasestablished a dedicated NEPAD team to facilitate themobilization of Eskom’s resources to promote, developand implement NEPAD’s related projects in the energyand, in particular, the power sector.

28 MASSCORP has links with markets in Africa and Asiaand organizes business forums/dialogue sessions betweenits members and visiting South-South Heads of State andtheir business delegations, undertakes trade andinvestment missions and exhibitions in other developingcountries, and maintains a library of information onSouth-South investment opportunities.

29 In March 2005 a Memorandum of Understanding wassigned by the Export-Import Bank of India, AfricanExport-Import Bank, Andean Development Corporation,Export-Import Bank of Malaysia, and Eximbanka SR(Slovakia). And in March 2006, these institutions werejoined by eight more agencies.

30 See UNCTAD/PRESS/IN/2006/005, 14 March 2006.31 The aim is to commercialize more than 200 of the world’s

leading technologies or products in the global marketby 2012 through the development of 80 core technologiesin growth industries (Republic of Korea 2004).

32 The promotion of inward FDI into natural resources maycall for a somewhat different approach.

33 Other target economies cited by at least 10% of IPAs thatindicated specific targets include Brazil, Hong Kong(China), Pakistan, the Russian Federation, Singapore,Taiwan Province of China, Thailand and the United ArabEmirates.

34 Very few IPAs in Latin America and the Caribbeanindicated that they target particular industries.

35 These IPAs are located in the United Republic ofTanzania, Venezuela, Serbia and Montenegro and theSolomon Islands.

36 Opposition in developed countries against takeover bidshas not been confined only to transactions involvingTNCs from the South; several deals among Europeancompanies, for example, have triggered similar reactions,in some cases leading the European Commission to stressthat individual member countries should not favournational takeover bids. The Commission’s President madethe point that “defending national champions in the short-term usually ends up relegating them to the seconddivision in the long-term” (See “EU commission warnsagainst protectionism in Europe”, EU Business, 15 March2006 and “EU to sue Spain over ‘illegal’ energy-mergerblocking law”, EUBusiness, 24 February 2006).

37 Even Lenovo — a public company listed in Hong Kong(China) — has close ties to the Government. Its parentcompany and largest shareholder, Legend Holdings, iscontrolled by the Chinese Academy of Sciences, aGovernment institution that manages national scientificresearch efforts in China.

38 In May 2005, the Beijing-based Lenovo Group acquiredIBM’s personal computer business, thus becoming theworld’s third largest PC producer. The purchase met initialopposition in the United States. The Committee onForeign Investment in the United States (CFIUS) hadconsidered blocking the deal over national securityconcerns but eventually consented to the transaction. Thetransaction was also scrutinized by the Departments ofJustice and Homeland Security. See ”Security objectionsto IBM-Lenovo deal?”, eSecurity, 24 January 2005.

39 Huawei’s plans to set up a telecom equipmentmanufacturing affiliate in India were blocked for nationalsecurity reasons by the Government as the ForeignInvestment Promotion Board and the Department ofTelecom. Investment plans of ZTE, another Chinesetelecom equipment company, have been delayed for twoyears pending a decision by Indian security agencies toallow the start of manufacturing in India. See e.g.”Raising the red scare in India’s telecom sector”, AsiaTimes, 16 November 2005.

40 See e.g. ”The Big Tug of War over Unocal”, New YorkTimes, 6 July 2005.

41 Ibid.42 The Government of Canada also introduced Bill C-59

to amend the Investment Canada Act (ICA) in order toallow the Government to conduct an investment reviewon national security grounds, regardless of the size ofthe transaction. While some observers saw the Bill asa mechanism to stop investments that could be politicallyunpalatable, such as the takeover of Noranda by theChinese State-owned Minmetals, the then Minister ofIndustry stated that the Bill was not aimed specificallyat the oil or resource sectors. The Bill did not go beyonda first reading in the House of Commons so has not beenpassed into law. See, for example, “Bill C-59: Foreigninvestment will become unpredictable and politicizedif Ottawa caves in to vague national interest concerns,”National Post [Toronto], 19 July 2005, p. FP 19; and“National security bill not aimed at energy takeovers:Emerson,” The Globe & Mail [Toronto], 15 July 2005,p. B1.

43 The company failed to pass the security investigationbecause of its “Chinese background”. It was the secondtime that a planned investment by this company wasblocked due to “security concerns”. See “Li Ka-shingwas disqualified for bidding for an Indian part”,International Finance News, 8 November 2005.

44 Centrica is the largest utilities company in the UnitedKingdom, accounting for 58% of the country’s residentialgas market and 23% of the power market. In April 2006,the United Kingdom’s Trade and Industry Secretary madeit clear that the Government would not intervene if atakeover bid was announced: “Whatever the difficultiesand challenges of globalization, the answers will not befound in the stagnant waters of protectionism,” he said.See e.g. “UK will not block Gazprom bid”, EnergyBusiness Review Online, 26 April 2006 (www.energy-

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business-review.com); “Gazprom warns EU to let itgrow”, BBC News, 20 April 2006 (www.bbc.co.uk).

45 See e.g. “Undue Fears of China Inc?”, YaleGlobal, 29September 2005, //yaleglobal.yale.edu/display.article?id=6320 and Antkiewicz and Whalley(2005).

46 See e.g. “IG Metall and BenQ Mobile Arrive at anAgreement”, IG Metall: Siemens Dialog¸24 September2005, (//dialog.igmetall.de).

47 See e.g. “Indian minister in France, expresses concernat resistance to takeover bids”, BBC Monitoring SouthAsia, 1 June 2006; “France’s economic patriotism”, TheStatesman, 21 May 2006; “Europe’s fear of pinstripedIndian”, International Herald Tribune, 4 Feb 2006.

48 “Unions declare united front against Mittal’s bid forArcelor”, EU Business, 1 February 2006.

49 “Politicians stop short of quashing Mittal offer”,International Herald Tribune, 30 January 2006.

50 “Arcelor succumbs to Mittal”, Financial Times, 26 June2006.

51 For example, in order to allow the Committee on ForeignInvestments to become comfortable with Chinesetakeovers, one study suggested that Chinese companiesin the United States would be wise to invest in lesssensitive sectors and build a track record before movingon to more sensitive areas (Graham and Marchick, 2006,p. 107).

52 Bill S 1412 IS. See //thomas.loc.gov/cgi-bin/query/z?c109:S.1412.

53 See e.g. “Raising the red scare in India’s telecom sector”,Asia Times, 16 November 2005.

54 See “DP World and U.S. trade: A zero-sum game”, TheNew York Times, 10 March 2006.

55 Unlike in the case of BITs, the share of North-North DTTsis also significant.

56 In an UNCTAD survey conducted for the WIR06, suchdiverse economies as Bulgaria, Colombia, the DominicanRepublic, Mauritius, Mexico, Republic of Korea, RussianFederation, Serbia and Montenegro, Thailand, Surinameand Venezuela all stated that the conclusion of such IIAswas part of their overall strategy to facilitate outwardFDI. The same is likely to apply to home countries likeChina, India, Malaysia and Singapore.

57 In Latin America and the Caribbean, various regionalagreements have also been adopted to avoid doubletaxation, in 1971 for the Andean Community and in 1994for the Caribbean Community Member States (UNCTAD1996).

58 The calculation is based on data for nine developingeconomies that report outward FDI stock by destination(Hong Kong, China; India; Kazakhstan; Malaysia;Pakistan; Singapore; South Africa; Thailand; and Tunisia).

59 So far, Singapore has concluded five FTAs with otherdeveloping countries: the Republic of Korea (2005), India(2005), Jordan (2004), Panama (2006) and Thailand(2004), in addition to the Trans-Pacific EconomicPartnership Agreement, which includes Brunei and Chile(2005). Furthermore, the country is planning, discussingor negotiating FTAs with, China, Bahrain, Egypt, Kuwait,Mexico, Pakistan, Peru, Qatar, Sri Lanka and the UnitedArab Emirates. See //app.fta.gov.sg/asp/index.asp.

60 The first wave was driven by the import substitutionpolicies of the 1960s and 1970s.

61 In April 2006, however, the Government of Venezuelaannounced that it was withdrawing from the AndeanCommunity.

62 See www.comunidadandina.org/ingles/investements.htm.63 CARICOM is in the process of developing a regional

investment policy framework, which will include, aCARICOM investment code; a harmonized incentiveregime; a streamlined approval process; and theimplementation of national investment policy reforms; (see www.caribbeanbusinesscommunity.com/newsletters/csm.html).

64 In July 2006, Venezuela was also admitted as a memberof Mercosur, although the treaty change had not yet beenratified at the time of the publication of this Report.

65 A less extensive range of provisions was established fornon-MERCOSUR investors under the Buenos AiresProtocol in 1994, which has been implemented.

66 In 2005, it was announced that COMESA would extendits membership to the Libyan Arab Jamahiriya andconclude a customs union by 2008.

67 Article 100 (h), COMESA Treaty.68 Article 159, COMESA Treaty.69 Article 101, COMESA Treaty.70 Article 159, COMESA Treaty. The COMESA Treaty does

not stipulate a right of admission; it is up to the memberStates to incorporate further investor rights in theirnational laws.

71 The main provisions negotiated to date include a closed-list definition that includes portfolio investment andintellectual property rights; the opening up of alleconomic activities and national treatment extended toCOMESA investors by 2010 and to non-COMESAinvestors by 2015, subject to exceptions through atemporary exclusion list and a sensitive list; fair andequitable treatment; transfer of funds; national treatmentand MFN treatment at the pre- and post-establishmentlevels; transparency; general exceptions; emergency andbalance-of-payment safeguard measures; institutionalarrangements; guarantees against expropriation;compensation for losses; State-State as well as investor-State dispute settlement, provisions on accession andwithdrawal of members.

72 The United Nations Global Compact defines CSR as “thecombined practice of implementing universal principlesinto business practices and engaging in partnershipprojects to meet broad societal goals.” It emphasizesthat socially responsible behaviour often requiresproactive actions that extend beyond the law.

73 The UNCTAD XI conference called for pro-activepolicies to encourage positive corporate contributionsto the economic and social development of hostdeveloping countries. Economic contributions mayinclude investing in the poor, providing affordable goodsand services, transferring technology and trainingpersonnel, building up local and cross-border valuechains, fostering employment and entrepreneurship,engaging in ethical business behaviour, contributing topublic revenue generation, and minimizing the negativeimpacts of business restructuring (UNCTAD 2005o).

74 Even more specialized treaty instruments that directlyaddress TNCs (such as IIAs) deal very little with thisissue (UNCTAD 2001).


75 According to the United Nations Special Representativeon Human Rights and TNCs, there tends to be a symbiosisbetween “the worst corporate-related human rights abusesand host countries that are characterized by a combinationof relatively low national income, current or recentconflict exposure, and weak or corrupt governance”(United Nations Commission on Human Rights 2006, para30). Thus, weak and/or corrupt governance poses aspecific challenge to the observance of CSR principlesand, in particular, to the established human rights regime.

76 Surveys of managers support the impression thatdifferences among regions and economies exist. Nearly90% of Indian managers interviewed in a recent surveyendorsed a “public good” dimension in their businessdealings whereas “Chinese managers were morelukewarm.” (McKinsey 2006).

77 Full text of the MNE Declaration available on the ILOwebsite: www.ilo.org.

78 For example, the MNE Declaration calls on enterprisesto contribute to the realization of fundamental principlesand rights at work and to refer to the principlesunderpinning these for guidance in their CSR policies.These include the abolition of forced labour, equalopportunity in employment, the elimination of childlabour and freedom of association, and the effectiverecognition of the right to bargain collectively.

79 The PRI initiative is carried out through closecoordination between the United Nations EnvironmentProgramme’s Finance Initiative and the United NationsGlobal Compact.

80 The eight performance standards define the roles andresponsibilities of IFC clients for managing the socialand environmental risks in their projects, and includerequirements to disclose information. As well as coveringnew areas of risk, such as labour and working conditionsand community health and safety, and an emphasis onmanagement systems, they embody an outcomes-basedapproach. The full text of the performance standardsand supporting materials can be found at: www.ifc.org/ifcext/enviro.nsf/.

81 See www.unctad.org/ISAR.

82 See also the 2005 United Nations Global CompactShanghai Declaration, which argues that “[P]roactivecorporate policies and practices that respect humanrights and ensure safe and decent workplaceconditions, environmental protection and goodcorporate governance create more sustainable valueand benefits for workers, communities and societyat large. They also enable business to attract and retainskilled workers, save costs, enhance productivity, createtrust and positive reputation with stakeholders, and buildbrands.” (United Nations Global Compact 2005, para 4).

83 See e.g. “University of California Regents vote to divestfrom companies doing business in Sudan”, AssociatedPress, 17 March 2006; or “Brown University agrees todivest from Sudan”, Associated Press 25 February 2006.

84 Of the 36 ATCA cases to date involving companies, 20have been dismissed, 3 settled and none decided in favourof the plaintiffs; the rest are ongoing (United Nations2006, para 62). In addition, the United States SupremeCourt had stipulated some strict prerequisites for ATCAclaims. See Sosa v. Alvarez-Machain, 542 US 692, 732(2004).

85 Economies represented in the Asia Pacific CSR Groupinclude: Australia, Hong Kong (China), India, Indonesia,Pakistan, the Philippines, Singapore, Sri Lanka andThailand.

86 See, for example, the Extractive Industries TransparencyInitiative, at: www.eitransparency.org.

87 Guidelines such as the Handbook on Conflict-SensitiveBusiness Practices: Guidance for Extractive Industries(International Alert 2005) or the Global Compact BusinessGuide for Conflict Impact Assessment and RiskManagement (United Nations Global Compact 2002)provide practical advice. Both publications containinformation on risk assessment in conflict zones and onthe correct behaviour of TNCs in such areas.

88 It has been argued that “most commercial risk assessmenttools are not explicitly concerned with the reverse flowof risk: the risk of a company aggravating a conflictsituation” (Campbell 2002, p. 2).

CONCLUSION

During the past two decades, FDI by TNCsfrom developing and transition economies hasexpanded at an unprecedented rate. This processhas been encouraged by many factors, includingsoaring export revenues and rapid economic growthin a number of these economies, as well as theburgeoning industrial and business prowess of theirfirms. Perhaps most importantly, firms from theseeconomies have been increasingly affected byglobal competition. They have come to realize thegrowing importance of accessing internationalmarkets and connecting to global productionsystems and knowledge networks. Accordingly,their view of business has become far moreinternational and their ambitions increasinglyregional or global in scope. This change, from adomestic vision to an international one, underscoresthe nature of the structural shift taking place inthe global economy.

Developed-country TNCs still provide thelarger proportion of global FDI, but the rapidgrowth in FDI by TNCs from developing andtransition economies means that some of them areemerging as major players on the world stage.Moreover, as well as being important new sourcesof FDI, the TNCs analysed in this report areharbingers of the future. Many firms in developingcountries and economies in transition have yet toestablish their first foreign affil iates, but areencouraged to do so because of the globalizationprocesses discussed in this WIR , includingcompetition with compatriot firms that have alreadyventured overseas. This is an exciting outlook fromthe development perspective, adding a new dimensionto the prospects for South-South cooperation.

Developing-country TNCs investproportionally more in developing countries thando their developed-country counterparts. For anumber of LDCs, their investments account for

over a half of total FDI inflows. FDI can assist hostdeveloping countries in a number of ways,including adding to financial resources andproductive capacity, supporting export activity,creating employment and transferring technology.FDI by developing-country TNCs can result inproportionally greater gains, where theircompetitive strengths, motives and strategies differfrom developed-country TNCs. For example, theyare more likely to establish greenfield operations,they more commonly use standardized, non-proprietary technology, and the technological gapbetween local firms and their affiliates is narrowerthan the equivalent gap with affiliates establishedby developed-country TNCs. All this augurs wellfor South-South development cooperation, with theaim of maximizing gains and avoiding pitfalls.

The rise of TNCs from developing andtransition economies is part of a profound shift inthe world economy. Since its high point in the mid-twentieth century, the share of developedeconomies in global GDP has steadily fallen, withconsequences for international patterns of trade,financial flows and investment. This process mightexperience the odd interruption (e.g. the Asianfinancial crisis of 1997), but it is now virtuallyirreversible.

An understanding of this dynamicphenomenon is growing, including recognition ofthe diverse nature and unique characteristics ofTNCs from developing and transition economies,which stem from a multiplicity of origins andsources of competitive advantage. Nevertheless,because it is a relatively new phenomenon in bothscope and magnitude, further investigation will benecessary to refine our knowledge, in order to helpdeveloping countries, and particularly the poorestamong them, realize the full benefits of the riseof these emerging sources of FDI.

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World Investment Report - UNCTAD | Home · widely acknowledged. It can be done through various institutional arrangements, for instance, by making customs handling more efficient,