History of the world economy

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TNCs CONTROL TWO-THIRDS OF WORLD ECONOMY

TNCs Control Two-Thirds of World Economy

By Chakravarthi Raghavan
Third World Network Features
29 January, 1996.

Geneva: Foreign direct investment (FDI) by transnational corporations (TNCs), and the transnational system of production and international economic transactions is now the most dominant element of the world economy, with TNCs increasingly influencing the size and nature of cross-border transactions, says an UNCTAD (United Nations Conference on Trade and Development) report.

The world's TNCs - 40,000 parent firms and 250,000 foreign affiliates - account for two-thirds of the world trade in goods and services, one-third in intra-firm transactions and the other one-third in inter-firm transactions. This is according to UNCTAD's World Investment Report 1995 (WIR 1995).

This means that only one-third of world trade in goods and services is according to free-market-free-trade theories of arms-length transactions.

In releasing the report at a press conference in mid-December 1995, UNCTAD Secretary-General Rubens Ricupero said that FDI had now superseded trade as the most important mechanism for international economic integration.

The report uses this fact to argue for making 'investments' part of the trade negotiation and rule-making process, through a Multilateral Investment Agreement (MIA).

At his press conference, Ricupero slightly distanced himself from the MIA of the WIR, preferring the term 'multilateral framework', but did not elaborate on the distinction.

The leader of UNCTAD's investment centre team responsible for the WIR, Karl Sauvant, at a Washington press conference, used the same terminology of a 'multilateral framework' to argue for an agreement 'creating new parameters for international business transactions'. The WIR refers in this regard to the increasing number of bilateral investment agreements, several between developing countries themselves or within regional integration accords, as well as the discussions for plurilateral and multilateral agreements in the Organisation for Economic Cooperation and Development (OECD) and so on,to make the argument in favour of a multilateral agreement.

The report also advocates developing countries liberalising not only inward FDI, but also outward FDI flows, and says it would be in the interests of all countries to have a multilateral agreement to provide stable, predictable and transparent international investment relations.

Given the growing importance of FDI and international production for linking national economies and improving economic performance, and given the transnational nature of this investment, 'it is unavoidable that a framework will be sought that provides for stability, predictability and transparency at the multilateral level.'

It refers in this connection to the built-in World Trade Organisation (WTO) agenda (of the Marrakesh agreements and the negotiations provided there for Trade-Related Investment Measures (TRIMs), Services and so on), the regional efforts (within the framework of the European Union, the North American Free Trade Agreement, Mercosur, the Asia Pacific Economic Cooperation) and the OECD negotiations for a binding Multilateral Agreement on Investment which, once it is concluded, would be open to non-OECD members to join.

UNCTAD, the report says, is also helping discussions for an international framework to advance understanding on this issue, especially on the development dimensions, and to promote consensus building.

Without predicting whether these efforts would lead in the foreseeable future to a comprehensive multilateral framework, the WIR asserts that such a framework when established could well rival in importance, the international trade framework created by establishing the General Agreement on Tariffs and Trade (GATT) 50 years ago, and setting parameters within which TNCs could maintain or increase their competitiveness and countries could improve economic performance.

But whether or not there is a difference of substance between negotiations for a framework (that conceptually would imply a large leeway for individual governments to set their own rules, to suit their own conditions) and a multilateral agreement that would give rights to the TNCs to 'invest' in any country for production of goods and services and 'discipline' governments against interference with these rights, the European Union (the leading exponent of a WTO investment agreement) promptly welcomed the WIR, but called for a WTO working group to make progress on the idea.

Incentives for investment

The WIR also details the number of incentives that developed and developing countries offer to attract FDI to their countries, or particular regions within the country, and says that 'unbridled competition among governments in this area can lead to abuses, as the world experienced in the inter-war years through successive rounds of currency devaluations in a beggar-my-neighbour attempt to boost exports, and the more recent export-credit competition.'

Some incentives could lead to waste of governmental financial resources and economic distortions, the WIR says, and advocates an international eminent persons group on incentives to be set up to make recommendations.

World sales generated by foreign affiliates of TNCs amounted to $5.2 trillion in 1992, exceeding the $4.9 trillion of world exports of goods and non-factor services in that year. During 1991-1993, the world FDI stock grew twice as fast as world trade and which again was one and a half times faster than world output.

The world outward FDI stock at the end of 1994 is estimated to be $2.4 trillion, with the industrialised countries as a whole accounting for about three-quarters of this.

Total FDI outflows to all countries in 1994 is put at $224 billion by the WIR - compared to the $208 billion in 1993 (according to a press release) and $222 billion according to the WIR review. An official of the division explained this as due to statistical discrepancy and lack of uniform international reporting standards.

The WIR projects FDI outflows in 1995 at $230 billion, with 15% of this originating in developing countries.

The United States was both the largest source of outward investment ($46 billion in 1994, down from $69 billion in 1993) and the largest inward flows ($49 billion in 1994, up from $41 billion in 1993). The stock of FDI in the US in 1994 is estimated to be more than $500 billion or 7% of its gross domestic product (GDP), while the outward FDI of US TNCs is $610 billion (9% of its GDP) or about a quarter of the world FDI stock.

While some 34,353 TNCs, with 93,311 affiliates, are based in the industrialised countries, some 3,788 with 101,139 affiliates are based in the developing countries. But the WIR definition of affiliates covers any kind of relationships between parent and 'affiliate', and makes comparisons difficult.

FDI flows concentrated in a few South countries

Developing countries are now increasingly attracting FDI, continuing a trend that began in 1990, with the 1994 FDI flows to the developing countries reaching $84 billion or 37% of the world FDI inward flows.

But the FDI flows continue to be concentrated in a few countries of the South, with China's $34 billion inflows in 1994 being the second largest and accounting for 40% of all flows into the developing world. But the Chinese figures may be over-valued by about a quarter because of 'round-tripping' and some double-counting. China though is more selective in the FDI flows it seeks.

The Asia-Pacific region (which now accounts for some 70% of developing country FDI stock) got $61 billion in 1994. While China and South-East Asia were at the forefront, the Pacific Island economies and South Asian countries are lagging behind, according to the WIR 1995.

Inward flows into Latin America and the Caribbean are fragile and depend very much on privatisation programmes (which don't create new production, though some with additional FDI may involve expansion).

Flows into the region increased only marginally in 1994, to some $40 billion, largely shaped by privatisation programmes open to foreign investors. Argentina, the largest recipient in 1993 with $6 billion inflows, saw a sharp decline to $1.2 billion in 1994. Peru with $2.7 billion, mostly privatisation FDI, and Chile with $1.8 billion saw a sharp upswing.

FDI flows into Brazil increased from $891 million in 1993 to $1,504 million in 1994. The WIR suggests and argues for further privatisation in Brazil which it estimates would bring in substantially more FDI.

[The increase in 1994 was an outcome of the successful Real plan, the more liberal attitude to all kinds of foreign inflows and the effects on the macro-economy. But in the aftermath of the Mexican crisis, Brazilian authorities became more cautious and some Brazilian analysts suggest that Brazil won't precipitately follow the neo-liberalism of Mexico and Argentina.]

Africa, the WIR stresses, remains marginalised. Despite the considerable efforts of African governments to undertake far- reaching domestic policy reforms and improving their domestic frameworks for investment, and the higher returns for investors in Africa, the FDI boom in other regions has largely bypassed that continent. Sub-Saharan Africa received only $1.8 billion of FDI in 1994, while North Africa got $1.3 billion. Most FDI in Africa also continues to be concentrated in a small number of countries, endowed with natural resources and especially in oil.

As for Central and Eastern Europe (the WIR definition includes most of the former Soviet Union, and thus the data is not easily comparable with data of other organisations), FDI flows reached $6.3 billion in 1993 and $6.5 billion in 1994, increasing the total FDI stock in the region to an estimated $22 billion. Inflows, the WIR says, have slowed down due to lingering economic recession in some West European countries and the slower transition to a market economy. The gap between investors' commitments and implementation in the region also remains high. The flows are also unevenly distributed.

The report suggests that while the dominant actors on the TNC scene are the industrialised countries - and more so the US, the EU (with Germany in the lead within it), Japan, Switzerland - developing countries are also undertaking outward FDI, accounting for $33 billion of outflows in 1994. The WIR notes that developing country-firms, because of the need to remain internationally competitive, are becoming significant foreign investors and says that prospects of large increases in FDI by TNCs headquartered in the South are bright. -

Third World Network Features