9.3.1 International Investment Patterns
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| Figure 9.3: Foreign capital investment (Billion US$) in developing countries,
by region. Source: Industrial development, Global report 1997, UNIDO |
Recent trends in industrial development stress the openness in trade and investments.
Today, foreign direct investment (FDI), joint ventures (JV) by transnational
corporations (TNC) are the largest foreign investments in industrial development
in developing countries (UNCTAD, 1997) (see also Chapter 2,
Section 2.2.4 and Sections 5.3 and
5.4 in Chapter 5). However, foreign
capital accounts for only 6% (1995) of total investments in developing countries
(UNIDO, 1997). In developing countries public spending is responsible for about
a quarter of national income (World Bank, 1997a), while the role has relatively
declined over the past 25 years (UNIDO, 1997).
Transnational corporations' spending in international investments increased
from less than US$100 billion (B$) in the early 1970s to over US$1.4 trillion
in 1996 (UNCTAD, 1997). The majority of the funds is still spent in industrialised
countries, but an increasing part is spent in developing countries. Foreign
industrial investment in developing countries has increased substantially, especially
since 1990, as shown in Figure 9.3. Figure
9.3 shows that foreign industrial capital spending is
concentrated in two regions, East Asia and Latin America. These regions have
experienced successful industrial growth in the last decade, although concentrated
in a small number of countries. Foreign direct investment, a part of the international
investments, has grown to 350 B$ in 1996 (UNCTAD, 1997), of which 34% was invested
in developing countries (see Figure 9.4).
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| Figure 9.4: Foreign direct investment (Billion US$) in developing countries,
by region. Source: Industrial development, Global report 1997, UNIDO |
Previous periods of high growth in FDI were mainly directed to oil producing
countries. The current growth of FDI seems to be more diverse, although there
is a strong geographic concentration in current FDI. Of the 129 B$ FDI in developing
countries, 42 B$ was spent in China, followed by 10 B$ in Brazil (UNCTAD, 1997).
Favoured regions are Asia and Latin America, and there are signs of increasing
FDI in Africa, although still limited. Important is the increasing FDI from
developing countries, especially Asia, which increased to 52 B$ (UNCTAD, 1997).
In Asia regional investments seem to be the main driver for industrialisation.
FDI in the former Central and Eastern Europe are relatively constant at 12-14
B$, but also concentrated in a few countries (Poland and the Czech Republic).
Also, FDI is concentrated in a relatively small number of TNCs. Only a few (from
Korea and Venezuela) of the top 100 TNCs are based in developing countries,
yet TNCs from developing countries are growing in importance. TNCs seem to be
most important in the electronics, automotive, and chemical industries, as well
as petroleum and mining. TNCs seem to be more productive than domestic companies
(UNIDO, 1997), which may be partly due to more efficient production technologies
and practices used. The role of TNCs in industrial development is generally
seen as positive, although negative effects may arise from TNC involvement if
the market power of the TNC is high.
It appears that future trends in FDI will be sustained, as international trade
seems to gain in importance, and as countries are liberalising trade and investment.
FDI aims at accessing and developing markets, whereas portfolio equity investment
(PEI) is more directed to participating in local enterprises. Following the
globalisation trend PEI is also growing, but tends to be more centred on developed
markets and to be more fluid. PEI is estimated at 45 B$ (1995) (UNCTAD, 1997).
Small and medium sized enterprises (SMEs) have less access to international
financing, and hence rely more on domestic capital and public spending. Even
small investments in cleaner production and GHG abatement projects in SMEs are
often not done, due to lack of capital, poorly developed banking systems, lack
of appropriate financing mechanisms, lack of knowledge (both within the industrial
and the financial sectors), technology risks, and management's unwillingness
to borrow funds (Van Berkel and Bouma, 1999). These barriers reduce the availability
of capital, stimulating investors to keep investment costs low, which may result
in the purchasing of second-hand equipment, low quality products, or equipment
without modern controls and instrumentation. This may lead to higher operating
costs, and environmental impacts. Lack of access to capital and credit is seen
as the strongest barrier to the development of SMEs (UNIDO, 1997). Various developing
countries have experimented and applied financing schemes for SMEs, e.g. Ecuador,
Indonesia, Korea, Malaysia, Pakistan and Tanzania, with varying rates of success
(UNIDO, 1997). Trends in foreign investments are relatively easy to monitor.
However, domestic capital spending in developing countries/CEITs, especially
by SMEs, is more difficult to monitor. Research in some developing countries
shows that especially SMEs contribute for a large part to industrial employment,
and that in LDCs industrial employment is found in rural areas (Little, 1987;
Putterman, 1997; UNIDO, 1997). However, this does not necessarily mean that
SMEs are more efficient with regard to capital and resource use (Little, 1987).
There is growing evidence that SMEs in some countries may be less efficient
with respect to resource use (World Bank, 1997b). Sound market conditions are
crucial to create a competitive market in which innovation by SMEs in process
technology is stimulated.
The above trends in industrial investments are difficult to translate to technology
choice and transfer. It is obvious, though, that increasing international investments
influences the rate of technology transfer, although it gives no information
on the way and on what technology is transferred. Generally, the majority of
investments in many developing countries seem to be in low-technology industries,
though the share of high-technology industries is increasing (UNIDO, 1997).
Also, there is no hard information available on the role of the markets for
environmentally sustainable technologies (including greenhouse gas abatement)
(Luken and Freij, 1995).
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