Putting it to Work in Developing Countries - Nathan Associates

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Figure 4-2 Selected Service Industries: Growth in Value of Developing Countries’ Stock of Inward FDI, 1990–2004 Percent 3500 3339 3000 2500 2000 1720 1500 1000 500 396 711 405 1057 259 0 Electricity, gas, and water Construction Trade Hotels and restaurants Transport, storage, and communications Finance Business activities Note: Includes all countries classified as “developing” by UNCTAD. UNCTAD classifies some countries as developing that the World Bank considers “high income, such as Singapore and South Korea, and classifies some as developed that the World Bank considers ”low and middle income,” such as Estonia, the Czech Republic, and Hungary. Data for the countries in UNCTAD’s “South-Eaast Europe and the commonwealth of Independent States” category are included in the developing country totals for 2004, but data for these countries are not available by sector and industry for 1990. SOURCE: Nathan Associates, based on UNCTAD, World Investment Report 2006, Annex Table A.1.2. of existing clients, especially as expansion of home markets slows. This should result in more market-seeking FDI possibilities, notably in cross-border M&A deals. High-growth prospects in these new markets will continue to be the principal driver for such FDI, along with liberalization of market entry and the easing of restrictions on foreign ownership and pricing. Second, privatization programs will continue to stimulate market-seeking FD in services. In the past, privatization turned many previously outof-bounds utilities into commercial enterprises. While many major privatizations are now complete, particularly in Eastern and Central Europe and in Latin America, future privatizations may still generate important new opportunities for market-seeking FDI in public utilities, finance, and other nontradable services. Finally, corporations already engaged in nontradable services in one market often see advantages in diversifying sources of revenue and profits. Such corporate risk diversification can spur FDI in new host country markets—particularly as those markets become more hospitable to multinationals making equity investments in local services industries. Market-seeking activities now account for the biggest portion of service-oriented FDI and these inflows can be expected to continue growing as new markets open. China will present the most dramatic opportunities, given its ongoing WTO commitments to free most services for majority foreign ownership. India, where service sector liberalization is gathering momentum, could offer others. The opening of India’s multibrand retailing to FDI, for example, would have 44
Figure 4-3 Selected Service Industries: Change in Developing Countries’ Share of Global Stock of Inward FDI, 1990-2004 Percentage point 20 20 15 10 6 7 7 5 0 -7 -16 -7 -5 -10 -15 -20 Electricity, gas, and water Construction Trade Hotels and restaurants Transport, storage, and communications Finance Business activities Note: Includes all countries classified as “developing” by UNCTAD. UNCTAD classifies some countries as developing that the World Bank considers “high income,” such as Singapore and South Korea, and classifies some as developed that the World Bank considers “low and middle income,” such as Estonia, the Czech Republic, and Hungary. Data for the countries in UNCTAD’s “South-East Europe and the Commonwealth of Independent States” category are included in the developing country totals for 2004, but data for these countries are not available by sector and industry for 1990. SOURCE: Nathan Associates, based on UNCTAD, World Investment Report 2006, Annex Table A.1.2. tremendous appeal to multinationals. Realizing even part of the potential pipeline of the enormous market-seeking FDI opportunities in these two economies alone may well boost the developing world’s future shares of global inward FDI stock in services, including shares in public utilities, finance, and transportation, where developing countries have lagged the global rate of FDI growth. TRADABLE SERVICES— EFFICIENCY-SEEKING FDI More services that were once location-bound and nontradable have become “tradable” thanks to information technology. These include business support activities such as accounting, recordkeeping, drawing, testing, audiovisual services, and even research and development. 5 IT has permitted knowledge to be codified, standardized and digitized, and then sent anywhere at very little cost. Service providers, taking the approach perfected for international manufacturing production networks, now split their products into components and distribute them according to the advantages offered by different locations. 6 Thus, service-oriented FDI flows can now be efficiency-seeking in at least three ways. First, firms can offshore internal intrafirm services. For example, manufacturers in developed countries create foreign affiliates in low-cost locations to provide back office services to the parent enterprise. Second, independent service providers—lawyers, accountants, engineers, consultants—can also offshore, and through FDI set up facilities in foreign markets to support 45
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FOREIGN DIRECT INVESTMENT PUTTING I
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Sponsored by USAID’s Bureau of Ec
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5. Attracting FDI 55 What Foreign I
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Page 47 and 48: Three Global Variables in FDI Flows
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25 See Koji Miyamoto, “Human Capi
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5 WIR 2004, p. 150, for a descripti
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Countries—The Importance of ICT a
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equirement to export a certain prop
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APPENDIX A Data on FDI Flows and St
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Table A-2 Estimated Value of Inward
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Table A-3 Estimated Distribution of
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Table A-4 Developing Countries' Sha
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Resource and Availability UNCTAD. 2
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Resource and Availability Descripti
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Resource and Availability UNCTAD. 2
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Resource and Availability Moran, Th
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Resource and Availability World Ban
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Business linkages. Supplier-produce
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Investment promotion agency (IPA).
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Subnational investment promotion. A
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Putting it to Work in Developing Countries - Nathan Associates

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