The factors determining where the world's
largest transnational corporations (TNCs) invest are becoming increasingly complex,
reflecting especially the rising importance of intangible assets. Access to technology and
innovative capacity in foreign countries is emerging as a crucial factor, states Rubens
Ricupero, Secretary-General of the United Nations Conference on Trade and Development
(UNCTAD).
In the World Investment Report 1998: Trends and Determinants (WIR98), released
today by UNCTAD, the Secretary-General writes that, in contrast to natural resources,
technology and innovative capacities are people-made, they are "created assets"
and possessing such assets is critical for firms' competitiveness in a globalizing
economy. Indeed, he writes in the Overview, "it is precisely the rise in the
importance of created assets that is the single most important shift among the economic
determinants of FDI location in a liberalizing and globalizing world economy."
Key determinants of FDI: old and new
At issue is an annual volume of FDI that is now approaching US$450 billion. Traditional
determinants of FDI, driven by the need to access markets, as well as natural and other
resources such as low-cost labour, are still key to attracting FDI, especially from new
TNCs and from many that have yet to develop large-scale international operations.
Thus, countries can be attractive to potential investors on account of the size and growth
of their domestic markets, their geographic proximity and access to key potential markets,
including large regional markets and the natural and other resources they host, and of
course he extent to which they effectively strive to attract foreign investors. All the
same, the existence of created assets is of mounting significance as a magnet for FDI
inflows, especially from major TNCs.
| Created assets Created assets can be tangible like the stock of financial and physical
assets such as communication infrastructure or marketing networks, or intangible.
The common denominator of intangibles in this context is knowledge.
The assets sought by TNCs in this context relate to skills, attitudes to wealth creation
and business culture, capabilities (technological, innovatory, managerial), competencies
(to organize income-generating assets productively) and relationships (such as those
between firms and contacts with government), as well as the stock of information trade
marks or goodwill. |
UNCTAD's Secretary-General states: "The challenge
[for governments] is precisely to develop a well-calibrated and preferably unique
combination of determinants of FDI location, and to seek to match those determinants with
the strategies pursued by competitiveness-enhancing TNCs."
As the search in foreign countries for created assets becomes more central to a firm's
competitiveness, so countries without traditional advantages, such as natural resources or
large domestic markets, can be more competitive in attracting FDI. Today's report shows,
for example, that Costa Rica created the conditions and people-made assets, including
skilled labour, needed to attract a US $500 million investment project from Intel
Corporation in 1997.
Inner and outer rings of policies
The report points out that, although there must be a basic regime in place in countries
that welcomes FDI, the existence of a pro-investment regime is now a given. Over the past
15 years, the overwhelming majority of countries have introduced measures to liberalize
their FDI frameworks and have in this way opened the door for TNCs to an increasing
degree. The choice of countries for the investor is now greater than ever. Thus, factors
beyond the existence of a pro-FDI regime, especially those economic factors such as the
existence of created assets, have become more significant.
In addition, policies used internationally to influence FDI and its location, constituting
the "inner ring" of the enabling FDI policy framework (traditionally, policies
of investment and trade liberalization), have been expanded to embrace new policies, that
have not specifically been considered in the FDI context in the past. These are what are
termed the "outer ring" of policies. As increasing numbers of countries have put
similarly liberal policies in place, so their existence is now becoming a minimum
requirement, and no longer a significant point of differentiation.
Countries are now striving to promote themselves by
highlighting "outer ring" policies. These include macro-economic policies, such
as sound monetary policies that secure price stability and affect costs of capital;
pro-investment fiscal policies that are attractive to executives and to firms; and
exchange rate policies that impact the value of transferred profits, acquired assets and
of exports. These "outer ring" policies today also include corporate
organizational issues, as countries strive for advantage over other countries and more
explicitly address the evolving needs of TNCs, as well as those of their own domestic
firms, in an era of globalization.
Host countries are gradually being evaluated by potential
foreign investors on a broader base of policy considerations than the traditional ones,
notes today's report. For example, countries are evolving technology policies that may
make them attractive to TNCs that are increasingly placing value on technological
advantages. The policy in this regard may relate to telecommunications privatization, or
tax credits for technology research, or provision of programmes to facilitate
technological partnerships between domestic and foreign firms.
Then, countries are striving to develop labour market skills
that may be particularly attractive to TNCs, while also promoting infrastructure
developments that may give them advantage in terms of TNC requirements.
Challenges to governments to attract FDI
WIR98 stresses that in an era of competition between countries to attract FDI,
the growing focus on the outer ring of policies as determinants of FDI decisions by
corporations leads to a number of striking consequences and challenges for governments of
host countries. Among them are:
- The expansion of the number of policies that investors view as
constituting a good investment climate.
- Greater demands on the effectiveness of investment policies.
- Emergence of new policy areas that cut across traditional
policies such as those affecting the production of created assets from special people
skills to technological innovation that TNCs are increasingly seeking.
- The mounting realization that an effective national FDI policy
framework requires a thorough understanding of the determinants of TNC decisions,
including the broader long-term strategies of TNCs.
Pro-active measures
As competition intensifies between countries to attract FDI, so the report notes that
governments are moving ahead with increasing efforts to be pro-active as promoters of FDI
into their countries. These efforts involve the promotion of FDI, curbing "nuisance
costs" of doing business (such as eliminating corruption and red tape) and the
provision of amenities that may contribute to the quality of life of expatriate personnel.
WIR98 states that few of these measures are entirely
new, but "what is new is that, in a globalizing world economy such measures have
proliferated rapidly and become increasingly routine, pervasive and sophisticated."
Natural resources still important for countries and investors
While natural resource factors have declined in relative importance as a determinant of
FDI, they remain key to FDI by numerous firms and in many countries. They are a major
factor, for example, in FDI flows to much of Africa, to Australia, to Azerbaijan,
Kazakhstan and the Russian Federation.
The existence of the resources themselves is, however, only one aspect of the FDI
attracting picture. Corporations will invest in countries where natural resources exist,
for example, if they can obtain the key permits, remit profits and if, in general, there
is welcoming FDI environment. |
