WTO Symposium on crossborder supply of services Geneva, 2829 April 2005

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WTO Symposium on cross-border supply of
servicesGeneva, 28-29 April 2005
FDI in Services Anne Miroux Head, Investment
Issues Analysis Branch UNCTAD, Division on
Investment, Technology and Enterprise
Development Phone [phone] Fax 4122
9170498 E-mail anne. miroux_at_unctad.org This
presentation is based on UNCTAD, World Investment
Report 2004 The Shift Towards Services (Geneva
UNCTAD, 2004), UN Sales Publication No.
E.04.II.D.33, also at www.unctad.org
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Background - FDI trends

The shift towards services

Offshoring
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FDI is recovering
Global inflows of FDI, 1990-2004, by region,
billions
Source UNCTAD, FDI/TNC database
(www.unctad.org/fdistatistics).
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led by the developing countries
Inflows of FDI to developing countries,
1995-2004, by region, billions
Source UNCTAD, World Investment Report 2004
The Shift Towards Services.
(see www.unctad.org/wir) and UNCTAD Press
/PR/2005/002
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The recovery in 2004 was driven by

• Stronger global economic growth
• Improved corporate profitability
• Higher stock valuations
• Higher levels of cross-border MAs
• Continuing liberalization and improvement of
  investment environment

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Indicators of FDI and international production
billions, current prices
Source UNCTAD, World Investment Report 2004
The Shift Towards Services
(see www.unctad.org/wir).
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The importance of commercial presence/mode 3 in
the delivery of services

• Mode 3 sales of services are clearly larger than
  cross border sales (mode 1) of services.
• In 2001, for instance, the sales of services by
  affiliates of US multinationals in foreign
  markets amounted to 432 billion while US exports
  of services amounted to 276 billion 1 (a 1.6 to
  1 ratio).
• 1/ US Bureau of Economic Analysis

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• The shift towards services

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Sectoral distribution of FDI inward stock
1990 2002
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34
60
Source UNCTAD, World Investment Report 2004
The Shift Towards Services
(see www.unctad.org/wir).
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Note Data should be interpreted with caution.
The world total was extrapolated on the basis of
data covering 48 countries in 1990 and 61
countries in 2002, or latest year available.
They account for over four-fifths of world inward
FDI stock in 1990 and 2002. The world total in
1990 includes the countries of Central and
Eastern Europe, although data by sector and
industry are not available for that region. a A
large share of investment in this industry is in
Hong Kong (China), which accounted for 58 of
developing economies and 22 of the world total.
Hong Kong (China) data include investment holding
companies.
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What services attract the most FDI?

• Traditional Industries
• Financial services (40 in 1990, 29 in 2002)
• Trading (25 in 1990, 18 in 2002)
• Emerging Industries
• Telecommunications (3 in 1990, 11 in 2002)
• Electricity (1 in 1990, 3 in 2002)
• Business services (13 in 1990, 26 in 2002)

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Additional features of the shift of FDI towards
services

• Shift towards services in all country groups
• Shift is fastest in developed countries
• Wide variations among individual economies
• Inward stock
• More than 80 Denmark, Hong Kong (China),
  Switzerland
• 30 or less Bangladesh, Sweden, Venezuela
• Outward stock
• More than 70 Austria, Colombia, Denmark
• Less than 40 Australia, Croatia, Sweden

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Drivers

• Tradability revolution  advances in ICT
• Trade and investment liberalization
• High demand for certain skills (growth of IT
  industries)
• Responses to increased competition
• Cost reduction and quality improvements through
• consolidation
• focus on core activities
• shift to lower-cost locations

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Potential benefits for developing countries

• Financial resources
• Improvement of services provided
• Transfer of soft technology (knowledge,
  information, expertise, organizational skills)
• Employment generation
• Transfer of hard technology (infrastructure)
• Enhancement of systemic and export
  competitiveness

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Potential costs and risks for countries the
importance of policies

• Potential abuse of monopolistic/oligopolistic
  market power, especially in basic services
• Systemic risk in banking and other financial
  services
• Contingent risks in socially or culturally
  sensitive areas

• Need for appropriate policies at the national and
  international levels
• Regulation of monopolistic/oligopolistic markets
• Supervision of banking/finance
• Protection of socially or culturally sensitive
  areas

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• Offshoring of services

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Offshoring vs. outsourcing
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The big picture

• The services tradability revolution
• Allows for an international division of labour in
  the production of services
• Open policy environment plus competitive
  pressures
• Total offshoring market 32 bn (2001) but
  potential is high

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U.S. firms lead the offshoring trend

• 55-65 of export-oriented service FDI projects
  are undertaken by U.S. firms
• but other companies are following
• 40 of top European firms have offshored services
• 23 of Japanese IT companies have offshored
  services, especially to China
• Indian companies among the top in the offshoring
  of IT services

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Top destinations for export-oriented FDI projects
in services, 2002-2003(Number)
Offshoring is not a North-South issue

• Ireland Canada among top recipients of
  offshored services
• But it offers opportunities for developing
  countries
• - Indias services exports 0.5 bn to
  12 bn in past decade

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A win-win-win proposition

• Companies
• Concentration on core competencies
• Increase competitiveness
• Recipient countries
• Export earnings
• New jobs and skills upgrading
• Technology transfers
• Potential for linkages
• Countries of origin
• Lower costs of services for consumers
• Export opportunities
• Structural change move to higher-value activities

In brief all the opportunities (and costs)
associated with the emerging international
division of labour in the services sector
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if policy challenges are met

• Recipients countries
• - Telecommunications, skilled labour, quality of
  suppliers
• - Regulatory framework (including privacy
  protection)
• - Investment promotion (including after care)
  where FDI becomes important
• - Prudential regulation
• - Integration into development strategies
  leverage export oriented activities for growth
  and development (e.g. linkages)
• Countries of origin
• - Protectionism is not the answer
• - Instead adjustment policies (especially to
  take care of employment impact). Not easy (see
  DCs)
• International community
• - Maintain open and enabling framework for
  offshored services

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In sum

• Offshoring is an important phenomenon, driven by
  the tradability revolution
• It is still in its infancy, although the tipping
  point may be approaching rapidly
• It is the cutting edge of the international
  division of labour
• It can be of benefit to all groups of countries
  if policy challenges are met

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Thank you very much!