MIBEThe economics of emerging economies

The role of Finance in economicThe role of Finance in economic

development and the emerging economiesdevelopment and the emerging economies

Gianni Vaggi, April 2014Gianni Vaggi, April 2014

Finance 1-2Finance 1-2

4-Foreign Direct Investments4-Foreign Direct Investments

Foreign Direct InvestmentForeign Direct Investment

Investment involving a LONG TERM Investment involving a LONG TERM relationship and reflecting a LASTING relationship and reflecting a LASTING interest and control by a FOREIGN direct interest and control by a FOREIGN direct INVESTOR in an enterprise resident in an INVESTOR in an enterprise resident in an economy other than that of the foreign economy other than that of the foreign investor.investor.

FDI inflows, global and by group of FDI inflows, global and by group of economies, 1995–2012 economies, 1995–2012

(Billions of Dollars)(Billions of Dollars)

FDI flows, by region, 2010-2012 (billions of Dollars and per cent)

FDI flows by region, 2005-2010(Billions of Dollars)

Top 20 host economies, 2012 (billion of dollars)

SECTOR of investmentSECTOR of investment

• Tendency towards SERVICES…Tendency towards SERVICES…

• SERVICES are important becauseSERVICES are important because

increase competitivenessincrease competitiveness

affect living standards (health, affect living standards (health, education, water, electricity)education, water, electricity)

Sectoral Distribution of FDI Projects, 2011-2012 (Billions of Dollars and per cent)

Modes of EntryModes of Entry

• Mergers & Acquisitions (M&A)Mergers & Acquisitions (M&A)Transfer of ownership - asset strippingTransfer of ownership - asset strippingNo productive capacity addedNo productive capacity addedMay reduce competitionMay reduce competitionThreaten national sovereignty Threaten national sovereignty

• Greenfield InvestmentsGreenfield InvestmentsNew production facilitiesNew production facilitiesStimulate domestic entrepreneurshipStimulate domestic entrepreneurshipBring in capital slower than M&ABring in capital slower than M&ACrowding outCrowding out

Value and Number of M&A and Greenfield FDI Projects, 2003-2012

Distribution of the value of greenfield FDI project by sector, 2012 (per cent)

FDI in Africa, 2002-2012

FDI inflows and their share in World Total, 2006-2012

AFRICAFDI inflows, top 5 economies, 2010-2011 (Billions of Dollars)

East and South-East Asia

FDI inflows and their share in World Total, 2006-2012

Distribution of FDI flows among economies, by range, 2012

EAP- FDI flows, top 5, host and home EAP- FDI flows, top 5, host and home economies, 2011-2012economies, 2011-2012

South Asia

FDI inflows and their share in World Total, 2006-2012

SA-FDI flows, top 5, host and home economies, 2011-2012

Latin America and the Caribbean

FDI inflows (billions of Dollars) and their share in world total, 2006-2012

Distribution of FDI flows among economies, by range, 2012

LAC-FDI flows, top 5, host and home economies, 2011-2012

FDIs; PROs and FDIs; PROs and ConsCons

The Foreign InvestorThe Foreign Investor

TNC conducts and controls productive TNC conducts and controls productive activities in a specific sector (primary, activities in a specific sector (primary, manufacturing, services) in more than one manufacturing, services) in more than one country.country.

N.B. TNC not in development businessN.B. TNC not in development business

MAX RETURNS ON CAPITAL

FDI source for DEVELOPMENT?FDI source for DEVELOPMENT?

Filling in gaps:Filling in gaps:

• CAPITAL flowCAPITAL flow

• TECHNOLOGY flowTECHNOLOGY flow

• Gvt. Revenue (tax)Gvt. Revenue (tax)

• Human capital skills (spillovers)Human capital skills (spillovers)

• Non debt creatingNon debt creating

FDI threat for DEVELOPMENT?FDI threat for DEVELOPMENT?

• Crowding out of local firmsCrowding out of local firms

• Influence gvt. policies badlyInfluence gvt. policies badly

• Local resources allocated for socially Local resources allocated for socially undesirable projects undesirable projects

• Modes of entry Modes of entry

• Sector of investment (value added)Sector of investment (value added)

Let’s consider…Let’s consider…

• Type of investmentType of investment

• Situation of the host country enterpriseSituation of the host country enterprise

• The sectorThe sector

• The time-frame The time-frame

SERVICESSERVICES

• POTENTIAL RISKSPOTENTIAL RISKS::

SISTEMICSISTEMIC

STRUCTURALSTRUCTURAL

CONTINGENTCONTINGENT

SISTEMIC RISKSSISTEMIC RISKS

Lack of regulationLack of regulation

Economic InstabilityEconomic Instability

Es. loose control over capital movements in and Es. loose control over capital movements in and out of the country, volatility of the exchange rate, out of the country, volatility of the exchange rate, contagion effect in case of crisescontagion effect in case of crises

STRUCTURAL RISKSSTRUCTURAL RISKS

Monopoly sectors (Natural Monopoly, State Monopoly sectors (Natural Monopoly, State Monopoly, public goods)Monopoly, public goods)

Privatization (private monopoly)Privatization (private monopoly)

increase in pricesincrease in prices

CONTINGENT RISKSCONTINGENT RISKS

FDI in social or cultural relevant FDI in social or cultural relevant sectors (media, strategic sectors i.e sectors (media, strategic sectors i.e financial)financial)

FDI in sectors with high FDI in sectors with high environmental impact (Tourism)environmental impact (Tourism)

Scope for Governmental PoliciesScope for Governmental Policies

• Active policies to directly affect FDI Active policies to directly affect FDI (sectors, local capabilities, upgrading (sectors, local capabilities, upgrading skills, technological capabilities, skills, technological capabilities, infrastructure)infrastructure)

• International Investment Agreements (IIA) International Investment Agreements (IIA) – Multilateral, Regional & Bilateral levels– Multilateral, Regional & Bilateral levels

References

• Global Development Finance (WB)• World Investment Report (UNCTAD)• Trade & Development Report (UNCTAD)• Mold Andrew, December 2008, “The Fallout from the Financial Crisis:

Implications for FDI to Developing Countries”, OECD Development Centre, Policy Insight, no.86

• Nunnenkamp Peter, 2002, “Foreign Direct Investment in Developing Countries: What Economists (Don’t) Know and What Policymakers Should (Not) Do!”, Cuts international press

• OECD press release, 24 June 2008, “FDI from OECD Countries Jumps 50% in 2007 but Set to Fall in 2008”, www.oecd.org

• UN, 2009, “World Economic Situation and Prospects 2009”, UN Publication• UNCTAD, 1999, “Foreign Direct Investment and Development”, UNCTAD

Series - on issues in International Investment Agreements•  'Financing Development in a Post-Crisis World: The Need for a Fresh Look‘,

Global Development Network • World Bank database available on the webWorld Bank database available on the web