South-South investment booming

17 October 2006

Transnational companies from developing countries such as Brazil, China, India and South Africa are generating increasing outflows of foreign direct investment – mostly into other developing countries, contributing to a “burgeoning shift in the structure of the world economy,” the United Nations’ trade and development body said on Monday.

Releasing its World Investment Report 2006, the UN Conference on Trade and Development (Unctad) said that foreign direct investment (FDI) from “developing and transition” economies – led by Hong Kong, the Russian Federation, Singapore, Taiwan, Brazil and China – reached a record level in 2005.

Most of these investments, according to the report, end up in other developing countries, contributing to “South-South” economic growth – and “appropriate policy responses in both source and recipient countries” could increase the development gains from this trend.

‘World economic structure shifting’
According to the report, transnational firms based in developing and transition economies generated FDI outflows of US$120-billion in 2005 – the highest level ever recorded.

At the same time, the number of large transnational firms from developing and transition economies is rising. While only 19 featured among the Fortune 500 in 1990, 47 such companies did in 2005.

“The rise of developing country transnational corporations is part of a burgeoning shift in the structure of the world economy,” Anne Miroux, head of Unctad’s World Investment Report team, said in a statement.

“Although the future global map of business and economic power is not easy to predict, companies from Brazil, China, India and South Africa – indeed from across the entire developing world – will increasingly be household names.

“This is an exciting outlook from the development perspective,” Miroux said, “especially because these transnational corporations are also significant investors in other developing countries.”

South-South opportunities
According to the Unctad report, the expansion of FDI from developing countries is particularly relevant for South-South cooperation. Excluding offshore financial centres, total South-South flows shot up from US$2-billion in 1985 to $60-billion in 2004, or 25% of all FDI inflows to developing countries.

At the same time, the report notes, the bulk of South-South FDI is intraregional – to the extent that, for a number of least developed countries, FDI from developing countries in the same region makes up a large share of their total inward flows.

“For example, more than 50% of all FDI inflows in Botswana, the Democratic Republic of the Congo, Lesotho, Malawi and Swaziland come from South African investors.”

In such cases, according to the report, a key advantage of developing-country investors over their developed-country rivals is their greater familiarity with the economic conditions of the host developing countries.

“It is important to consider how this form of ‘South-South’ cooperation can be further enhanced to promote development gains”, said UN Secretary-General Kofi Annan.

Noting that some developing countries had set up dedicated programmes to boost South-South FDI, Unctad said these efforts should be “further explored and supported through closer collaboration among developing-country institutions”.

Policy responses
According to the Unctad report, the expansion of FDI from these new source economies has already attracted some interest, especially from a number of investment promotion agencies.

“More than 90% of African investment promotion agencies currently target FDI from other developing countries, notably from within their own region. Developed-country IPAs have also set up local offices in places such as Brazil, China, India, the Republic of Korea, Singapore and South Africa.”

There is also a growing recognition by developing country governments that outward FDI can strengthen the competitiveness of firms, the report states.

However, the report stresses that whether a country should move to active promotion of outward FDI depends on several factors, including the country’s balance-of-payments situation and the capabilities of its enterprise sector.

More dialogue needed
Unctad also notes that not all FDI has been well received by developing countries.

“Some cross-border mergers and acquisitions, especially in the energy sector, along with mergers and acquisitions in infrastructure services or other industries with a ‘security dimension,’ have raised concerns,” the report states.

To mitigate risks and enhance the benefits from increased FDI among developing economies, Unctad urged countries to engage in more dialogue.

“South-South sharing of experiences may enhance opportunities for cross-border investments and contribute to the mutual development of home and host countries,” the report states.

“From a South-North perspective, there is a similar need for dialogue, increased awareness and understanding of the factors that drive FDI from the South and of the potential impacts.

“Unctad and other international organisations can play an important role by providing analysis, technical assistance and – not least – fora for exchanging views and experiences, to help countries realise the full benefit of the increase in FDI from developing and transition economies.”

SouthAfrica.info reporter

Using SAinfo material Want to use this article in your publication or on your website?
See: Using SAinfo material