UNCTAD: Foreign direct investment rises to $4 trillion in 1998; growth is driven by mergers and acquisitions

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An unprecedented growth of foreign direct investment (FDI) is contributing to the acceleration of economic integration worldwide and to the emergence of a complex international production system. Countries that do not attract FDI are in danger of becoming marginalized, according to a recent report released by the United Nations Conference on Trade and Development (UNCTAD). The World Investment Report 1999: Foreign Direct Investment and the Challenge of Development was released on September 27 at a press conference at the IMF.

Background

Transnational corporations-the firms that engage in international production-now number 60,000, with more than 500,000 foreign affiliates, and account for an estimated 25 percent of global output, according to Karl P. Sauvant of UNCTAD. In 1998, sales of these foreign affiliates amounted to $11 trillion, compared with world exports of $7 trillion. Thus, international production is more important than international trade in delivering goods and services to foreign markets.

Also in 1998, the world stock of FDI rose by 20 percent, to more than $4 trillion, Sauvant said. The largest 100 transnational corporations, measured in terms of foreign assets, command more than $2 trillion of foreign assets and account for $4 trillion in total sales, making them dominant players in the new international production system. General Electric is the largest transnational corporation, according to the report, closely followed by Ford Motor Company and the Royal Dutch Shell Group.

Mergers and acquisitions are driving FDI growth more than ever, particularly between transnational corporations on either side of the Atlantic, but increasingly for FDI into developing countries, according to Sauvant. Mega mergers-involving deals of $ 1 billion or more-have increased in number and value, amounting to about $400 billion in 1998, and this momentum shows no signs of slowing. It is possible that total FDI in 1999 could exceed $700 billion after rising almost 40 percent to more than $640 billion in 1998, UNCTAD estimated. Developed countries account for most of this investment. In the developing countries, Asia receives the most FDI, followed by Latin America and the Caribbean. Africa and the least developed countries attract little FDI in absolute terms.

Developing country challenges

For developing countries as a group, FDI is the most important source of external...