6.

1 GLOBAL DEVELOPMENTS MIDDLE EAST AND NORTH AFRICA

Foreign Direct Investment Performance The MENA region is not well connected with global investment and production chains. This is evident from the limited role played in the regions economies by foreign direct investment and by trade in parts and components. Integration with global private capital flow markets has also been relatively stagnant in sharp contrast to comparable country groups. Net FDI inflows to MENA (measured as a share of PPP GDP) were consistently less than half a percentage point of GDP for most of the period. In the early 1980s this put MENA roughly on par with comparable groups. But in the next 15 years, the average of the other comparators had risen to between 1.0 to 2.5 percent while MENA continued to trail at around 0.5 percent. The MENA region, excluding the Gulf countries, received net inflows of foreign direct investment (FDI) of about $2.2 billion in 2000slightly more than 1 percent of the $158 billion to all developing countries, and one-sixth of their share (7 percent) in the GDP of all developing countries. The group of five Eastern European countries (Czech Republic, Hungary, Poland, Turkey and Russia) together received some $19 billion, nine times more than MENA. The three East Asian countries (Malaysia, Philippines, and Thailand) received more than $8 billion in inflows, four times more than MENA. And the group of four Latin American countries (Bolivia, Chile, Mexico, and Brazil) received about $50 billion, more than 22 times the inflows to the MENA region. These comparisons provide some indication of the huge potential for expanding inflows of FDI to the MENA region. A large part of these inflows came from (neighboring) high-income Europe. Egypt accounted for about half the MENA total ($1.2 billion), and Tunisia and Jordan about a quarter each ($750 million and $560 million respectively). The rest received very small amounts or even had significant outflows (Yemen). Potential for foreign direct investment The potential for higher inflows by country can be determined by conditioning FDI inflows on non-oil trade performance (measured by non-oil export to PPP GDP ratios), natural resources, and population. FDI inflows are known to be closely related to trade flows, so the predicted levels of FDI should be associated with trade. Natural resource endowments often also lead to higher levels of foreign investment, albeit of a different type of flows. And size may matter, with larger countries expected to receive higher investment inflows (market-seeking investments), but because this is already accounted for by measuring FDI inflows relative to GDP, the residual population variable may or may not be significant. The results for 42 countries are pretty much in accord with expectations: trade and natural resources raise FDI flows, but size turns out to be a negative influence. Firstly, only Jordan, Lebanon and Tunisia (small resource-poor countries) do as well or slightly less than expected. Morocco is a surprise in how little it receives in FDI inflows (at least for 19982000); Egypt receives more, possibly given its larger size, but still well below expected levels. Second, among the countries with large natural resource endowments, Saudi Arabia is the only country that receives relatively high FDI led by its oil sector. All the larger oil-producing

countries (Algeria, Iran, Syria, and Yemen) receive very low FDI relative to expected levels. Third, for the MENA countries as a whole, FDI inflows are only about half what they should be receiving. In comparison, Chile receives three times as much FDI as expected and the Czech Republic twice as much. Others such as China, Brazil and Argentina receive FDI inflows four to five times their expected levels. The FDI gap for MENA also shows investment climate barriers in these countries, since the gap in potential already takes into account their very low non-oil trade. If their non-oil trade were higher and if the investment climate were better, the region should expect FDI inflows at least four to five times the current levelor some 3 percent of GDP on average, compared with the current 0.5 percent of GDP. Summary 1. FDI inflows greatly improved in many countries of the region, however, risk of reversal in current crisis. 2. Need to continue work on FDI restrictiveness and general investment climate instruments (investment laws, privatization/PPP legislation, IIAs). 3. BCDS tool and identification of competitive sectors should be considered when issuing Investment laws and negotiating International Investment Agreements. 4. Framework including state of the art investment regulation and IIAs need to be communicated as part of the investment promotion strategy. 5. Investor perception is the key, especially during the crisis. MENA countries also have great potential for attracting more investment from abroad and encouraging more private investment at home, both crucial in trade and development. If exports other than oil were higher, and in a better investment climate, domestic private investment in traded goods and services would be much higher. And the FDI inflows that the region could expect would be four to five times what they are todaysome 3 percent of GDP, up from an average of 0.6 percent. On the other hand, the region remains subject to a geopolitical context featuring high levels of tension and conflict which can discourage foreign investment and even trade. Nevertheless, if only half the regions trade and private investment potential were realized over the next ten years, that would be enough to raise its per capita GDP growth from about 1 percent to about 4 percent a yearhalf from more private investment and half from the greater productivity that openness would encourage.

CHINA
FDI in China has increased considerably in the last decade reaching $185 billion in 2010.China is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial Crisis (global macroeconomic factors) but rebounded in 2010. Definitely, governments policy towards FDI plays an important role in attracting FDI. In 1950s and 1960s, due to the well known political reasons, China was isolated from western countries, logically, China shut up the door to western investors. Since 1978, China has adopted reform and opening up policy. To develop Chinas economy, Chinese government encourages FDI. In 1979 China promulgated Sino-China Equity Joint Venture Law. In 1986, China promulgated Foreign Capital Venture Law. In order to attract foreign investment, China gave foreign investors a variety of favourable treatments, such as tax reduction, cheaper land etc. In addition, nearly all local governments set up investment promotion agencies. To compete for foreign investment, many local governments even gave more favourable treatment to foreign investors some of which were illegal. Furthermore, After China joined the WTO in 2001; China reduced or abolished some performance requirements and other restrictions on FDI. Investment climate in China 1. Globalization First of all, globalization is an irresistible trend in 21st century; no one can change the trend of it. No country can isolate itself from the world. Every nation can only adapt to the tendency. Globalization will involve all economies and integrate them into a single global economy. Transnational companies in developed countries will continue to invest abroad. What is more, developing countries will become more and more important sources of FDI. 2. China: A Huge Market with Great Potential Secondly, China has a huge market with great potential. China has a population which is more than 1.3 Billion, and the middle class has grown quickly after 30 years of development of Chinese economy. China will remain a magnet for FDI, especially for market-seeking FDI. 3. Affluent Human Resources Furthermore, China has ample human resources. Every year, more than 6 million students graduate from universities and colleges. In rural area, there exists a huge pool of potential labour. Such human resources reserve can meet all demands of FDI. 4. The Investment Environment will continue to improve In addition, the investment environment will continue to be improved. In foreseeable future, Chinese government will hold the policy of utilization of FDI. Although China will control

cross-border M&A, (Actually, it is international customs in FDI regime, even USA, the only economy superpower, still restricts some cross-border M&A by the reason of national), China regards cross-border M&A as a higher form of FDI and welcome the M&A without harm to Chinese economy. To attract FDI, it is reasonably expected that Chinese government will continue to improve governance and legal environment. Nonetheless, in our view, the prospect of inward FDI to China is quite optimistic. Following statistics show the recent trends in Chinese FDI environment

In the past three decades, China has witnessed rapid economic growth, however, such growth was on the cost of natural resources and environment pollution, Chinese government realizes such an economic growth model can not last long. Additionally, after 30 years of economic development, especially due to the consecutive trade surplus, China has accumulated astronomical foreign reserves. Unlike 30 years ago, the lack of capital is no longer a problem for the development of Chinese economy.

BRAZIL
FDI began to gain importance in Brazil in the late 19th century, especially through British investments in services directly related to exports activities such as railroad and sea transportation, financial services and commercialization. Foreign investments in urban infrastructure services (transportation, energy, and so on) gained strength in the first decades of the 20th century, driven by growing urbanization and industrialization. Later on, provision of a great deal of public services was taken over by the State, through a unilateral decision of governments or negotiations with the foreign investors. The share of foreign capital was particularly high in the industrial sectors that were more capital and technology-intensive (transportation equipment, electrical and mechanical equipment, plastics, rubber and pharmaceuticals). In 1975 the transnationals accounted for 42% of the sales of the 500 leading Brazilian companies and operated with higher levels of productivity and more modern technologies than the average nationally-owned companies. As of the second half of the 70s, under the State policy of fostering the creation of joint ventures with private and stateowned Brazilian companies, FDI participated in large investment projects in intermediate-goods sectors (notably chemical and petrochemical) as well as capital goods. The reduction of the economys anti-export bias in the late 60s through an exchange policy that was more favorable to exports and the implementation of an aggressive scheme of tax and credit incentives for exporters, led the transnational companies to deeper involvement with foreign trade via exports. These companies contributed heavily to the process of diversification of Brazils exports and above all to the dynamism registered in the 70s in exports of manufactured goods. They also became relevant users of the incentives and subsidies to exports: in 1978 they accounted for 37% of exported manufactured products and absorbed 42% of the tax incentives. The 90s, especially from the middle of the decade on, marks Brazils return to a relevant destination of FDI among developing countries. Between 1990 and 1995, Brazil received about US$ 2 billion a year in FDI, which corresponded to 0.9% of the world flows of FDI and to 2.7% of the flows directed towards developing countries. In 1996 the FDI meant for Brazil multiplied by five in relation to the annual average for the first half of the decade. In 1998 the FDI flows totaled US$ 28.9 billion, that is, 4.2% of the world flows of FDI and 15.4% of the flows sent to developing countries. These shares fell from that point on, but the flow in the direction of Brazil went on growing until 2000, when the total reached US$ 32.8 billion. From then onwards, the inflow of FDI bound for Brazil fell. Even so, in 2001 the flows heading for Brazil (US$ 21 billion) amounted to 3% of the world total and 11% of the FDI received by the Developing countries. Various factors contributed to the FDI boom in the 90s. In the first place, in the middle of the decade, macro-economic stabilization caused a strong growth in domestic demand, which attracted new transnational companies as well as new investments from already established TNCs.

Secondly, the unilateral trade liberalization brought about in the beginning of the period led companies to increase investments in order to face an environment that was less protected and more competitive. It should be remembered that Brazilian trade liberalization was limited, especially in the industrial sectors preferred by FDI, which maintained high import levels. A third factor was that for some industrial sectors the consolidation of Mercosur as an amplified domestic market lent incentive to new investments. Although Mercosur as a source of dynamization of FDI flows can only be considered as a protagonist in the case of the auto sector, the consolidation of the regional bloc played an important secondary role in this process in several other sectors and even generated some impact on the FDI outflows from Brazil to its neighbor countries. In the fourth place, the regulatory updating carried out by the government - privatizations, concessions, suppression of public monopolies, among others affected principally the sectors of public services by opening them to private investments, including foreign investments. In the late 90s, privatizations accounted for about 31% of the FDI flows directed towards Brazil. The fifth factor is that some sectoral regimes for promoting industrial investments such as the auto regime and the new version of the Information-Technology Law worked to attract important flows of direct investments in the manufacturing industry. The recent flows of FDI involve both newcomers who entered the domestic market via privatizations and through other modalities, and transnational companies already installed in Brazil. Although there are no systematic data on this, there are sure indications that mergers and takeovers, without immediate addition of capacity, represented a significant portion of the new investments, if only because of the weight of the privatization processes of state-owned companies as a factor to attract foreign investments in the 90s. In 2003 the flows of FDI to Brazil suffered a sharp reduction, falling to just US$ 10.1 billion, a figure 45% lower than that posted in 2002. As the preliminary data from UNCTAD point to the world flows of FDI having remained stable in 2003 when compared with 2002, Brazils participation in these flows fell to 1.6%, the lowest since 1995. In terms of the sectoral makeup of the investments, the expansion of the oil sector explains the growth in the share of the mining industry in the total for the year: from 3.4% in 2002 to 11.5% in 2003. The United States recovered its position as leading foreign investor, outdoing The Netherlands, which led the field in 2002. So, at the beginning of the early 21st century the stock of FDI in Brazil presents some marked differences in relation to the amount accumulated up to the mid-90s. The most significant change concerns diversification both with regard to sectors of destination and countries of origin of FDI inflows.

6.2 CURRENT SCENARIO

Developing and transition economies, for the first time, absorbed more than half of global FDI flows. Global inflows of foreign direct investment (FDI) rose marginally by 1%, from $1,114 billion in 2009 to almost $1,122 billion in 2010, based on UNCTAD estimates. Stagnant global flows in 2010 were accompanied by diverging trends in the components of FDI. While the increased profits of foreign affiliates, especially in developing countries, boosted reinvested earnings, the uncertainties surrounding global currency markets and European sovereign debt, resulted in negative intra-company loans and lower equity investments. Cross-border mergers and acquisitions (M&As) increased by 37% in 2010, while international greenfield projects, fell both in number and in value. Nevertheless, the total project value of greenfield investments has been much higher than that of cross-border M&As since the crisis, which was the opposite case before the crisis. Global FDI inflows remained stagnant in 2010 at an estimated $1,122 billion, compared to $1,114 billion in the previous year. However, they showed an uneven pattern among regions, components and modes of FDI. While FDI inflows to developed countries contracted further in 2010, those to developing and transition economies recovered, surpassing the 50% mark of global FDI flows. The improvement of economic conditions in2010 drove up reinvested earnings, while equity capital and intra-company loans remained relatively subdued. Crossborder M&A volume rebounded in 2010, whereas greenfield investments continued to decline. FDI in the United States surged by more than 40% over 2009 levels, an increase worth $56 billion, the single biggest increase in FDI among the major economic regions. This rise is largely due to a significant recovery in reinvested earnings of foreign affiliates. Europe stood out as the sub region where flows fell most sharply, explained largely by two groups of countries. First, the Netherlands and Luxembourg saw significant declines. Negative FDI flows in the former country were caused by more volatile flows related to transactions of financial affiliates. Second, uncertainties about sovereign debts caused drops in FDI, with the largest impacts seen in Ireland and Italy (Greece and Spain are less significant FDI recipients). FDI in the regions major economies (France and Germany) fell only slightly. Inflows to Africa, which peaked in 2008 driven by the resource boom, appear to continue the downward trend of the previous year. For the region as a whole, UNCTAD estimates show that FDI inflows fell by 14% to$50 billion in 2010, although there are significant regional variations. While the downward trends of inflows to North Africa appear to have stabilized, in sub-Saharan Africa, inflows to South Africa declined to barely a quarter of the 2009 level, contributing to the large fall of FDI inflows in the sub region. Cross-border M&A mainly in extractive industries, registered an increase of 49%, while the number and value of greenfield projects normally the main mode of FDI in Africa suffered a decline of about 10% in 2010. The rise of FDI

from developing Asia and Latin America to Africa was not yet enough to compensate for the decline of FDI from developed countries which still account for the lions share of inward FDI flows to many African countries. FDI flows to South, East and South-East Asia have picked up markedly, outperforming other developing regions. After a 17% decline in 2009,inflows to the region rose by about 18% in 2010, reaching $275 billion, due to booming inflows in Singapore, Hong Kong (China), China, Indonesia, Malaysia and Vietnam, in that order. FDI flows (in the non-financial sector) to China, for example, reached more than $100 billion. Breaking this general upward trend, South Asia experienced a 14% drop in FDI, mainly due to declines in flows to India. FDI flows to West Asia, at $57 billion, continued to be affected by the global economic crisis, despite the steady economic recovery registered by the economies of the region. Sizeable increases in government spending by oil-rich countries helped push their economies forward, but conditions in the private sector remained subdued. The picture varies by country, with inflows to the United Arab Emirates rebounding modestly from the relatively low values of 2009, to little change in performance for Lebanon, to a drop in Saudi Arabia due in part to foreign investors pulling out of or freezing large refinery projects. A surge in cross-border M&As is the main factor explaining the significant increase in FDI flows to Latin America and the Caribbean, which attained the level of $141 billion. Compared with negative values in 2009, M&As reached $32 billion in 2010, nearly reaching the high values registered in the region during the 1990s.The targets of these deals were mainly in the oil and gas, metal mining and food and beverages industries. Strong economic growth, spurred by robust domestic and external demand, good macroeconomic fundamentals and higher commodity prices, explain the quick recovery of FDI flows to the region. Nearly all the big recipient countries saw inward flows increase, with Brazil remaining the largest destination for the fourth consecutive year.