World Investment Report 2002
Transnational Corporations and Export Competitiveness
By Nuchhi R. Currier for the Chronicle
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| In order to sustain growth and development in this increasingly contracting world, trade among nations has become a prerequisite to successful economic policy. For developing nations to grow out of their cycle of deprivation and poverty, they have to become active participants in the global economy and one way of achieving this is through expansion and diversification of exports. Transnational corporations (TNCs) play the role of facilitators in this process, providing resources, technology and access to new markets. According to Secretary-General Kofi Annan, "in order to take full advantage of their partnerships with TNCs, Governments must do their utmost to mobilize their own countries' resources and capabilities". He stressed the value of investments in education, health, science and technology to enable countries to keep pace with an increasingly knowledge-based economy. TNCs continue to grow, as does international production in a globalizing world economy. The United Nations Conference on Trade and Development (UNCTAD) estimates, in its World Investment Report 2002, that there are 65,000 TNCs today with 850,000 foreign affiliates, accounting for one tenth of world gross domestic product and one third of world exports. The impact is greater if the value of TNC activities associated with non-equity relationships is considered. The world's largest TNCs dominate the field in both sales and employment figures, becoming progressively larger each year due to mergers and acquisitions (M & As). In 2001 alone, foreign affiliates accounted for about 54 million employees, compared to 24 million in 1990; their sales of almost $19 trillion were more than twice as high as world exports in 2001, compared to 1990 when both were roughly equal. The stock of outward foreign direct investment (FDI) increased from $1.7 trillion to $6.6 trillion over the same period. The global economic slowdown in 2001 resulted in the evaporation of the euphoria for new technology firms and the stock market, coupled with the problem of auditing irregularities in a number of TNCs. A drop in the value of cross-border M & As was a direct result of this recession — its total value ($594 billion) completed in 2001 was only half that of 2000. The number of cross-border M & As also declined from 7,800 in 2000 to 6,000 in 2001; while the number of cross-border deals worth over $1 billion fell from 175 to 113 — their total value falling from $866 billion to $378 billion. As a result, the decline in FDI inflows was mainly concentrated in developed economies, shrinking almost by 59 per cent, compared to 14 per cent in developing economies. World inflows of FDI amounted to $735 billion, of which $503 billion went to developed economies, $205 billion to developing economies, and the remaining $27 billion to the transition economies of Central and Eastern Europe (CEE). According to UNCTAD figures, a record five firms, headquartered in developing countries, made it to the top 100 list for the year 2000. These companies, based in Hong Kong, China, Mexico, Venezuela and the Republic of Korea, have been responsible for driving the continued transnationalization of the top 50 companies from developing countries.
The expansion of international production has three main drivers, in the long-term. One is policy liberalization—opening of national markets and allowing all kinds of FDI and non-equity arrangements; the second is rapid technological change, which has resulted in efficiency-seeking FDI with important implications for the export competitiveness of countries; and the third force is increasing competition, which encourages increased efficiency achieved by greater penetration of international markets and shifting of production activities to reduce costs.
FDI in the 49 LDCs was small in absolute terms but continued to make a contribution to local capital formation, mainly through greenfield investments rather than cross-border M&A. They have begun to promote their countries more actively to foreign investors. Short-term changes in business cycles contribute to investment policies of firms as well. A weakening of the global economy in 2001, notably in the world's three largest economies that all fell into recession, has contributed to a decline in FDI (the first time in a decade) and intensified competitive pressures, accentuating the need to search for lower-cost locations which could lead to an expansion in low-wage economies. In developing countries and in economies in transition, FDI proved pretty resilient despite the global economic turndown.
The United States remained the largest FDI recipient, as well as the world's largest investor, even though the economic slowdown caused declines in both areas by 50 and 30 per cent, respectively. Its major trading partners remained the European Union countries, with the North American Free Trade Agreement (NAFTA) partners also benefiting. Despite the weakened demand in the largest global economies, the longer-term prospects for FDI remain promising. Surveys show that international expansion of TNCs is likely to continue in both the developed and developing world. Improved export competitiveness helps countries develop by increasing international market-share by diversifying the export basket and sustaining higher growth rates; upgrading technological and skill content; and expanding base of domestic firms to raise productivity and living standards. Greater competitiveness and diversity leads to more exports and more foreign exchange earnings. TNCs can help raise competitiveness in developing countries and in economies in transition, but tapping their potential is not easy. Sustaining export competitiveness as wages rise and market conditions change is not an easy accomplishment. Coherent and consistent policy support is essential as part of a broader national development strategy — seeing it as a means to an end, which is development. With the spread of global value chains in many low- and medium-technology activities, TNCs are now involved in the whole spectrum of manufactured exports. In low-technology sectors, they act as coordinating local producers in addition to setting up their own affiliates. Trade in parts and components is on the rise, and there is an increasing trend towards trade specialization associated with international production systems. The most dynamic products in world trade are found mainly in non-resource-based manufacturers, particularly electronics, automotive and apparel. TNCs have played an important role in the export expansion of these products. Mexico, China and South Africa were among the top 8 of 10 country gainers in absolute increases. Of the 10 countries with the steepest declines in FDI inflows, eight were developed countries led by Belgium, Luxembourg, the United States and Germany. Falling barriers to international transactions allow TNCs to locate different parts of their production processes across the globe to take advantage of the differences in costs, resources, logistics and markets. Their search for enhanced competitive advantage through optimal geographical configuration results in an intensity of integration on a regional and global scale, resulting in competition between entire production systems rather than between factories or firms. International production systems have three critical elements: governance, global value chains, and geographic configuration. Changing corporate strategies and production systems open new possibilities for developing economies to enter technology-intensive and export-oriented activities, thus becoming part of the international production systems. The disadvantage inherent in this is the raising of barriers to market entry for smaller and newer suppliers from transition economies who do not possess competitive advantages that modern production systems require. |
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