World Investment Report 1994

Key Messages

The recovery from the FD1 recession

After a two-year slow-down in outflows (from $232 billion in 1990 to $171 billion in 1992), FDI outflows began recovering in 1993, reaching $195 billion (table 1). Not all major home countries contributed equally to the recovery. Still, the recovery from the FDI recession is seeing a slow return to the previous configuration of major home and host countries. This configuration had substantially changed during the FDI recession: Japan slipped from first place as a source of FDI to third place, behind the United States and France (table 2). The United Kingdom – the largest outward investor during most of the second half of the 1980s moved down to fifth place, after Germany. The decline of world FDI outflows during 1991 and 1992 consisted primarily of reduced outflows from Japan and, to a lesser extent, from some Western European countries, mainly to the United States. The large decline in Japanese outflows – accounting for 44 per cent and 65 per cent, respectively, of the total declines during these two years – can be explained by a combination of adverse cyclical factors and some special factors.

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is being led by a vigorous expansion of FDI in developing countries

Even during the FDI recession in the developed countries, flows into developing countries continued to boom, one of the outstanding features of recent global FDI trends. In 1993, developing countries attracted a record $80 billion in estimated FDI, twice the amount of flows in 1991 and the same as the level of total world inflows in 1986. As a result, the share of developing countries in world FDI flows reached about 40 per cent in 1993, a share unsurpassed in decades. Foreign-direct-investment flows in 1992 were the largest component of net resource flows to developing countries, comprising one-third of the total; they constitute over one-half of total private flows to those countries.

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but only moderate FDI increases in Central and Eastern Europe

The remarkable expansion of FDI flows to developing countries has belied the fear that the opening of Central and Eastern Europe – and the efforts of the countries of that region to attract such investment-would divert investment flows from developing countries. In fact, the growth of FDI flows to Central and Eastern Europe has fallen far short of the growth of flows to the developing countries. The modest inflows also greatly dampened expectations regarding the role of FDI in the transition from centrally planned to market economies. Flows into the region totalled an estimated $5 billion in 1993 (about the size of flows to Mexico). Cumulated FDI flows were approximately $13 billion in 1993 (barely more than the FDI stock in Thailand). Investments are unevenly distributed within the region, concentrated in those countries that have made the most progress in establishing a market-oriented economic system.

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The expanding 77VC universe

The universe of TNCs in the early 1990s was composed of at least 37,000 parent firms that controlled over 200,000 foreign affiliates worldwide, not counting numerous non-equity links. Two-thirds of these parent firms – 26,000 – were from 14 major home developed countries, an increase of 19,000 since the end of the 1960s. Foreign affiliates generated sales of more than $4.8 trillion in 1991, slightly more than world exports of goods and non-factor services (some one-third of which were infra-firm) and twice the sales figure at the beginning of the 1980s (table 5). The influence of the largest TNCs on output, employment, demand patterns, technology and industrial relations should not be underestimated: the world’s largest 100 TNCs, ranked by foreign assets, held $3.4 trillion in global assets in 1992, of which about 40 per cent were assets located outside their home countries. The top 100 control about one-third of the world FDI stock (table 6).

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has linked national production systems in the broader context of globalization

Transnational corporations and their activities have not only grown in quantitative terms (table 7) . They also have had a qualitative impact on the world economy, within the broader process of globalization. The driving forces of technological progress and competition, combined with liberalization, have lowered barriers to international flows of goods, services and factors of production, increased the scope for international specialization and led to an unprecedented expansion in international economic transactions. Transnational corporations have played a leading role in this process as traders, investors, disseminators of technology and movers of people – thus strengthening the links among national markets. Beyond that, the distinguishing role of TNCs is that they organize the production process internationally: by placing their affiliates worldwide under common governance systems, they interweave production activities located in different countries, create an international intra-firm division of labour and, in the process, internalize a range of international transactions that otherwise would have taken place in the market. The strategies pursued by TNCs are of central importance to understanding the globalization process (figure 2).

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Globalization has important implications for the organization of labour markets

Until quite recently, the world of work has been shaped by local and national factors. At least since the Second World War, the level of employment has been a major consideration influencing the policies of national governments. The quality of employment depended on the sectoral distribution of production and the behaviour of individual firms with respect to wages, working conditions and training programmes, albeit in the context of wider government policies relating to the labour market and education and training. Most people, at least in the developed countries, expected a lifetime’s employment, if not in the same company, then most likely in the same locality or country. Trade union and employer organizations bargained within an established framework of national industrial relations. All that is now changing under the pressure of globalization, as the increased mobility of capital meets the more location-bound asset that is labour.

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Quantitatively, employment in 77VCs has grown more slowly than FDI worldwide

Transnational corporations are estimated to employ some 73 million persons at home and abroad (table 8). Although this represents only around 3 per cent of the world’s labour force, employment in TNCs accounts for nearly 10 per cent of paid employment in non-agricultural activities worldwide, and close to 20 per cent in developed countries considered alone. In addition, the indirect employment effects of TNC activity are at least equal to the direct effects and probably much larger. Backward linkages, such as the purchasing of raw materials, parts and components from subcontractors and external suppliers, are among the principal channels whereby TNCs can indirectly contribute to employment generation. The importance of these effects has grown in recent years, as firms have progressively focused on smaller but higher-value segments of the production process, relying increasingly on national and international outsourcing for technological, cost or flexibility reasons. An example is the footwear company Nike whose core staff consists of 9,000 persons, but, through subcontracting, employs an additional 75,000 (box 1). Overall, however, it is estimated conservatively that each job in a TNC generates at least one additional job elsewhere in the economy.

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and employment in foreign affiliates rose, particularly in affiliates in developing countries, compared to that in parent firms

Parent corporations account for nearly two-thirds of total direct employment in TNCs. However, during the 1980s and early 1990s, the limited growth that took place in direct employment in TNCs was concentrated in foreign affiliates. For example, employment in United States parent TNCs fell slightly during 1985-1990, while that in their foreign affiliates rose during the same period. In the case of Swedish manufacturing TNCs, employment at home declined sharply during 1986-1990, while that in foreign affiliates rose, resulting in an increase in the share of foreign affiliates from 41 per cent to 61 per cent of total employment. Particularly significant was the growth of employment in Japanese foreign affiliates, which more than doubled during the second half of the 1980s.

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Qualitatively, foreign affiliates can make a contribution

These figures do not say anything about the qualitative aspects of employment in foreign affiliates, be it in developed or developing countries.

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both in terms of working conditions

To begin with, the workforce directly employed by foreign affiliates typically – but not always – enjoys better wages, conditions of work and social security benefits relative to those prevailing in domestic firms. The explanatory factors include the size of foreign affiliates and their tendency to be concentrated in more capital- and skill-intensive industries and the importance of skills and quality of work for generating competitive advantages. Thus, TNCs have the potential to exert a positive qualitative influence on wages and working conditions in host countries. Particularly in developing countries, the higher wage levels in foreign affiliates are likely to be an influence for raising wages, at least of certain kinds of labour. When it comes to other conditions related to work, TNCs generally adopt standards that are not less favourable than those of comparable national employers and are sometimes above the national average.

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and human resource development

Perhaps even more importantly, TNCs often provide labour with the opportunity to acquire additional knowledge and skills, and this is particularly so in the case of affiliates operating in developing countries. Indeed, the essential characteristic of TNCs is that they bring together in the workplace international knowledge and skills with the human resources present in a particular location. Accordingly, host country employees and the host economy as a whole can benefit from the upgrading of skills already possessed through employment in TNCs and, especially, the acquisition of new vocational and management skills through formal and on-the-job training in foreign affiliates. The major role of TNCs in human resource development stems from the learning opportunities and training that they provide for their employees. The extent and nature of training varies according to the country, industry and activity in which a TNC is engaged, as well as firm-specific strategies with respect to FDI and human resource management.

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Although industrial relations practices continue to frame workplace issues in TNCs

Decisions affecting the quantity and quality of employment in TNCs are the responsibility of management. But these decisions are not taken in isolation. Trade unions – in the context of national industrial relations systems-continue to be important to articulate, explain and present workers’ views to management. However, there has been, particularly over the past decade, a tendency for management to take up certain employment issues in the context of human resource management, thus removing them from the domain of collective industrial relations. The expanding influence of TNCs over domestic economic activity is accompanied by perceptible changes in industrial relations practices, both within TNCs and in industrial relations in general.

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the transnational organization of production poses special challenges for nationally organized labour

The central characteristic shaping the relationships between trade unions and TNCs is the difference between the international organizational scope of TNCs on the one hand and the mostly national scope of labour organizations on the other. Within this basic asymmetry, the greater flexibility of TNCs to shift productive assets assumes particular importance because the real or perceived threat to relocate production can have implications for the effectiveness of unions, first to organize themselves and then to take action. This may be further exacerbated if governments seeking to attract FDI see trade union presence as a possible deterrent to foreign investors. Another aspect of the transnational character of TNCs is that their decision-making processes are often more complex than in purely domestic firms. This makes access to information and to ultimate decision makers more difficult than in the national context.

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but also opens new avenues for cooperation

Such relationships have become all the more important as the pressures of competition require that firms need to “reinvent” themselves continuously through the introduction of innovatory practices and corporate restructuring. Often these require the formal or at least informal cooperation of organized labour to be effective. Perhaps more profoundly, the growing importance of created assets and the adoption,by many TNCs, of flexible production methods and new organizational paradigms increases the need for workers’ commitment to the performance of the firm. Such a need can be best sustained in the framework of a cooperative approach to industrial relations. As a result, employees are increasingly recognized as important stakeholders in the enterprise, with a strong interest in ensuring its success.

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Although the relocation of jobs through FDI is limited

Foreign direct investment is often associated with a process of structural transformation in host economies, a transformation that may be expected to generate growth and hence employment in the long term. As part of that process, the rise of international production is associated with a certain redistribution of jobs, especially at the regional level, and an increase in the speed of the broader process of industrial restructuring that is taking place on the global level. On the whole, however, the number of jobs relocated from developed to developing countries through FDI is small, compared with the size of the total labour force in developed countries. The reasons are varied. To begin with, services account today for a substantial share of FDI flows to developing countries; given the (still) limited tradability of most services, most FDI in this sector is therefore by necessity location-bound, i.e., markets (domestic and international) cannot be served by trade.

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governments seek to influence FDI to gain or maintain jobs

Nevertheless, given the unemployment problems facing most countries, it is a frequent objective of governments in developed as well as developing countries to retain or attract TNC operations with a view to maintaining or adding to jobs available. In fact, competition for FDI may tempt governments to offer concessions in the social and labour fields as an incentive to attract TNCs and to create much needed jobs. This reflects a genuine policy dilemma faced, in particular, by developing countries, between the need to create jobs and the need to raise labour standards. Policy formulation in this respect should recognize the complex factors determining employment and go beyond simple measures for attracting additional FDI inflows per se or, in the case of home countries, discouraging outward investment.

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The widespread liberalization of FDI policies

In the FDI area, liberalization is the most important policy trend of the 1990s, as part of broadbased efforts to attract foreign investors. This trend is embedded in a broader liberalization movement – covering international trade in goods, external financial transactions, transfer of technology and, more recently, services and some aspects of labour movement – that seeks to enhance economic efficiency through the elimination of market distortions caused by restrictive or discriminatory governmental measures.

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means that TNCs are given more freedom and, hence, need to assume greater responsibility

The liberalization of FDI policies and related international transactions means that TNCs are given more freedom to shape their strategies and structures. With this increased freedom comes also a greater ability to influence national and international economic activity and, hence, more responsibility, particularly social responsibility. This is recognized by firms, for instance, when they adopt codes of corporate ethics, and by shareholder and other groups, for instance, when they advocate the social responsibility of firms. The concept of corporate social responsibility helps firms to define and organize their relations with society. It first assumes that an enterprise is a distinct, identifiable entity with the capacity both to act and assume responsibility for its actions. Secondly, it describes the nature of a corporation’s relationship with society which includes not only following narrow legal requirements but also includes broader actions as defined by a firm’s social charter. Finally, the concept helps to determine which social groups fall within a corporation’s circle of social responsibility and why.

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and that trade unions can count less on government and, hence, need to rely more on their own efforts

Trade unions represent another group with a direct stake in shaping the broader policy framework concerning employment and workplace issues. As trade unions must deal more and more with TNCs, one would expect them to seek ways to match the organizational scope of TNCs by transnationalizing their own structures. However, because of many obstacles, including differences in labour market legislation, the problem of defining mutual interest among differently organized national groups of workers and the difficulties of organizing workers arising from the increasingly fluid relations within TNC networks, this approach is of only limited significance for the time being. For these and other reasons, trade unions internationalize some of their actions, as a means of strengthening their leverage in their relations with TNCs. Thus, while the social responsibility of TNCs is grounded internationally but implemented locally, the approach of trade unions is grounded locally but implemented internationally. Trade unions are taking two broad approaches to international action.

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while governments need to be pro-active in human resource development policies

Despite the general trend towards a greater role of markets, the role of national governments in education and human resource development remains undisputed. If anything, in fact, this role has become more important, especially in developing countries, although the manner in which it is being pursued is changing. As competitiveness and economic growth are increasingly determined by created assets, it is important that governments coordinate their policies for human resource development with measures to promote FDI and channel it into priority areas for human resource development. Since TNCs must balance their competing requirements of globally efficient operations and locally responsive strategies, government policies for harnessing the capabilities of TNCs for human resource development must also strike the right balance in terms of supporting national goals while taking into account the needs of TNCs to be competitive in global markets.

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