With some $6.4 trillion in global sales in 1994 (and estimated global sales of $7 trillion in 1995) — the value of goods and services produced by some 280,000 foreign affiliates — international production outweighs exports as the dominant mode of servicing foreign markets (table 1). The growth of global sales has exceeded that of exports of goods and services by a factor of 1.2 to 1.3 since 1987. But as far as developing countries are concerned, despite their growing involvement in international production — of the world’s 44,000 parent firms, 7,900 firms were based in developing countries in the mid-1990s (table 2), compared to 3,800 in the late 1980s — exports continue to be the principal mode of delivering goods and services to foreign markets.

Transnational corporations raise capital from a variety of sources at home and abroad: commercial banks, local and international equity markets, public organizations and their own corporate systems in the form of internally generated profits for reinvestment. Taking all these sources of finance into account, investment in foreign affiliates — the investment component of international production — was an estimated $1.4 trillion in 1996 (figure 1). Of this, only $350 billion, i.e., a quarter, were financed by FDI flows. This means therefore that the weight of international production is also considerably larger: expressed as a ratio of world gross fixed capital formation, about one-fifth was undertaken by foreign affiliates. (This measure does not capture additional investment controlled by TNCs via various non-equity measures, including corporate alliances.)

Returning to FDI flows themselves, the boom that began in 1995 continues, with inflows setting a new record of around $350 billion in 1996, a 10 per cent increase (figure 2). Fifty four countries on the inflow side and twenty countries on the outflow side set new records in 1996. Unlike the two previous investment booms in 1979- 1981 and 1987-1990 (the first one being led by petroleum investments in oil producing countries, and the second one being concentrated in the developed world), the current boom is characterized by considerable developing-country participation on the inflow side, although it is driven primarily by investments originating in just two countries — the United States and the United Kingdom. There are signs that an even greater number of countries will take part in the present boom as it unfolds on the inward side (e.g., developing countries in Latin America), as well as on the outward side (e.g., France, Germany and Asian developing countries). During 1995-1996, the share of developing countries in global inflows was 34 per cent.

Even in the current boom, cross-border M&As, especially in the United States and Western Europe, are playing an important role in boosting FDI, although this time there is no ensuing decline in the developing-country share of inflows. The value of such M&As increased by 16 per cent in 1996, to $275 billion. If majority-held transactions only are taken into account, the value of cross-border M&As in 1996 would be $163 billion, or 47 per cent of global FDI inflows (though the measured values are not strictly comparable) (figure 3).

Despite the growing number of small and medium-sized enterprises with investments abroad, a good part of FDI continues to be concentrated in the hands of a small number of companies. The largest 100 TNCs (table 3), ranked on the basis of the size of foreign assets, own $1.7 trillion assets in their foreign affiliates, controlling an estimated one-fifth of global foreign assets. In the United States, 25 TNCs are responsible for half of that country’s outward stock, a share that has remained almost unchanged during the past four decades. For six out of nine developed countries for which such data are available, 25 TNCs account for more than a half of their respective countries’ outward stocks (table 4). For the first time, two developing-country TNCs, Daewoo Corporation (Republic of Korea) and Petroleos de Venezuela S.A. (Venezuela), have entered the list of the top 100 TNCs. Daewoo Corporation also tops the list of the 50 largest TNCs based in developing countries (table 5) for the second year running, while Royal Dutch Shell (United Kingdom/Netherlands) continues to top the list of the largest 100 TNCs for the fifth consecutive year.

The expansion of international production would not have been possible if it were not for the ongoing liberalization of FDI regimes. The trend towards greater liberalization was sustained again in 1996, with 98 changes in the direction of investment liberalization and promotion of a total number of 114 changes in investment regimes introduced during that year in 65 countries (table 6). Over the period 1991-1996, indeed, some 95 per cent of a total of 599 changes in the regulatory FDI regimes of countries were in the direction of liberalization. They mostly involved the opening of industries previously closed to FDI, the streamlining or abolition of approval procedures and the provision of incentives (figure 4). The desire of governments to facilitate FDI is also reflected in the dramatic increase in the number of bilateral investment treaties (BITs) for the protection and promotion of investment throughout the 1990s. As of 1 January 1997, there were 1,330 such treaties in the world, involving 162 countries, a threefold increase in half a decade. Around 180 such treaties were concluded in 1996 alone — one every second day.

The ongoing globalization of production begs the question of whether the upward trend in FDI flows witnessed to date will continue into the next century. A survey of foreign investors suggests that this may, indeed, be the case. More specifically, foreign sales are expected to increase as a proportion of total sales, especially for Japanese and United States’ firms. Production by foreign affiliates is also expected to increase as a proportion of total production by TNCs, while home-country exports are expected to remain constant. Mergers and acquisitions, joint ventures and other equity and nonequity types of inter-firm agreements are expected to go hand in hand with the growth in FDI. Although smaller firms will be stepping up investments abroad, large firms will continue to account for the lion’s share of outward investments. Corporate restructuring in developed countries, aimed at improving efficiency and modernization, is expected to continue, giving rise to efficiencyseeking investment. However, accessing markets will remain the principal motive for investing abroad: survey respondents placed twice as much weight on production for local markets than on labour cost factors.

Developed countries’ investments abroad reached an all-time high of $295 billion in 1996. The investment picture for developed countries is dominated by the United States, which, with $85 billion is by far the largest home country (by a margin of $31 billion over the United Kingdom, the second largest home country), as well as, with $85 billion, the largest recipient country (by a margin of $42 billion over China, the second largest recipient) in 1996 (figure 5). Around two-fifths of United States outflows go to the European Union and around 30 per cent to developing countries. Growing consumer markets have encouraged United States investments in the latter, while sluggish growth in the former has led to a decrease in its share of United States outflows. Investment flows into the United States — mostly in the form of M&As — were stimulated by its strong and sustained growth performance and potential for high profits. Western Europe received $105 billion in inflows and invested $176 billion abroad in 1996. More European Union investment is now directed to non-European Union countries than in 1992, when the internal market was completed.

Although developed countries received a record $208 billion in FDI flows in 1996, there has been a steady decline in their share of global inflows since 1989. That decline can be attributed partly to the increasing attractiveness of developing countries, especially those that are growing rapidly and have large domestic markets. Furthermore, some developed countries that are large outward investors are small investment recipients, especially in relation to the size of their economies; notable examples are Germany, Italy and Japan. And as the rationalization of production through FDI in response to regional integration arrangements among developed countries (notably, the European Union) has reached a high level, firms are turning increasingly towards untapped markets found mostly in the developing world.

In light of the above, it is not surprising that developing countries received $129 billion of FDI inflows in 1996 and invested $51 billion abroad — both amounts are all-time highs. Their share of world inflows rose to 37 per cent in 1996 (from 30 per cent in 1995), while their share of outflows was 15 per cent in that year. With $42 billion, China was the largest developing-country recipient (figure 5); the country’s success can be attributed mostly to its large and growing domestic market, “soft landing” and macroeconomic reforms, as well as to measures to promote investment in provinces other than those in the coastal areas. Every developing region saw an increase in inflows. Even the 48 least developed countries experienced an increase in inflows of 56 per cent in 1996, to $1.6 billion.

With $81 billion in inflows in 1996, South, East and SouthEast Asia received about two-thirds of the developing-country total in that year. The 25 per cent increase in these inflows over 1995 was also in sharp contrast with the large decline in the rate of growth of exports and, to a lesser extent, of the gross domestic product, in that year. China accounted for over two-fifths of the $16 billion increase in investment inflows in the region. Next to China, Singapore was the second largest investment recipient, with inflows worth $9 billion, exceeding the combined inflows of the other newly industrializing economies (Hong Kong, China, Republic of Korea and Taiwan Province of China). Flows into Hong Kong, China, were $2.5 billion in 1996. Foreign-investor confidence in Hong Kong, China, after its reversion to China on 1 July 1997 is strong, as indicated by a number of surveys of foreign (and local) companies. Indonesia, Malaysia, Philippines and Thailand together received some $17 billion in 1996, an increase of 43 per cent over 1995.

Investment flows into Latin America and the Caribbean increased by 52 per cent in 1996, the highest increase of any developing region, to a record level of nearly $39 billion. Far-reaching changes in the region’s FDI regimes — both at the national level and through the conclusion of bilateral investment treaties — have certainly contributed to this performance. Even during the turbulence in portfolio investment flows into that region in 1994 and 1995, FDI flows registered small but steady increases. Latin America and the Caribbean now account for 30 per cent of all developing country inflows. Investment inflows into Argentina tripled in 1996 to $4.3 billion, propelled by the country’s membership in MERCOSUR (which contributed particularly to automobile investments), the liberalization of mining legislation and privatization schemes. But the most noteworthy performance has been that of Brazil. With nearly $10 billion, Brazil has surpassed Mexico (with around $8 billion) as the star performer in Latin America in 1996. (In the first four months of 1997, inflows were over $4 billion — two and a half times higher than inflows in the same period in 1996.) This represents a dramatic reversal: in 1992, with $2 billion, Brazil ranked third in the region (after both Mexico and Argentina). The upswing in Brazil’s inflows is the outcome of large investments in automobiles (in the context of intra-regional production rationalization triggered by MERCOSUR) and the reactivation of its privatization programme. Foreign-investor confidence in Brazil (and in the region as a whole) is high: in a recent survey, company executives expressed more confidence in Latin America’s prospects now than five years ago, placing Brazil, Mexico and Chile in top places.

Africa continues to receive small levels of investment flows (nearly $5 billion in 1996), an increase of only 5 per cent, the smallest of any developing region. On average, Africa’s share of developingcountry inflows has more than halved between 1986-1990 and 1991- 1996 — to 5 per cent in the latter period. Political unrest, armed conflict, low domestic investment levels and frequent changes in economic policies that affect business calculations of expected risks and returns have contributed to this relative decline. However, Africa’s investment performance looks less gloomy when put into perspective. In relation to the size of a number of economies, those investments can be fairly significant. For the region as a whole, the ratio of investment inflows to gross fixed capital formation was 5.4 per cent, compared with 5.5 per cent for Asia and 5.9 per cent for Western Europe during the first half of the 1990s. Putting the size of Africa’s FDI stock in relation to the size of Africa’s domestic market (GDP) yields a share of 10 per cent — compared with 14 per cent for Asia, 18 per cent for Latin America and the Caribbean and 13 per cent for Western Europe in 1995. While these figures suggest that the significance of the investment that Africa receives (without the benefit of large intra-regional investment) is certainly not negligible, they do not say anything about Africa’s need for investment nor, for that matter, the continent’s potential.

After large disinvestments in West Asia in 1995 that resulted in negative inflows, particularly in Saudi Arabia and Yemen, inflows attained a level of nearly $2 billion in 1996. Excluding these two countries, investment flows into West Asia show a much more stable trend. In fact, the volatility of inflows to these two countries — albeit important ones — masks considerable improvements in the investment performance of other countries in the region in response to successful efforts to create business-friendly environments.

In 1996, FDI flows to Central and Eastern Europe experienced a decline — to $12 billion from $14 billion in 1995, partly reflecting declines in privatization-related investments in Hungary and the Czech Republic. As long as investment flows to that region depend to a large extent on the participation of foreign investors in privatization programmes, a certain degree of “lumpiness” — yearto-year volatility — is to be expected. The decline might also stem from other problems related to the transition to a market economy. Foreign investors, for example, might have overestimated the region’s ability to absorb investments and might have temporarily shelved their plans for expansion. However, despite the decline, flows in 1996 were still more than twice as high as the annual average during 1992-1994. The estimated FDI stock in Central and Eastern Europe was $46 billion in 1996 — almost comparable to the 1996 investment flows to China ($42 billion).

Substantial flows of foreign portfolio equity investment to emerging markets is a recent phenomenon dating only from the early 1990s. The year 1993 was the watershed for such flows when their level trebled, to $45 billion, from the previous year. However, the level of these flows fell in the two subsequent years in response to the Mexican peso crisis — by 27 per cent and 2 per cent in 1994 and 1995, respectively — but recovered in 1996. The volume of new equity raised on international capital markets by emerging markets in that year increased by 34 per cent, reaching some $15 billion. In principle, foreign portfolio equity investment and direct investment are quite distinct. By definition, foreign portfolio equity investment is distinguished from FDI by the degree of management control that foreign investors exercise in a company. Portfolio equity investors usually provide only financial capital without any involvement in a company’s management, and typically have a shorter-term investment horizon than direct investors.

Two major factors lie behind the rise in foreign portfolio equity investment flows into emerging markets: the liberalization and globalization of financial markets and the concentration of substantial financial resources in the hands of institutional investors. Investments into emerging markets have been facilitated by the rapid provision of market information made possible by improvements in communications technology and the willingness of portfolio equity investors to bear greater risks in the expectation of reaping higher returns in these new and fast-growing markets. The higher returns have been made possible by the sustained superior growth performance of emerging markets in comparison to that of developed economies during the 1990s.