World Investment Report 2019

Key Messages

Global foreign direct investment (FDI) flows continued their slide in 2018, falling by 13 per cent to $1.3 trillion

The decline – the third consecutive year’s fall in FDI – was mainly due to large-scale repatriations of accumulated foreign earnings by United States multinational enterprises (MNEs) in the first two quarters of 2018.

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FDI flows to developed economies reached the lowest point since 2004, declining by 27 per cent

Inflows to Europe halved to less than $200 billion, due to negative inflows in a few large host countries as a result of funds repatriations and to a sizeable drop in the United Kingdom. Inflows in the United States also declined, by 9 per cent to $252 billion.

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Flows to developing countries remained stable, rising by 2 per cent while those to transition economies continued its decline

As a result of the increase and the anomalous fall in FDI in developed countries, the share of developing countries in global FDI increased to 54 per cent, a record.

FDI flows to economies in transition continued their downward trend in 2018, declining by 28 per cent to $34 billion, driven by a 49 per cent drop in flows to the Russian Federation.

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The tax-driven fall in FDI was cushioned by increased transaction activity in the second half of 2018

The value of cross-border merger and acquisitions (M&As) rose by 18 per cent, fueled by United States MNEs using liquidity in their foreign affiliates that was no longer encumbered by tax liabilities.

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In 2019, FDI is expected to see a rebound in developed economies as the effect of the tax reforms winds down

Greenfield project announcements – indicating forward spending plans – also point at an increase, as they were up 41 per cent in 2018 from their low 2017 levels. Despite this, projections for global FDI show only a modest recovery of 10 per cent to about $1.5 trillion, below the average over the past 10 years. The underlying FDI trend remains weak. Trade tensions also pose a downward risk for 2019 and beyond.

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The underlying FDI trend has shown anemic growth since 2008

FDI net of one-off factors such as tax reforms, megadeals and volatile financial flows has averaged only 1 per cent growth per year for a decade, compared with 8 per cent in 2000–2007, and more than 20 per cent before 2000. Explanations include declining rates of return on FDI, increasingly asset-light forms of investment and a less favourable investment policy climate.

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The long-term slide of greenfield investment in manufacturing halted in 2018

The value of announced projects up 35 per cent from the low value in 2017. Among developing countries – where manufacturing investment is key for industrial development – the growth was mostly concentrated in Asia and pushed up by high value projects in natural resource processing industries.

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The number of State-owned MNEs (SO-MNEs) stabilized, and their acquisitions abroad slowed down

There are close to 1,500 SO-MNEs, similar to 2017. Their presence in the top 100 global MNEs increased by one to 16. The value of their M&A activity shrank to 4 per cent of total M&As in 2018, following a gradual decline from more than 10 per cent on average in 2008–2013.

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Much of the continued expansion of international production is driven by intangibles

Non-equity modes of international production are growing faster than FDI, visible in the relative growth rates of royalties, licensing fees and services trade. The top 100 MNE ranking for 2018 confirms that industrial MNEs are sliding down the list, with some dropping out.

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MNEs in the global top 100 account for more than one third of business funded R&D worldwide

Technology, pharmaceutical and automotive MNEs are the biggest spenders. The R&D intensity (relative to sales) of the developing country top 100 is significantly lower. International greenfield investment in R&D activities is sizeable and growing.

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A significant part of investment between developing countries (South–South FDI) is ultimately owned by developed-country MNEs

New data on the global network of direct and indirect bilateral FDI relationships shows the important role of regional investment hubs in intraregional FDI and in South–South FDI. Indirect investment also has implications for the coverage of international investment agreements.

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FDI flows to Africa rose by 11 per cent to $46 billion

Flows increased despite declines in many of the larger recipient countries. The increase was supported by continued resource-seeking inflows, some diversified investments and a recovery in South Africa after several years of low-level inflows.

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Flows to developing Asia, the largest recipient region, were up 4 per cent

In a sign of continued dynamism, greenfield project announcements in the region doubled in value, recovering from their 2017 pause.

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FDI in Latin America and the Caribbean was 6 per cent lower

Failing to maintain momentum after the 2017 increase halted a long slide. FDI in the region is still 27 per cent lower than during the peak of the commodities boom.

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FDI flows to structurally weak and vulnerable economies continued to account for less than 3 per cent of the global total

Flows to the least developed countries recovered from their 2017 fall, back to $24 billion, the average for the decade.

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FDI flows to developed economies reached the lowest point since 2004

Declining by 27 per cent. Inflows to Europe halved to less than $200 billion, due
to negative inflows in a few large host countries as a result of funds repatriations
and to a sizeable drop in the United Kingdom.

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FDI flows to economies in transition continued their downward trend

Declining by 28 per cent to $34 billion, driven by a 49 per cent drop in flows to
the Russian Federation.

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New national investment policy measures show a more critical stance towards foreign investment

In 2018, some 55 economies introduced at least 112 measures affecting foreign investment.

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Screening mechanisms for foreign investment are gaining importance

Since 2011, at least 11 countries have introduced new screening frameworks and at least 41 amendments have been made to existing regimes.

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Nevertheless, attracting investment remains a priority

The majority of new investment policy measures still moved in the direction of liberalization, promotion and facilitation.

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International investment policymaking is in a dynamic phase, with far-reaching implications

In 2018, countries signed 40 international investment agreements (IIAs). For at least 24 existing treaties, terminations entered into effect.

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IIA reform is progressing, but much remains to be done

Almost all new treaties contain numerous elements in line with UNCTAD’s Reform Package for the International Investment Regime.

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IIA reform actions are also creating new challenges

New treaties aim to improve balance and flexibility, but they also make the IIA regime less homogenous.

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Sustainable capital market trends

Capital market policies and instruments designed to promote the integration
of sustainability into business and investment practices are transitioning from
niche to mainstream.

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Special economic zones (SEZs) are widely used in most developing and many developed economies

Within these geographically delimited areas governments facilitate industrial activity through fiscal and regulatory incentives and infrastructure support. There are nearly 5,400 zones across 147 economies today, up from about 4,000 five years ago, and more than 500 new SEZs are in the pipeline. The SEZ boom is part of a new wave of industrial policies and a response to increasing competition for internationally mobile investment.

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SEZs come in many types

Basic free zones focused on facilitating trade logistics are most common in developed countries. Developing economies tend to employ integrated zones aimed at industrial development, which can be multiindustry, specialized or focused on developing innovation capabilities. The degree and type of specialization is closely linked to countries’ level of industrialization, following an SEZ development ladder.

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Many new types of SEZs and innovative zone development programmes are emerging

Some focus on new industries, such as high-tech, financial services, or tourism – moving beyond the trade- and labour-intensive manufacturing activities of traditional SEZs. Others focus on environmental performance, science commercialization, regional development or urban regeneration.

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International cooperation on zone development is increasingly common

Many zones in developing countries are being built through bilateral partnerships or as part of development cooperation programmes. Regional development zones and cross-border zones spanning two or three countries are becoming a feature of regional economic cooperation.

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SEZs can make important contributions to growth and development

They can help attract investment, create jobs and boost exports – both directly and indirectly where they succeed in building linkages with the broader economy. Zones can also support global value chain (GVC) participation, industrial upgrading and diversification. However, none of these benefits are automatic.

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In fact, the performance of many zones remains below expectations

SEZs are neither a precondition nor a guarantee for higher FDI inflows or GVC participation. Where they lift economic growth, the stimulus tends to be temporary: after the build-up period, most zones grow at the same rate as the national economy. And too many zones operate as enclaves with limited impact beyond their confines.

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Only a few countries regularly assess the performance and economic impact of zones

Doing so is critical, because the turnaround of unsuccessful SEZs requires timely diagnosis, especially when there has been a significant level of public investment in zone development. UNCTAD’s SEZ Sustainable Development Profit and Loss Statement (P&L) can guide policymakers in the design of a comprehensive monitoring and evaluation system.

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The decades-long experience with SEZs provides important lessons for modern zone development:
  • Strategic design of the SEZ policy framework and development programme is crucial. Zone policies should not be formulated in isolation from their broader policy context, including investment, trade and tax policies. The types of zones and their specialization should build on existing competitive advantages and capabilities. And long-term zone development plans should be guided by the SEZ development ladder.
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Looking ahead, SEZs face new challenges:
  • The sustainable development agenda increasingly drives MNEs’ strategic decisions and operations, which should be reflected in the value proposition that SEZs market to investors. Modern SEZs can make a positive contribution to the ESG performance of countries’ industrial bases. Controls, enforcement and services (e.g. inspectors, health services, waste management and renewable energy installations) can be provided more easily and cheaply in the confined areas of SEZs.
    SEZs are traditionally big employers of women, with about 60 per cent female employees on average. Some modern zones are implementing gender equality regulations, such as anti-discrimination rules, and support services, such as child care and schooling facilities, setting new standards for SDG performance.
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Finally, the 2030 Agenda to achieve the Sustainable Development Goals (SDGs) provides an opportunity for the development of an entirely new type of SEZ: the SDG model zone

Such zones would aim to attract investment in SDG-relevant activities, adopt the highest levels of ESG standards and compliance, and promote inclusive growth through linkages and spillovers.

The recommendations in this report aim to provide guidance for policymakers in their efforts to revitalize and upgrade existing zones, and to build new ones that avoid the pitfalls of the past and are prepared for the challenges ahead. The key objective should be to make SEZs work for the SDGs: from privileged enclaves to sources of widespread benefits.

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