Transnationality. Cross-border Mergers and Acquisitions. Global Outflows. Global Inflows: The Foreign Direct Investment Network.

Worldwide foreign direct investment (FDI) inflows by transnational corporations (TNCs) rose for the seventh consecutive year in 1997, according to the World Investment Report 1998: Trends and Determinants (WIR98), published by the United nations conference on Tarde and Development. Accounting for 90 per cent of all global outflows, developed countries also absorbed nearly two thirds of all inflows. The United States invested $115 billion abroad during 1997 and received $91 billion in inflows, accounting for more than one fifth of global inflows. In contrast, for the second successive year, Germany registered net FDI withdrawals. Japan invested $26 billion aborad and received $3 billion in 1997, a record figure, though still low compared to other developed economies. Outflows from the European Union reached $180 billion in 1997. However, FDI in developing countries has been catching up. On 1997, FDI flows to developing countries rose to $149 billion, accounting for 37 per cent of all global FDI, as compared to 17 percent ($34 billion) in 1990.

The eight in an annual series, WIR98 surveys FDI trends around the world, compiling data from 170 countries, and analyses the factors determining these investment flows, providing a comprehensive picture of the rapidly changing landscape of global business. Worldwide cross-border mergers and acquisitions (M&As) - mostly in banking, insurance, chemicals, pharmaceuticals and telecommunications - accelerated inflows to developed countries, which rose by almost a fifth, to $233 billion. Aimed at the global strategic positioning of firms in key industries, M&As reveal the prevailing strategies of TNCs: divesting non-core activities and strengthening competitive advantages through acquisitions in core activities.

The world's 100 largest TNCs have become increasingly globalized, and show a high degree of transnationality in terms of foreign assets, sales and employment. Generally, firms at the top of the composite transnationality index are from countries with small domestic markets. The top 50 TNCs headquartered in developing countries are catching up rapidly in their efforts to transnationalize. They have built up their foreign assets almost seven times faster than the world's top 100 TNCs between 1993 and 1996.

Latin America now tops developing regions in FDI growth. The region invested a record $9 billion abroad and received $56 billion - an increase of 28 per cent over 1996. The increase in inflows accounted for two thirds of the overall increase in inflows to all developing countries. Apart from sustained economic growth and good macroeconomic performance, key factors in the region's FDI boom were trade liberalization, wide-ranging privatization and deregulation.

Attracting more than $16 billion in inflows, Brazil emerged as the region's champion in 1997, surpassing Mexico with $12 billion and Argentina with $6 billion. Despite the growing role of Asian and intra-regional FDI, the United States is still the largest investor in Latin America and the Caribbean, with its investment in the region reaching $24 billion in 1997, mostly in automobiles, electronics, apparel and other manufacturing.

The recent FDI boom in Latin America has also been accompanied by concerns over a negative balance-of-payments impact. WIR98 predicts that, in the longer ran, the strengthened export orientation of foreign affiliates will help to improve current account imbalances if complementary policies to strengthen domestic capabilities are also pursued.

After stagnating for several years, Central and Eastern European economies experienced a turn-round in 1997, receiving a record $19 billion in FDI flows, 44 per cent more than the previous year. The Russian Federation was the leading recipient, mainly in natural resources and infrastructure development, as well as the leading outward investor. In the other economies, most of the FDI growth occurred in manufacturing and services, while outflows from Central and Eastern Europe more than tripled in 1997.

The FDI pattern in the region remains uneven, states WIR98, reflecting the diverse experiences of countries in the transition to market-based economies, the strengthening of regulatory and institutional frameworks relevant for TNC operations, and privatization efforts. Central and Eastern Europe's share in world inward FDI stock is still low: 1.8 per cent in 1997.

Africa still trails other developing regions in attracting FDI. Excluding South Africa, the continent's share in FDI flows to developing countries was just 3 per cent. However, investment in Africa has stabilized at a significantly higher level than at the beginning of the 1990s: an average of $5.2 billion during 1994-1996, compared to an average of $3.2 billion at the beginning of the decade. In 1997, inflows were $4.7 billion, almost unchanged from the previous year. Africa remains a highly profitable investment location as companies receive rates of return on their investments that by far exceed those in other developing regions.

A group of seven countries - Botswana, Equatorial Guinea. Ghana, Mozambique, Namibia, Tunisia and Uganda - stand out in terms of relative FDI inflows and their growth during 1992-1996, not only in comparison to other African countries, but also to developing countries as a whole. While natural resources are an important determinant for FDI flows into most of these countries, they are by no means the only explanation for their relative success in attracting FDI. What these "front-runner" countries have in common is significant progress in improving their regulatory FDI frameworks, as well as major advances in strengthening political and macroeconomic stability.

The differences in FDI performance among countries can be explained in the determinants key to TNCs in their choice of investment locations. The principal determinants of the location of FDI are policy framework, business facilitation measures and economic factors of host countries. The growing role of FDI in the world economy is reflected by the efforts of countries to facilitate it. Much of the inward FDI of the 1960s and 1970s was drawn by large national markets for manufacturing products, sheltered from international competition by tariff barriers and quotas. Since the mid-1980s, an overwhelming majority of countries have introduced measures to liberalize FDI frameworks, with positive effects on inward investment.

Globalization and FDI liberalization have exerted mutually reinforcing pressures on each other and have led to the proliferation of bilateral treaties and the creation of new regional markets and investment areas. During 1997, 151 changes in FDI regulatory regimes were made by 76 countries, 89 per cent of them in the direction of creating a more favourable environment for FDI, particularly in telecommunications, broadcasting and energy industries that used to be closed to foreign investors. The network of bilateral investment treaties and double taxation treaties is expanding as well. now totalling 1,513 and 1.794 agreements, respectively.

The forces driving globalization are also changing the ways in which TNCs pursue their objectives for investing abroad, as witnessed by the growing number of firms that are becoming transnational. When it comes to the economic determinants, firms that undertake competitiveness-enhancing FDI seek not only cost reduction and bigger market shares, but also access to technology and innovative capacity. These resources, as distinct from natural resources, are "created assets". Possessing such assets is critical for firms' competitiveness in a globalizing economy. Consequently. the rise in the importance of created assets is, according to WIR98, the single most important shift among the economic determinants of FDI location in a liberalizing and globalizing world economy.

Did the Asian Crisis Have an Impact?

According to WIR98, not greatly. Global FDI inflows rose by 19 per cent, to $400 billion, while outflows increased by 27 per cent, to $424 billion - a record level that is projected to be surpassed in 1998. Annual world inflows have nearly doubled since 1990 and are now seven times the amount recorded in 1980.

Foreign direct investment has remained a source of relative stability in capital flows to developing countries. Unlike other net resource flows such as official development assistance, FDI inflows increased in 1997, with no developing region experiencing a decline in the level of inflows. FDI flows to the region have been quite resilient in the face of the Asian financial crisis, continuing to add to the capital stock of the affected countries, while other capital flows, including bank lending and portfolio equity investment, fell sharply and even turned negative this past year.

With $87 billion in 1997, Asia and the Pacific accounts for nearly three fifths of the FDI inflows received by all developing countries and for over a half of the developing country FDI stock. China, attracting a record-level $45 billion, absorbed the lion's share of FDI, which contributed to the 9-per-cent increase in total FDI flows to the region in 1997. However, China's current FDI boom, now in its sixth consecutive year, may come to an end, as the leading Asian economies investing in China - particularly Hong Kong and Japan - struggle with the economic downturn. The five Asian economies most affected by the financial crisis - Indonesia, Korea, Malaysia, the Philippines and Thailand - saw their combined FDI in-flows remain at a level almost unchanged from that in 1996.

With inflows totalling $2.6 billion in 1997, largely concentrated in oil-producing Kazakhstan and Azerbaijan, Central Asia has become a more important destination for FDI than West Asia which received $1.9 billion in 1997. Overall, FDI outflows from Asia and the Pacific increased by 9 per cent in 1997 to $50.7 billion. The biggest investor is Hong Kong and China, with an outward stock of $137.5 billion in 1997.

The Asian crisis has changed a number of factors that influence FDI in the affected countries, at least in the short and medium terms. The FDI pattern emerging in Asia and the Pacific is chained by a decline in intra-regional investment, as many of the region's TNCs grapple with mounting debts and other difficulties. Many Asian developing countries, including China, Viet Nam and the least developed countries, depend heavily on FDI from other developing Asian countries. According to WIR98, the fundamental features of the region as a destination for FDI remain sound, which suggest not only that its longer-term FDI prospects remain positive, but that they may even improve as countries strengthen certain aspects of their economies in response to the crisis.