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Date: Thu, 1 Feb 1996 02:08:05 GMT
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Subject: Multinationals Control 2/3 Of World Economy
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** Topic: TNCs Control 2/3 Of World Economy **
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TNCs CONTROL TWO-THIRDS OF WORLD ECONOMY
TNCs Control Two-Thirds of World Economy
By Chakravarthi Raghavan
The world's transnational corporations account for two-thirds of
the world trade in goods and services, and foreign direct
investment, even though concentrated in a few South countries,
has now superseded trade as the most important mechanism for
international economic integration, says an UNCTAD report.
Third World Network Features
29 January, 1996.
Geneva: Foreign direct investment (FDI) by transnational
corporations (TNCs), and the transnational system of production
and international economic transactions is now the most dominant
element of the world economy, with TNCs increasingly influencing
the size and nature of cross-border transactions, says an UNCTAD
(United Nations Conference on Trade and Development) report.
The world's TNCs - 40,000 parent firms and 250,000 foreign
affiliates - account for two-thirds of the world trade in goods
and services, one-third in intra-firm transactions and the other
one-third in inter-firm transactions. This is according to
UNCTAD's World Investment Report 1995 (WIR 1995).
This means that only one-third of world trade in goods and
services is according to free-market-free-trade theories of
In releasing the report at a press conference in mid-December
1995, UNCTAD Secretary-General Rubens Ricupero said that FDI had
now superseded trade as the most important mechanism for
international economic integration.
The report uses this fact to argue for making 'investments' part
of the trade negotiation and rule-making process, through a
Multilateral Investment Agreement (MIA).
At his press conference, Ricupero slightly distanced himself from
the MIA of the WIR, preferring the term 'multilateral framework',
but did not elaborate on the distinction.
The leader of UNCTAD's investment centre team responsible for the
WIR, Karl Sauvant, at a Washington press conference, used the
same terminology of a 'multilateral framework' to argue for an
agreement 'creating new parameters for international business
transactions'. The WIR refers in this regard to the increasing
number of bilateral investment agreements, several between
developing countries themselves or within regional integration
accords, as well as the discussions for plurilateral and
multilateral agreements in the Organisation for Economic
Cooperation and Development (OECD) and so on,to
make the argument in favour of a multilateral agreement.
The report also advocates developing countries liberalising not
only inward FDI, but also outward FDI flows, and says it would be
in the interests of all countries to have a multilateral
agreement to provide stable, predictable and transparent
international investment relations.
Given the growing importance of FDI and international production
for linking national economies and improving economic
performance, and given the transnational nature of this
investment, 'it is unavoidable that a framework will be sought
that provides for stability, predictability and transparency at
the multilateral level.'
It refers in this connection to the built-in World Trade
Organisation (WTO) agenda (of the Marrakesh agreements and the
negotiations provided there for Trade-Related Investment Measures
(TRIMs), Services and so on), the regional efforts (within the
framework of the European Union, the North American Free Trade
Agreement, Mercosur, the Asia Pacific Economic Cooperation) and
the OECD negotiations for a binding Multilateral Agreement on
Investment which, once it is concluded, would be open to non-OECD
members to join.
UNCTAD, the report says, is also helping discussions for an
international framework to advance understanding on this issue,
especially on the development dimensions, and to promote
Without predicting whether these efforts would lead in the
foreseeable future to a comprehensive multilateral framework, the
WIR asserts that such a framework when established could well
rival in importance, the international trade framework created by
establishing the General Agreement on Tariffs and Trade (GATT) 50
years ago, and setting parameters within which TNCs could
maintain or increase their competitiveness and countries could
improve economic performance.
But whether or not there is a difference of substance between
negotiations for a framework (that conceptually would imply a
large leeway for individual governments to set their own rules,
to suit their own conditions) and a multilateral agreement that
would give rights to the TNCs to 'invest' in any country for
production of goods and services and 'discipline' governments
against interference with these rights, the European Union (the
leading exponent of a WTO investment agreement) promptly welcomed
the WIR, but called for a WTO working group to make progress on
Incentives for investment
The WIR also details the number of incentives that developed and
developing countries offer to attract FDI to their countries, or
particular regions within the country, and says that 'unbridled
competition among governments in this area can lead to abuses, as
the world experienced in the inter-war years through successive
rounds of currency devaluations in a beggar-my-neighbour attempt
to boost exports, and the more recent export-credit competition.'
Some incentives could lead to waste of governmental financial
resources and economic distortions, the WIR says, and advocates
an international eminent persons group on incentives to be set up
to make recommendations.
World sales generated by foreign affiliates of TNCs amounted to
$5.2 trillion in 1992, exceeding the $4.9 trillion of world
exports of goods and non-factor services in that year. During
1991-1993, the world FDI stock grew twice as fast as world trade
and which again was one and a half times faster than world
The world outward FDI stock at the end of 1994 is estimated to be
$2.4 trillion, with the industrialised countries as a whole
accounting for about three-quarters of this.
Total FDI outflows to all countries in 1994 is put at $224
billion by the WIR - compared to the $208 billion in 1993
(according to a press release) and $222 billion according to the
WIR review. An official of the division explained this as due to
statistical discrepancy and lack of uniform international
The WIR projects FDI outflows in 1995 at $230 billion, with 15%
of this originating in developing countries.
The United States was both the largest source of outward
investment ($46 billion in 1994, down from $69 billion in 1993)
and the largest inward flows ($49 billion in 1994, up from $41
billion in 1993). The stock of FDI in the US in 1994 is estimated
to be more than $500 billion or 7% of its gross domestic product
(GDP), while the outward FDI of US TNCs is $610 billion (9% of
its GDP) or about a quarter of the world FDI stock.
While some 34,353 TNCs, with 93,311 affiliates, are based in the
industrialised countries, some 3,788 with 101,139 affiliates are
based in the developing countries. But the WIR definition of
affiliates covers any kind of relationships between parent and
'affiliate', and makes comparisons difficult.
FDI flows concentrated in a few South countries
Developing countries are now increasingly attracting FDI,
continuing a trend that began in 1990, with the 1994 FDI flows to
the developing countries reaching $84 billion or 37% of the world
FDI inward flows.
But the FDI flows continue to be concentrated in a few countries
of the South, with China's $34 billion inflows in 1994 being the
second largest and accounting for 40% of all flows into the
developing world. But the Chinese figures may be over-valued by
about a quarter because of 'round-tripping' and some
double-counting. China though is more selective in the FDI flows
The Asia-Pacific region (which now accounts for some 70% of
developing country FDI stock) got $61 billion in 1994. While
China and South-East Asia were at the forefront, the Pacific
Island economies and South Asian countries are lagging behind,
according to the WIR 1995.
Inward flows into Latin America and the Caribbean are fragile and
depend very much on privatisation programmes (which don't create
new production, though some with additional FDI may involve
Flows into the region increased only marginally in 1994, to some
$40 billion, largely shaped by privatisation programmes open to
foreign investors. Argentina, the largest recipient in 1993 with
$6 billion inflows, saw a sharp decline to $1.2 billion in 1994.
Peru with $2.7 billion, mostly privatisation FDI, and Chile with
$1.8 billion saw a sharp upswing.
FDI flows into Brazil increased from $891 million in 1993 to
$1,504 million in 1994. The WIR suggests and argues for further
privatisation in Brazil which it estimates would bring in
substantially more FDI.
[The increase in 1994 was an outcome of the successful Real plan,
the more liberal attitude to all kinds of foreign inflows and the
effects on the macro-economy. But in the aftermath of the Mexican
crisis, Brazilian authorities became more cautious and some
Brazilian analysts suggest that Brazil won't precipitately follow
the neo-liberalism of Mexico and Argentina.]
Africa, the WIR stresses, remains marginalised. Despite the
considerable efforts of African governments to undertake far-
reaching domestic policy reforms and improving their domestic
frameworks for investment, and the higher returns for investors
in Africa, the FDI boom in other regions has largely bypassed
that continent. Sub-Saharan Africa received only $1.8 billion of
FDI in 1994, while North Africa got $1.3 billion. Most FDI in
Africa also continues to be concentrated in a small number of
countries, endowed with natural resources and especially in oil.
As for Central and Eastern Europe (the WIR definition includes
most of the former Soviet Union, and thus the data is not easily
comparable with data of other organisations), FDI flows reached
$6.3 billion in 1993 and $6.5 billion in 1994, increasing the
total FDI stock in the region to an estimated $22 billion.
Inflows, the WIR says, have slowed down due to lingering economic
recession in some West European countries and the slower
transition to a market economy. The gap between investors'
commitments and implementation in the region also remains high.
The flows are also unevenly distributed.
The report suggests that while the dominant actors on the TNC
scene are the industrialised countries - and more so the US, the
EU (with Germany in the lead within it), Japan, Switzerland -
developing countries are also undertaking outward FDI, accounting
for $33 billion of outflows in 1994. The WIR notes that
developing country-firms, because of the need to remain
internationally competitive, are becoming significant foreign
investors and says that prospects of large increases in FDI by
TNCs headquartered in the South are bright. -
Third World Network
About the writer: Chakravarthi Raghavan is Chief Editor of SUNS
(South-North Development Monitor), a daily bulletin, and the
Geneva representative of the Third World Network.
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