Foreign portfolio equity investment (FPEI) is distinguished from foreign direct investment by the investor's degree of management control (UNCTAD, 1998). Portfolio investors typically purchase shares in a company, often through a fund, without any intention of influencing management decisions. The investment horizon of portfolio investors is typically shorter, and the type of investor is more often a financial institution, institutional investor, or insurance company interested in the financial returns. Venture capital is a special type of long-term, high-risk finance with returns usually taken in the form of capital gains and fees rather than dividends (see Section 5.3.3). Venture capital is often focused on early-stage investment in technology-based companies. FPEI and venture capital primarily involve the private sector, although institutions such as the International Finance Corporation, Commonwealth Development Corporation, and U.S.-backed Overseas Private Investment Corporation have promoted venture capital funds in developing countries in an effort to "improve the access of small and medium-sized companies to equity finance and management expertise" (UNCTAD, 1998). FPEI's links to technology transfer are that it makes money available to companies in developing countries, which they in turn can use to purchase equipment and training.
FPEI and Venture Capital Trends
According to UNCTAD (1998), the capitalisation of stock markets in developing countries grew more than tenfold during the period 1986 to 1995, from $171 billion to more than $1.9 trillion (compared to US$13.2 trillion for the industrial economies). Much of the increase came from FPEI flowing into emerging markets in Latin America and Asia, although as with FDI the inward flows were concentrated on relatively few countries. The major factors behind the increased inflows were the liberalisation of stock markets in upper middle-income and large low-income developing countries, the globalisation of financial markets, and the concentration of financial resources in the hands of institutional investors, such as mutual and pension funds and insurance companies.
Overall, FPEI flows to developing countries have fluctuated more widely than FDI flows during the period 1986 to 1995 (UNCTAD, 1998), consistent with the shorter investment horizon of equity investors. After a steep rise, FPEI declined in 1998 because of the financial crisis in Asia, and because high returns in the U.S. market offered a more attractive alternative for many investors. Equity investment in developing countries in that year was US$12 billion, down from $38 billion in 1997 (OECD, 1999c). Foreign portfolio equity investment has provided large sums of money for the expansion of industry in a select group of developing countries, but its volatility suggests that it should be treated with caution when looked to for consistent, stable funding of technology transfer.
Venture capital is more common in the United States than in other OECD member countries. OECD governments invest an estimate $3 billion of risk finance per year in small, technology-based companies, while the private sector venture capital supply was estimated at US$100 billion in 1997 (OECD 1997c). It is not clear how much of this is directed at developing countries or climate-relevant technologies.
|Box 2.2: Impact of the Asian Financial Crisis on International Financial Flows to Asia|
|Economic difficulties experienced by a number of Asian countries since
mid-1997 initially caused great concern that they might spread throughout
the world's financial system, leading in the worst scenarios to a global
depression. In early 1998, the International Chamber of Commerce and the
UNCTAD conducted a study of multinational corporations to determine what
impacts the Asian financial crisis had had on their investment plans in
that region. The survey covered 500 companies, including the world's largest
MNCs in terms of foreign assets; the largest MNCs with origins in developing
countries; and additional businesses with significant operations in Asia.
Banking and finance companies were not surveyed. A total of 198 companies
(40 per cent) responded.
What emerged from the survey is that foreign companies investing in Asia if anything saw the crisis as an opportunity to increase their investment in the region; their confidence in the region remained unchanged despite the turmoil. ICC and UNCTAD noted "... most MNCs typically take a long-term view with respect to their locational decisions and, given the region's past performance and solid fundamentals in a number of respects, this leads them to remain bullish about FDI in Asia. ... Indeed, in the longer-term, the attractiveness of the region is likely to be enhanced as Asian countries overcome their problems and reassert their economic dynamism on the basis of improved fundamental strengths" (ICC, 1998; OECD, 1998a).
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