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| Figure 9.3: Foreign capital investment (Billion US$) in developing countries, by region. Source: Industrial development, Global report 1997, UNIDO |
Recent trends in industrial development stress the openness in trade and investments. Today, foreign direct investment (FDI), joint ventures (JV) by transnational corporations (TNC) are the largest foreign investments in industrial development in developing countries (UNCTAD, 1997) (see also Chapter 2, Section 2.2.4 and Sections 5.3 and 5.4 in Chapter 5). However, foreign capital accounts for only 6% (1995) of total investments in developing countries (UNIDO, 1997). In developing countries public spending is responsible for about a quarter of national income (World Bank, 1997a), while the role has relatively declined over the past 25 years (UNIDO, 1997).
Transnational corporations' spending in international investments increased from less than US$100 billion (B$) in the early 1970s to over US$1.4 trillion in 1996 (UNCTAD, 1997). The majority of the funds is still spent in industrialised countries, but an increasing part is spent in developing countries. Foreign industrial investment in developing countries has increased substantially, especially since 1990, as shown in Figure 9.3. Figure 9.3 shows that foreign industrial capital spending is
concentrated in two regions, East Asia and Latin America. These regions have experienced successful industrial growth in the last decade, although concentrated in a small number of countries. Foreign direct investment, a part of the international investments, has grown to 350 B$ in 1996 (UNCTAD, 1997), of which 34% was invested in developing countries (see Figure 9.4).
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| Figure 9.4: Foreign direct investment (Billion US$) in developing countries, by region. Source: Industrial development, Global report 1997, UNIDO |
Previous periods of high growth in FDI were mainly directed to oil producing countries. The current growth of FDI seems to be more diverse, although there is a strong geographic concentration in current FDI. Of the 129 B$ FDI in developing countries, 42 B$ was spent in China, followed by 10 B$ in Brazil (UNCTAD, 1997). Favoured regions are Asia and Latin America, and there are signs of increasing FDI in Africa, although still limited. Important is the increasing FDI from developing countries, especially Asia, which increased to 52 B$ (UNCTAD, 1997). In Asia regional investments seem to be the main driver for industrialisation. FDI in the former Central and Eastern Europe are relatively constant at 12-14 B$, but also concentrated in a few countries (Poland and the Czech Republic). Also, FDI is concentrated in a relatively small number of TNCs. Only a few (from Korea and Venezuela) of the top 100 TNCs are based in developing countries, yet TNCs from developing countries are growing in importance. TNCs seem to be most important in the electronics, automotive, and chemical industries, as well as petroleum and mining. TNCs seem to be more productive than domestic companies (UNIDO, 1997), which may be partly due to more efficient production technologies and practices used. The role of TNCs in industrial development is generally seen as positive, although negative effects may arise from TNC involvement if the market power of the TNC is high.
It appears that future trends in FDI will be sustained, as international trade seems to gain in importance, and as countries are liberalising trade and investment. FDI aims at accessing and developing markets, whereas portfolio equity investment (PEI) is more directed to participating in local enterprises. Following the globalisation trend PEI is also growing, but tends to be more centred on developed markets and to be more fluid. PEI is estimated at 45 B$ (1995) (UNCTAD, 1997).
Small and medium sized enterprises (SMEs) have less access to international financing, and hence rely more on domestic capital and public spending. Even small investments in cleaner production and GHG abatement projects in SMEs are often not done, due to lack of capital, poorly developed banking systems, lack of appropriate financing mechanisms, lack of knowledge (both within the industrial and the financial sectors), technology risks, and management's unwillingness to borrow funds (Van Berkel and Bouma, 1999). These barriers reduce the availability of capital, stimulating investors to keep investment costs low, which may result in the purchasing of second-hand equipment, low quality products, or equipment without modern controls and instrumentation. This may lead to higher operating costs, and environmental impacts. Lack of access to capital and credit is seen as the strongest barrier to the development of SMEs (UNIDO, 1997). Various developing countries have experimented and applied financing schemes for SMEs, e.g. Ecuador, Indonesia, Korea, Malaysia, Pakistan and Tanzania, with varying rates of success (UNIDO, 1997). Trends in foreign investments are relatively easy to monitor. However, domestic capital spending in developing countries/CEITs, especially by SMEs, is more difficult to monitor. Research in some developing countries shows that especially SMEs contribute for a large part to industrial employment, and that in LDCs industrial employment is found in rural areas (Little, 1987; Putterman, 1997; UNIDO, 1997). However, this does not necessarily mean that SMEs are more efficient with regard to capital and resource use (Little, 1987). There is growing evidence that SMEs in some countries may be less efficient with respect to resource use (World Bank, 1997b). Sound market conditions are crucial to create a competitive market in which innovation by SMEs in process technology is stimulated.
The above trends in industrial investments are difficult to translate to technology choice and transfer. It is obvious, though, that increasing international investments influences the rate of technology transfer, although it gives no information on the way and on what technology is transferred. Generally, the majority of investments in many developing countries seem to be in low-technology industries, though the share of high-technology industries is increasing (UNIDO, 1997). Also, there is no hard information available on the role of the markets for environmentally sustainable technologies (including greenhouse gas abatement) (Luken and Freij, 1995).
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