World Investment Report 2018 - Investment And New .

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U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N TEMBARGOThe contents of this Report must notbe quoted or summarized in the print,broadcast or electronic media before6 June 2018, 17:00 GMT.(1 p.m. New York; 7 p.m. Geneva;10.30 p.m. Delhi; 2 a.m. on 7 June, Tokyo)WORLDINVESTMENTREPORT2018INVESTMENT AND NEW INDUSTRIAL POLICIESKEY MESSAGES ANDOVERVIEW

U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N TWORLDINVESTMENTREPORT2018INVESTMENT AND NEW INDUSTRIAL POLICIESKEY MESSAGES ANDOVERVIEWNew York and Geneva, 2018

NOTEThe UNCTAD Investment and Enterprise Division is the focal point in the United NationsSystem for investment and enterprise development. As a global centre of excellence, theDivision conducts leading-edge research and policy analysis, provides technical assistanceto 160 member States and regional groupings, and builds international consensus among the196 member States of the organization. Its mission is to promote investment and enterprise forsustainable and inclusive development.The Division provides, among others,Two flagship products:Seven core services:World Investment ReportInvestment databases and researchWorld Investment ForumNational and internationalinvestment policiesSix key policy frameworks:Investment Policy Framework forSustainable DevelopmentAction Plan for Investing in the SDGsEntrepreneurship Policy FrameworkReform Package for the InternationalInvestment RegimeInvestment promotionResponsible investmentBusiness facilitationEntrepreneurship developmentAccounting and reportingGlobal Action Menu for Investment FacilitationAccounting Development ToolInformation about these products, frameworks and services, as well as the publications ofthe Division, can be found free of charge at UNCTAD’s website (www.unctad.org/diae) or theorganization’s investment policy hub (www. investmentpolicyhub.unctad.org).The copyright of the material in this publication rests with UNCTAD. It may be freely quotedor reprinted, but acknowledgement is requested, together with a reference to UNCTAD andthis Report. A copy of the publication containing the quotation or reprint should be sent to theUNCTAD Secretariat (e-mail: diaeinfo@unctad.org).The Overview is prepared based on the in-depth analysis contained inWorld Investment Report 2018: Investment and New Industrial Policies(United Nations publication, Sales No. E.18.II.D.4).UNCTAD/WIR/2018 (Overview)Copyright United Nations, 2018. All rights reserved. Printed at United Nations, Geneva.iiWorld Investment Report 2018 Investment and New Industrial Policies

PREFACEGlobal flows of foreign direct investment fell by 23 per cent in 2017.Cross-border investment in developed and transition economiesdropped sharply, while growth was near zero in developing economies.With only a very modest recovery predicted for 2018, this negativetrend is a long-term concern for policymakers worldwide, especially fordeveloping countries, where international investment is indispensablefor sustainable industrial development.This troubling global investment picture underscores the importanceof a conducive global investment environment, characterized by open,transparent and non-discriminatory investment policies. The themechapter of the report shows that over 100 countries have adoptedindustrial development strategies in recent years. New types of industrialpolicies have emerged, responding to the opportunities and challengesassociated with a new industrial revolution. The report presents optionsfor investment policy tools in this new environment.I commend this year’s World Investment Report as a timely contributionto an important debate in the international investment and developmentcommunity.António GuterresSecretary-General of the United NationsPrefaceiii

FOREWORDWe are at the dawn of a fourth industrial revolution, propelled by frontier technologiesand robotization advances that make production better, cheaper and faster thanever before. This new industrial revolution offers enormous opportunities foreconomic growth and sustainable development with potential benefits on a scalethat is difficult to imagine. New technologies promise possibilities of industrialupgrading and leapfrogging. Cheaper transportation and communication, coupledwith more efficient logistics, can also help developing countries better link to globalvalue chains. Some of the most advanced emerging economies are already on theverge of becoming global technological leaders in a number of industries.Yet, the new economic age and the accelerating pace of technological innovationcould also result in serious economic disruption and more inequality. Existinginvestment patterns, for instance, might go through profound and far-reachingchanges, in terms of both flows and content. Last year’s World Investment Reporthighlighted the emerging structural impact of the digital economy on foreign directinvestment.In this context, developing countries, and least developed countries in particular,face considerable challenges. They range from structural constraints, such as thelack of adequate infrastructure and scarce access to finance, to strategic issues.Offshoring and relocation towards destinations offering cheaper domestic labourbecome less relevant in a world of increasingly automated manufacturing. At thesame time, improving living conditions requires creating jobs, which in turn still reliesheavily on manufacturing. Developing countries with small markets face additionalpressure on their investment policies as companies increasingly look for investmentlocations offering the best conditions to deliver new and high-quality productsrapidly, close to the customer and through flexible production processes.Challenges are particularly pronounced in Africa. Despite a period of strongeconomic growth, the level of economic transformation has been low. The share ofmanufacturing in the GDP of African countries is small, and it has further declinedor stagnated over the past decade. However, manufacturing has the potential ofcreating a large number of jobs in the formal sector and therefore raising livingconditions.ivWorld Investment Report 2018 Investment and New Industrial Policies

Confronted with an altering global economic landscape and deep structuralreconfiguration, governments around the globe have invigorated their industrialpolicies in recent years. There is a growing consensus that structural transformationdoes not occur by itself, but rather requires a proactive policy that facilitates atransition towards new sectors and activities with higher productivity and more valueadded, while fostering sustainable and inclusive development.As they pursue multifaceted objectives, new industrial policies have become morecomplex and intertwined, wielding multiple instruments, from trade to education.Central to these industrial policies is foreign investment. Investment builds andupgrades industries. It connects to international markets. It also drives essentialinnovation and competitiveness. All in all, the current debate is less about whethergovernments should intervene, but rather how.Industrial policies and accompanying investment policies need to revolve around aclearly articulated vision but, at the same time, they have to contain practical anddetailed recommendations, a clear timeline for action and a division of responsibilitiesamong the public and private sectors.Against this background, the World Investment Report 2018 aims to provide a betterunderstanding of the interaction between new industrial policies and investmentpolicies. It provides an overview of industrial policy models – based on an inventoryof industrial policies adopted by more than 100 countries over the last decade –and the role of investment policies within each model. The Report illustrates howinvestment policy instruments are used differently across various models andsuggests ways to improve the impact of industrial policy through more effectiveand efficient investment policies. Finally, the Report offers recommendations toupdate existing investment policy instruments, including investment incentives,special economic zones, investment facilitation and foreign investment screeningmechanisms.Building from this Report, UNCTAD will host a discussion of the interface betweenindustrial and investment policies at its 6th World Investment Forum, which will takeplace in Geneva on 22–26 October 2018.Together, let us work towards finding solutions to ensure that economic changedoes not create new hardships, but benefits that are widely shared and lead to abetter life for all.Mukhisa KituyiSecretary-General of UNCTADKey Messagesv

ACKNOWLEDGEMENTSThe World Investment Report 2018 was prepared by a team led by James X. Zhan.The team members included Richard Bolwijn, Bruno Casella, Hamed El Kady, KumiEndo, Thomas van Giffen, Kálmán Kalotay, Joachim Karl, Hee Jae Kim, Isya Kresnadi,Guoyong Liang, Anthony Miller, Shin Ohinata, Diana Rosert, William Speller, AstritSulstarova, Claudia Trentini, Elisabeth Tuerk, Joerg Weber and Kee Hwee Wee.Research support and inputs were provided by Jorun Baumgartner, Juan CarlosCastillo, Tiffany Grabski, Josse Jakobsen, Kim Kampel, Melinda Kuritzky, SergeyRipinsky, Stella Sakellaridou, Stefanie Schacherer, Sylvie Somerville, Ilan Strauss,Paul Wessendorp and Linli Yu. Contributions were also made by Marta Kolasinska,Ventzislav Kotetzov, Oktawian Kuc, Mathabo Le Roux, Eduardo Lins, AbrahamNegash and Michelle Ngo.Statistical assistance was provided by Bradley Boicourt, Mohamed Chiraz Baly andLizanne Martinez.The manuscript was edited with the assistance of Caroline Lambert and copyedited by Lise Lingo. Pablo Cortizo designed the charts, maps and infographics; heand Laurence Duchemin typeset the report. Production of the report was supportedby Elisabeth Anodeau-Mareschal, Nathalie Eulaerts, Rosalina Goyena, Jovan Licina,Sivanla Sikounnavong and Katia Vieu.The Report benefited from extensive advice from Harsha Singh on chapter IV. Atvarious stages of preparation, in particular during the expert meetings organizedto discuss drafts, the team received comments and inputs from these experts:Willy Alfaro, Azar Aliyev, Antonio Andreoni, Nathalie Bernasconi, Sjoerd Beugelsdijk,Jonathan Bonnitcha, Damien Charlotin, Manjiao Chi, Xiaolan Fu, Angel GonzalezSanz, Nicolas Jansen Calamita, John Kline, Markus Krajewski, Sarianna Lundan,Gian Maria Milesi-Ferretti, Ted Moran, Rajneesh Narula, Anthea Roberts, MavludaSattorova, Esme Shirlow, Jagjit Singh Srai, Heinz Tüselmann, Gus Van Harten,Markus Wagner and Philip Wooldridge.Also acknowledged are comments received from other UNCTAD divisions as partof the internal peer review process, as well as comments from the Office of theSecretary-General. The United Nations Cartographic Section provided advice forthe regional maps.Numerous officials of central banks, government agencies, international organizationsand non-governmental organizations also contributed to the report.viWorld Investment Report 2018 Investment and New Industrial Policies

TABLE OF CONTENTSPREFACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iiiFOREWORD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ivACKNOWLEDGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viKEY MESSAGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiiOVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1GLOBAL TRENDS AND PROSPECTS. . . . . . . . . . . . . . . . . . . . 1REGIONAL TRENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11INVESTMENT POLICY TRENDS . . . . . . . . . . . . . . . . . . . . . . . 16INVESTMENT AND NEW INDUSTRIAL POLICIES. . . . . . . . . . 23Acknowledgementsvii

KEY MESSAGESchaper 1-2INVESTMENT TRENDS AND PROSPECTS-23Global FDI2017Global foreign direct investment (FDI) flows fell by 23%per cent to 1.43 trillion. This is in stark contrast to theaccelerated growth in GDP and trade. The fall was causedin part by a 22 per cent decrease in the value of crossborder mergers and acquisitions (M&As). But even discounting the large one-offdeals and corporate restructurings that inflated FDI numbers in 2016,the 2017 trendFDI downwarddecline remained significant. The value of announced greenfield investment – anDeveloped 712 bnindicator of future trends – also decreased by 14 per cent. 671 bn 1.43 trillionDevelopingFDI flows to developing economies remained stable at 671 billion, seeing noTransition2005–2017recovery following the 10 per cent drop in 2016. FDI flows to Africa continued to slide, reaching 42 billion, down 21 per centfrom 2016. The decline was concentrated in the larger commodity exporters. Flows to developing Asia remained stable, at 476 billion. The region regainedits position as the largest FDI recipient in the world. FDI to Latin America and the Caribbean rose 8 per cent to reach 151 billion,lifted by that region’s economic recovery. This was the first rise in six years,but inflows remain well below the 2011 peak during the commodities boom. FDI in structurally weak and vulnerable economies remained fragile. Flowsto the least developed countries fell by 17 per cent, to 26 billion. Those tolandlocked developing countries increased moderately, by 3 per cent, to 23billion. Small island developing States saw their inflows increase by 4 percent, to 4.1 billion. 47 bnGrowth in GVCshas stagnatedTop 100lead the wayGenderInward FDI flows to developed economies fell sharply, by 37 per cent, to 712billion. Cross-border M&As registered a 29 per cent decrease, with fewer ofthe megadeals and corporate restructurings that shaped global investmentbalancedleadershipviiiWorld Investment Report 2018 Investment and New Industrial Policieschaper 3

1.43 trillionpatterns in 2016. The strong decrease in inflows wasin large part the effect of a return to prior levels in theUnited Kingdom and the United States, after spikes in2016.FDI flows to transition economies declined by 27 percent, to 47 billion, the second lowest level since 2005.The decline reflects geopolitical uncertainties andsluggish investment in natural resources.FDI downward trendDeveloped 712 bn 671 bnDeveloping2005–2017Transition 47 bnProjections for global FDI in 2018 show fragile growth. Global flows are forecastto increase marginally, by up to 10 per cent, but remain below the average overthe past 10 years. Higher economic growth projections, trade volumes andcommodity prices would normally point to a larger potential increase in globalFDI in 2018. However, risks are significant, and policy uncertainty abounds.Escalation and broadening of trade tensions could negatively affect investmentin global value chains (GVCs). In addition, tax reforms in the United Statesand greater tax competition are likely to significantly affect global investmentpatterns.Growth in GVCshas stagnatedTop 100A decrease in rates of return is a contributor to the investment downturn. Theglobal average return on foreign investment is now at 6.7 per cent, down from8.1 per cent in 2012. Return on investment is in decline across all regions, withthe sharpest drops in Africa and in Latin America and the Caribbean. The lowerreturns on foreign assets may affect longer-term FDI prospects.lead the wayGenderbalancedleadershipFDI activity was lower across all sectors. M&A values were down in the primary,manufacturing and services sectors. The fall in greenfield announcements in2017 was concentrated in services. However, over the past five years, the levelof greenfield projects in manufacturing has been consistently lower than in thepreceding five-year period across all developing regions. This has importantchaper 3implications for industrial RegulationThe sharp fall in global FDI contrasted with the trend in other cross-bordercapital flows. Total capital flows increased from 5.6 to 6.9 per cent of GDP, asbank lending and portfolio investment compensated for the FDI slump.% Capitalflows to developing countries increased modestly, from 4.0 to 4.8 per centof GDP.16%Key Messagesix

FDI 1.43Globaltrillion-23% 2017chaper 1-2 1.43trillionFDI downwardtrend-23GlobalFDI remains the largest external source of finance for developing economies.It FDI 712 bnmakes up 39 per cent of total incoming finance in developing economies% as a 671 bngroup,trendbut less than a quarter in the LDCs, with a declining trend since 2012.FDI downwardDevelopingDeveloped 1.43 trillion 47 bnrate 712 bnofTheexpansion of international production is slowing down. The 671 bnof international production and of cross-border exchanges of factorsmodalitiesDevelopingFDI downwardof productionare gradually shifting from tangible to intangible forms.Sales oftrend 47 bnTransitionforeign affiliates continue to grow but assets and employees are increasingat a 712 bnDeveloped 671 bnslower rate. This could negatively affect the prospects for developing countriesDevelopingtohasattractinvestment in productive capacity.stagnated 47 wth in GVCs2005–2017TransitionGrowth in GVCs has stagnated. Foreign value added in globaltrade (i.e., the imported goods and services incorporated inhas stagnated countries’ exports) peaked in 2010–2012 after two decadesof continuous increases. UNCTAD’s GVC data shows foreignvalue added down 1 percentage point to 30 per cent of hastradestagnatedin 2017. Growth in GVC participation decreased significantly this decadecompared with the last, across all regions, developed and developing. The GVCslowdown shows a clear correlation with the FDI trend and confirms the impactof the FDI trend on global trade patterns.Growth in GVCsGrowth in GVCsTop 100lead the wayTopGender100balancedlead thewayMNEs in the global Top 100 and the developing-economyTop 10084%16%16National investment%policy measuresDEVELOPMENTSMany countries continued policy efforts aimed at attractingchaper 3FDI. In 2017, 65 countries and economies adopted at least126 investment policy measures, of which 84 per cent werefavourable to investors. They liberalized entry conditions%in a number of industries including transport, energy andmanufacturing. They also promoted and facilitated investmentby simplifying administrative procedures, providing incentivesand establishing new special economic zones (SEZs).National investmentWorld Investment Report ization/PromotionLiberalization/Promotionchaper Restriction/RegulationleadershipTop 100 are leading the way towards more gender-balancedGenderboardrooms, although they have a distance to go. On average lead the waybalanced22 per cent of board members of the Top 100s are women,Genderleadershipchaperbetter3than both the S&P average and national averages.balancedleadershipINVESTMENT POLICY16%Investment and New Industrial PoliciesNational investment

y, an increasing number of countries have taken a more critical stance%towards foreign investment. New investment restrictions or regulations in2017 mainly reflected concerns about national security and foreign ownershipNationalof investmentland and natural resources. Some countries have heightened scrutiny ofpolicyforeignmeasurestakeovers, in particular of strategic assets and technology firms. Severalcountries are considering tightening investment screening procedures.18 in 2017Total IIAs3 32216%National investmentInvestment treaty making has reached a turning point. Thenumberpolicymeasuresof new international investment agreements (IIAs) concluded in2017 (18) was the lowest since 1983. Moreover, for the first time,the number of effectiv

Global flows of foreign direct investment fell by 23 per cent in 2017. Cross-border investment in developed and transition economies dropped sharply, while growth was near zero in developing economies. With only a very modest recovery predicted for 2018, this negative trend is a long-term concern for policymakers worldwide, especially for developing countries, where international investment is .

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