Leaders or Outsiders: Who Will We Tomorrow?
The UN Conference on Trade and Development (UNCTAD) published its annual report on world investment in autumn 2006. The 2006 World Investment Report was titled “FDI from Developing and Transition Economies: Implications for Development” and provided a global picture of foreign direct investment flows by economies and regions. We are publishing an abridged version of this report in the current issue of our magazine, but we would like to discuss Kazakhstan’s position and prospects in this process.
Reporting about economic successes in recent years, the government presented our country as a leader in terms of attracting foreign direct investment per capita. Considering the population of Kazakhstan, this indicator is indeed quite high. However, we should not forget about the absolute figures which are currently not very impressive.
For example, according to UNCTAD, Kazakhstan attracted foreign direct investment worth $2,092m in 2003, a record $4,113m in 2004 and only $1,738m in 2005. Kazakhstan lagged behind Russia ($14.4bn) and Ukraine ($7.8bn), whereas Azerbaijan came in neck and neck ($1,680m). In general, Kazakhstan attracted only 6.5% of the FDI placed in the CIS during 2005. The drop in the FDI flow can be explained by the state’s policy to strengthen its involvement in the oil sector, which remains one of the most attractive to foreign investors. Even though the move to de-privatise strategic oil assets can be regarded as positive, however, the problem is that Kazakhstan has nothing to offer foreign investors except for the oil and banking sectors. Despite the government’s efforts, our non-extractive sectors do not generate any interest among foreign investors. As a result, in terms of attracting foreign direct investment, Kazakhstan fell from 12th place to 26th out of 141 countries in 2005. This is lower than our country’s performance in 2000 when it was in 23rd place.
Another indicator used in the UNCTAD report is outward foreign direct investment. This term means multinational companies’ investment flowing from their home countries to foreign economies. In other words, this indicator shows a country’s position as a source of foreign investment. The latest trend established by the report is that countries with developing or transitional economies have become active in this process. For example, outward foreign direct investment from these countries reached $133bn in 2005 and accounted for 17% of the global investment flow. This is the highest figure ever recorded by UNCTAD. The growing role of multinational companies from these countries is also proven by the fact that their share in cross-border mergers and acquisitions grew from 4% to 13% in terms of value and from 5% to 17% in terms of the number of deals between 1987 and 2005. These multinational companies’ share in setting up new and expanding existing enterprises exceeded 15% in 2005.
The number of multinational companies based in Brazil, Hong Kong, India, China and South Korea grew from 3,000 to 13,000. The leaders among developing countries in terms of outward investment in 2005 were Hong Kong (China), Russia, Singapore and Taiwan.
These trends are the result of globalisation’s effect on these countries. The more developing economies become increasingly open to international companies the greater competition from foreign multinationals local companies face in the local and foreign markets. In connection with this, there are two aspects of their development strategies. The first aspect is linked to using existing competitive advantages to set up subsidiaries in foreign countries, i.e. the so-called strategy of utilising assets. Another direction is the course to increase assets through buying existing assets (including technology, trademarks, chains, infrastructure, research and development and management), which do not exist in the countries that the multinational originates from. In general, UNCTAD singles out four main arguments for multinationals’ investment decisions: aiming to enter markets, increasing the efficiency of their activities, accessing resources and obtaining existing assets.
On the one hand, by expanding operations abroad, a multinational obtains practical experience on an international level, and on the other hand, gains expertise and technologies to boost its internal advantages. In some circumstances outward foreign direct investment is the only way to gain a position in new markets (for example, in cases where export is hindered by trade barriers). Furthermore, outward foreign direct investment can also contribute towards boosting a company’s effectiveness. A growth in “national outlays”, especially the cost of the workforce, is currently forcing a number of multinationals from East and Southeast Asia to invest in places where outlays are significantly less.
The question arises as to what advantages the base country gains from this. In the right conditions an increase in the competitiveness of the investing company can make for an increase in competitiveness in a given sphere and to the restructuring of the economy in the origin country as a whole. By way of example, we can cite India’s IT industry, the manufacturing of consumer electronics in South Korea and China, and also the manufacturing of computers and semiconductors in Taiwan.
Although outward foreign direct investment entails an outflow of capital from the base country into the receiving country, it can generate a flow of funds in the form of repatriated profits, royalties and licence payments, and also from payments by the receiving country for increasing imports from the base country. Although immediately after the outward investment is made the balance of payments is as a rule negative, it gradually becomes positive. Furthermore, outward foreign direct investment has a delayed, but, as a whole, beneficial effect on the dynamics of internal investment.
Conscious of all these advantages, more and more developing countries and countries with a transitional economy are removing any previous barriers to outward foreign direct investment. Although control over the movement of capital remains in one form or another (mainly with the aim of decreasing the risk of capital flight or financial instability), the current limitations are in the main aimed at restraining not foreign direct investment but other international capital flows. Moreover, in some states, especially in developing countries in Asia, the government is using a whole arsenal of measures to support local companies investing abroad. They include setting up agencies to encourage investment, information support, services to assist in finding partners, financial or fiscal incentives, and also insuring foreign investment.
Returning to Kazakhstan, it is worth noting that the expansion of national companies abroad could resolve several problems at once. On the one hand, it will allow the “restriction” of our market to be overcome by using the markets of the Central Asian states and China, and it will make it possible to curtail outlays by creating and obtaining production capacities there. Our northern neighbour, Russia, also offers a lot of prospects. One the other hand, investment in the existing assets of developed countries would open up access to new technologies, making it possible to extend value-added output in the metallurgical industry and enter global markets with value-added products.
With surplus liquidity and a mass inflow into the country’s economy of petrodollars, Kazakhstan will sooner or later face the problem of capital flight. Our government, then, would be acting in a very farsighted manner if it took measures now to ensure that these flows are controlled and targeted. However, all that is in theory. For the moment, Kazakhstan occupies the second last position (out of 141 countries) in the rating of the Outward FDI Performance Index, allowing Tajikistan, Jordan, Zambia and Vietnam to be ahead of it. This, in our opinion, should provide serious food for thought for the government of Kazakhstan…
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