UN World Investment Report 2013.pdf

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U N I T E D N A T 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 T

WORLD

INVESTMENTREPORT

GLOBAL VALUE CHAINS: INVESTMENT AND TRADE FOR DEVELOPMENT

2013

New York and Geneva, 2013


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentii

NOTE

The Division on Investment and Enterprise o UNCTAD is a global centre o excellence, dealing with issuesrelated to investment and enterprise development in the United Nations System. It builds on our decadeso experience and international expertise in research and policy analysis, intergovernmental consensus-building, and provides technical assistance to over 150 countries.

The terms country/economy as used in this Reportalso reer, as appropriate, to territories or areas; thedesignations employed and the presentation o the material do not imply the expression o any opinionwhatsoever on the part o the Secretariat o the United Nations concerning the legal status o any country,territory, city or area or o its authorities, or concerning the delimitation o its rontiers or boundaries. Inaddition, the designations o country groups are intended solely or statistical or analytical convenience anddo not necessarily express a judgment about the stage o development reached by a particular country orarea in the development process. The major country groupings used in this Reportollow the classifcation

o the United Nations Statistical Ofce. These are:

Developed countries: the member countries o the OECD (other than Chile, Mexico, the Republic o Koreaand Turkey), plus the new European Union member countries which are not OECD members (Bulgaria,Cyprus, Latvia, Lithuania, Malta and Romania), plus Andorra, Bermuda, Liechtenstein, Monaco and SanMarino.

Transition economies: South-East Europe, the Commonwealth o Independent States and Georgia.

Developing economies: in general all economies not specifed above. For statistical purposes, the data orChina do not include those or Hong Kong Special Administrative Region (Hong Kong SAR), Macao SpecialAdministrative Region (Macao SAR) and Taiwan Province o China.

Reerence to companies and their activities should not be construed as an endorsement by UNCTAD othose companies or their activities.

The boundaries and names shown and designations used on the maps presented in this publication do notimply ofcial endorsement or acceptance by the United Nations.

The ollowing symbols have been used in the tables:

t Two dots (..) indicate that data are not available or are not separately reported. Rows in tables havebeen omitted in those cases where no data are available or any o the elements in the row;

t A dash () indicates that the item is equal to zero or its value is negligible;

t A blank in a table indicates that the item is not applicable, unless otherwise indicated;

t A slash (/) between dates representing years, e.g., 1994/95, indicates a fnancial year;

t Use o a dash () between dates representing years, e.g., 19941995, signifes the ull period involved,including the beginning and end years;

t Reerence to dollars ($) means United States dollars, unless otherwise indicated;t Annual rates o growth or change, unless otherwise stated, reer to annual compound rates;

Details and percentages in tables do not necessarily add to totals because o rounding.

The material contained in this study may be reely quoted with appropriate acknowledgement.

UNITED NATIONS PUBLICATIONSales No. E.13.II.D.5

ISBN 978-92-1-112868-0eISBN 978-92-1-056212-6

Copyright United Nations, 2013All rights reserved

Printed in Switzerland


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iii

BAN Ki-moonSecretary-General o the United Nations

PREFACE

The 2013 World Investment Reportcomes at an important moment. The international community is making

a fnal push to achieve the Millennium Development Goals by the target date o 2015. At the same time, the

United Nations is working to orge a vision or the post-2015 development agenda. Credible and objective

inormation on oreign direct investment (FDI) can contribute to success in these twin endeavours.

Global FDI declined in 2012, mainly due to continued macroeconomic ragility and policy uncertainty or

investors, and it is orecast to rise only moderately over the next two years.

Yet as this report reveals, the global picture masks a number o major dynamic developments. In 2012

or the frst time ever developing economies absorbed more FDI than developed countries, with our

developing economies ranked among the fve largest recipients in the world. Developing countries also

generated almost one third o global FDI outows, continuing an upward trend that looks set to continue.

This years World Investment Reportprovides an in-depth analysis, strategic development options and

practical advice or policymakers and others on how to maximize the benefts and minimize the risks

associated with global value chains. This is essential to ensure more inclusive growth and sustainable

development.

I commend the World Investment Report 2013 to the international investment and development community

as a source o reection and inspiration or meeting todays development challenges.


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentiv

ACKNOWLEDGEMENTS

The World Investment Report 2013 (WIR13) was prepared by a team led by James Zhan. The team members

included Richard Bolwijn, Bruno Casella, Joseph Clements, Hamed El Kady, Kumi Endo, Masataka Fujita,

Noelia Garcia Nebra, Thomas van Gien, Axle Giroud, Ariel Ivanier, Joachim Karl, Guoyong Liang, Anthony

Miller, Hafz Mirza, Nicole Moussa, Shin Ohinata, Davide Rigo, Sergey Ripinsky, William Speller, Astrit

Sulstarova, Claudia Trentini, Elisabeth Tuerk, Jrg Weber and Kee Hwee Wee.

WIR13 benefted rom the advice o Carlo Altomonte, Richard Baldwin, Carlos Braga, Peter Buckley,

Lorraine Eden, Gary Geref, John Humphrey, Bart Los and Pierre Sauv.

Research and statistical assistance was provided by Bradley Boicourt and Lizanne Martinez. Contributions

were also made by Wolgang Alschner, Amare Bekele, Hector Dip, Ventzislav Kotetzov, Mathabo Le Roux,

Kendra Magraw, Abraham Negash, Naomi Rosenthal, Diana Rosert, John Sasuya, Teerawat Wongkaew

and Youngjun Yoo, as well as interns Alexandre Genest, Jessica Mullins and Thomas Turner.

The manuscript was copy-edited by Lise Lingo and typeset by Laurence Duchemin and Teresita Ventura.

Sophie Combette designed the cover.

Production and dissemination o WIR13 was supported by Elisabeth Anodeau-Mareschal, Evelyn Benitez,

Nathalie Eulaerts, Severine Excofer, Rosalina Goyena, Natalia Meramo-Bachayani and Katia Vieu.

At various stages o preparation, in particular during the review meetings organized to discuss drats o

WIR13, the team benefted rom comments and inputs received rom external experts: Rol Adlung, Michael

Bratt, Tomer Broude, Jeremy Clegg, Lorenzo Cotula, Michael Ewing-Chow, Masuma Farooki, Karina

Fernandez-Stark, Stephen Gelb, Stine Haakonsson, Inge Ivarsson, Keiichiro Kanemoto, Lise Johnson,

Raphie Kaplinsky, Nagesh Kumar, Sarianna Lundan, Bo Meng, Daniel Moran, Michael Mortimore, Ram

Mudambi, Rajneesh Narula, Lizbeth Navas-Aleman, Christos Pitelis, William Powers, Zhengzheng Qu,Alexander Raabe, Rajah Rasiah, Arianna Rossi, Armando Rungi, Emily Sims, Gabriele Suder, Tim Sturgeon,

Fan Wenjie, Deborah Winkler and Robert Yuskavage. Comments and inputs were also received rom many

UNCTAD colleagues, including Alredo Calcagno, Torbjorn Fredriksson, Marco Fugazza, Ebru Gokce,

Kalman Kalotay, Joerg Mayer, Alessandro Nicita, Victor Ognivtsev, Celia Ortega Sotes, Yongu Ouyang,

Ral Peters, Miho Shirotori, Guillermo Valles and Paul Wessendorp.

UNCTAD wishes to thank the Eora project team members or their kind collaboration.

Numerous ofcials o central banks, government agencies, international organizations and non-governmental

organizations also contributed to WIR13. The fnancial support o the Governments o Finland, Norway and

Sweden is grateully acknowledged.


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v

TABLEOFCONTENTS

PREFACE ............................................................................................................ iii

ACKNOWLEDGEMENTS ....................................................................................... iv

ABBREVIATIONS ................................................................................................ viii

KEY MESSAGES ..................................................................................................ix

OVERVIEW ..........................................................................................................xi

CHAPTER I. GLOBAL INVESTMENT TRENDS ......................................................... 1

A. GLOBAL TRENDS: THE FDI RECOVERY FALTERS ................................................ 2

1. Current trends ............................................................................................................................ 2

a. FDI by geographical distribution ............................................................................................................ 2

b. FDI by mode and sector/industry ........................................................................................................... 7

c. FDI by selected types o investors .......................................................................................................10

d. FDI and oshore fnance ......................................................................................................................15

2. Global FDI prospects in 20132015 ......................................................................................... 18

a. General FDI prospects ..........................................................................................................................18

b. FDI prospects by sector/industry ......................................................................................................... 20

c. FDI prospects by home region ............................................................................................................. 21

d. FDI prospects by host region ...............................................................................................................22

B. INTERNATIONAL PRODUCTION ....................................................................... 23

1. Overall trends ........................................................................................................................... 23

2. Repositioning: the strategic divestment, relocation and reshoring o oreign operations ........ 26

C. FDI INCOME AND RATES OF RETURN .............................................................. 31

1. Trends in FDI income ............................................................................................................... 32

a. General trends ...................................................................................................................................... 32

b. Rates o return ...................................................................................................................................... 32

c. Reinvested earnings versus repatriated earnings ................................................................................ 33

2. Impacts o FDI income on the balance o payments o host countries ................................. 34

3. Policy implications ................................................................................................................... 36

CHAPTER II. REGIONAL TRENDS IN FDI .............................................................. 37

INTRODUCTION ................................................................................................. 38

A. REGIONAL TRENDS ....................................................................................... 39

1. Arica ......................................................................................................................................... 39

2. East and South-East Asia ........................................................................................................ 44


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentvi

3. South Asia ................................................................................................................................ 49

4. West Asia .................................................................................................................................. 53

5. Latin America and the Caribbean ............................................................................................ 576. Transition economies ............................................................................................................... 63

7. Developed countries ................................................................................................................ 67

B. TRENDS IN STRUCTURALLY WEAK, VULNERABLE AND SMALL ECONOMIES ....... 73

1. Least developed countries ...................................................................................................... 73

2. Landlocked developing countries ........................................................................................... 78

3. Small island developing States ............................................................................................... 84

CHAPTER III. RECENT POLICY DEVELOPMENTS .................................................. 91

A. NATIONAL INVESTMENT POLICIES .................................................................. 92

1. Overall trends ............................................................................................................................ 92

2. Industry-specifc investment policies ...................................................................................... 94

a. Services sector .....................................................................................................................................94

b. Strategic industries ...............................................................................................................................95

3. Screening o cross-border M&As ............................................................................................ 96

4. Risk o investment protectionism .......................................................................................... 100

B. INTERNATIONAL INVESTMENT POLICIES ...................................................... 101

1. Ttrends in the conclusion o IIAs ........................................................................................... 101

a. Continued decline in treaty-making ....................................................................................................101

b. Factoring in sustainable development ...............................................................................................102

2. Trends in the negotiation o IIAs ............................................................................................ 103

a. Regionalism on the rise ..................................................................................................................... 103

b. Systemic issues arising rom regionalism...........................................................................................105

3. IIA regime in transition ........................................................................................................... 107

a. Options to improve the IIA regime .......................................................................................................107

b. Treaty expirations .............................................................................................................................. 108

4. InvestorState arbitration: options or reorm ....................................................................... 110

a. ISDS cases continue to grow ..............................................................................................................110b. Mapping fve paths or reorm .............................................................................................................111

CHAPTER IV. GLOBAL VALUE CHAINS: INVESTMENT ANDTRADE FOR DEVELOPMENT ............................................................................. 121

INTRODUCTION ............................................................................................... 122

A. GVCS AND PATTERNS OF VALUE ADDED TRADE AND INVESTMENT ............... 123

1. Value added trade patterns in the global economy .............................................................. 123

2. Value added trade patterns in the developing world ............................................................ 133


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3. FDI and the role o TNCs in shaping GVCs ........................................................................... 134

B. GVC GOVERNANCE AND LOCATIONAL DETERMINANTS ................................. 140

1. GVC governance: the orchestration o ragmented and internationally

dispersed operations .............................................................................................................141

2. Locational determinants o GVC activities ............................................................................ 144

C. DEVELOPMENT IMPLICATIONS OF GVCS ....................................................... 148

1. Local value capture ................................................................................................................ 148

a. GVC contribution to GDP and growth ................................................................................................ 151

b. Domestic value added in trade and business linkages ...................................................................... 152

c. Foreign afliates and value added retention or the local economy ................................................... 154

d GVCs and transer pricing .................................................................................................................. 155

2. Job creation, income generation and employment quality .................................................. 156

a. GVC participation, job creation and income generation .................................................................... 156

b. GVCs and the quality o employment ................................................................................................. 157

3. Technology dissemination and skills building ...................................................................... 159

a. Technology dissemination and learning under dierent GVC governance structures ...............................159

b. Learning in GVCs: challenges and pitalls .......................................................................................... 161

4. Social and environmental impacts ........................................................................................ 161

a. CSR challenges in GVCs .....................................................................................................................162

b Oshoring emissions: GVCs as a transer mechanism o environmental impact .............................. 164

5. Upgrading and industrial development .................................................................................164

a. Upgrading dynamically at the frm level .............................................................................................165b. Upgrading at the country level and GVC development paths ............................................................169

D. POLICY IMPLICATIONS OF GVCS .................................................................. 175

1. Embedding GVCs in development strategy .......................................................................... 177

2. Enabling participation in GVCs .............................................................................................. 180

3. Building domestic productive capacity ................................................................................ 183

4. Providing a strong environmental, social and governance ramework ............................... 185

a. Social, environmental and saety and health issues ........................................................................... 185

b Transorming EPZs into centres o excellence or sustainable business ........................................... 186

c Other concerns and good governance issues in GVCs ..................................................................... 1895. Synergizing trade and investment policies and institutions ................................................ 190

a. Ensuring coherence between trade and investment policies ............................................................. 190

b Synergizing trade and investment promotion and acilitation ............................................................ 193

c Regional Industrial Development Compacts ...................................................................................... 195

CONCLUDING REMARKS: GVC POLICY DEVELOPMENT TOWARDSA SOUND STRATEGIC FRAMEWORK .................................................................. 196

REFERENCES .................................................................................................. 203

ANNEX TABLES ................................................................................................ 211


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentviii

ABBREVIATIONS

ADR alternative dispute resolutionAGOA Arican Growth and Opportunity ActAPEC Asia-Pacifc Economic CooperationASEAN Association o Southeast Asian NationsBIT bilateral investment treatyCETA Comprehensive Economic and Trade AgreementCIS Commonwealth o Independent StatesCOMESA Common Market or Eastern and Southern AricaCSR corporate social responsibilityDCFTA Deep and Comprehensive Free Trade AgreementDPP dispute prevention policyEPZ export processing zoneFDI oreign direct investmentFTA ree trade agreement

GAP good agricultural practicesGATS General Agreement on Trade in ServicesGCC Gul Cooperation CouncilGSP Generalized System o PreerencesGVC global value chainIIA international investment agreementIP intellectual propertyIPA investment promotion agencyIPFSD Investment Policy Framework or Sustainable DevelopmentIRS United States Internal Revenue ServiceISDS investorState dispute settlementISO International Organization or StandardizationLBO leveraged buy-out

LDC least developed countriesLLDC landlocked developing countriesMFN most avoured nationMRIO multi-region input-outputNAFTA North American Free Trade AgreementNAICS North American Industry Classifcation SystemNEM non-equity modeOFC oshore fnancial centrePPP public-private partnershipPRAI Principles or Responsible Agricultural InvestmentPTA preerential trade agreementSEZ special economic zoneSIC standard industrial classifcationSIDS small island developing States

SME small and medium-sized enterpriseSOE State-owned enterpriseSPE special purpose entitySWF sovereign wealth undTNC transnational corporationTPO trade promotion organizationTPP Trans-Pacifc Partnership AgreementTRIMS Trade-Related Investment MeasuresTTIP Transatlantic Trade and Investment PartnershipUNCITRAL United Nations Commission on International Trade LawWIPS World Investment Prospects SurveyWTO World Trade Organization


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KEY MESSAGES ix

KEY MESSAGES

Global and regional investment trends

The road to oreign direct investment (FDI) recovery is bumpy. Global FDI ell by 18 per cent to $1.35 trillion

in 2012. The recovery will take longer than expected, mostly because o global economic ragility and policy

uncertainty. UNCTAD orecasts FDI in 2013 to remain close to the 2012 level, with an upper range o $1.45

trillion. As investors regain confdence in the medium term, ows are expected to reach levels o $1.6 trillion

in 2014 and $1.8 trillion in 2015. However, signifcant risks to this growth scenario remain.

Developing countries take the lead. In 2012 or the frst time ever developing economies absorbed

more FDI than developed countries, accounting or 52 per cent o global FDI ows. This is partly because

the biggest all in FDI inows occurred in developed countries, which now account or only 42 per cent o

global ows. Developing economies also generated almost one third o global FDI outows, continuing a

steady upward trend.

FDI outfows rom developed countries dropped to a level close to the trough o 2009. The uncertain

economic outlook led transnational corporations (TNCs) in developed countries to maintain their wait-

and-see approach towards new investments or to divest oreign assets, rather than undertake major

international expansion. In 2012, 22 o the 38 developed countries experienced a decline in outward FDI,

leading to a 23 per cent overall decline.

Investments through oshore nancial centres (OFCs) and special purpose entities (SPEs) remain a concern.

Financial ows to OFCs are still close to their peak level o 2007. Although most international eorts to

combat tax evasion have ocused on OFCs, fnancial ows through SPEs were almost seven times more

important in 2011. The number o countries oering avourable tax conditions or SPEs is also increasing.

Reinvested earnings can be an important source o nance or long-term investment. FDI income amounted

to $1.5 trillion in 2011 on a stock o $21 trillion. The rates o return on FDI are 7 per cent globally, and higherin both developing (8 per cent) and transition economies (13 per cent) than in developed ones (5 per cent).

Nearly one third o global FDI income was retained in host economies, and two thirds were repatriated

(representing on average 3.4 per cent o the current account payments). The share o retained earnings is

highest in developing countries; at about 40 per cent o FDI income it represents an important source o

fnancing.

FDI fows to developing regions witnessed a small overall decline in 2012, but there were some bright

spots. Arica bucked the trend with a 5 per cent increase in FDI inows to $50 billion. This growth was

driven partly by FDI in extractive industries, but investment in consumer-oriented manuacturing and service

industries is also expanding. FDI ows to developing Asia ell 7 per cent, to $407 billion, but remained at

a high level. Driven by continued intraregional restructuring, lower-income countries such as Cambodia,

Myanmar and Viet Nam are bright spots or labour-intensive FDI. In Latin America and the Caribbean, FDIinows decreased 2 per cent to $244 billion due to a decline in Central America and the Caribbean. This

decline was masked by an increase o 12 per cent in South America, where FDI inows were a mix o

natural-resource-seeking and market-seeking activity.

FDI is on the rise in structurally weak economies. FDI inows to least developed countries (LDCs) hit a

record high, an increase led by developing-country TNCs, especially rom India. A modest increase in FDI

ows to landlocked developing countries (LLDCs) occurred, thanks to rising ows to Arican and Latin

American LLDCs and several economies in Central Asia. FDI ows into small island developing States

(SIDS) continued to recover or the second consecutive year, driven by investments in natural-resource-rich

countries.

FDI fows to developed economies plummeted. In developed countries, FDI inows ell drastically, by 32

per cent, to $561 billion a level last seen almost 10 years ago. The majority o developed countries saw


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentx

signifcant drops o FDI inows, in particular the European Union, which alone accounted or two thirds o

the global FDI decline.

Transition economies saw a relatively small decline. A slump in cross-border mergers and acquisitions

(M&As) sales caused inward FDI ows to transition economies to all by 9 per cent to $87 billion; $51 billiono this went to the Russian Federation, but a large part o it was round-tripping.

Investment policy trends

National investment policymaking is increasingly geared towards new development strategies. Most

governments are keen to attract and acilitate oreign investment as a means or productive capacity-

building and sustainable development. At the same time, numerous countries are reinorcing the regulatory

environment or oreign investment, making more use o industrial policies in strategic sectors, tightening

screening and monitoring procedures, and closely scrutinizing cross-border M&As. There is an ongoing risk

that some o these measures are undertaken or protectionist purposes.

International investment policymaking is in transition. By the end o 2012, the regime o internationalinvestment agreements (IIAs) consisted o 3,196 treaties. Today, countries increasingly avour a regional

over a bilateral approach to IIA rule making and take into account sustainable development elements. More

than 1,300 o todays 2,857 bilateral investment treaties (BITs) will have reached their anytime termination

phase by the end o 2013, opening a window o opportunity to address inconsistencies and overlaps in

the multi-aceted and multi-layered IIA regime, and to strengthen its development dimension.

UNCTAD proposes ve broad paths or reorming international investment arbitration. This responds to the

debate about the pros and cons o the investment arbitration regime, spurred by an increasing number o

cases and persistent concerns about the regimes systemic defciencies. The fve options or reorm are:

promoting alternative dispute resolution, modiying the existing ISDS system through individual IIAs, limiting

investors access to ISDS, introducing an appeals acility and creating a standing international investment

court. Collective eorts at the multilateral level can help develop a consensus on the preerred course oaction.

Global value chains: investment and trade or development

Todays global economy is characterized by global value chains (GVCs), in which intermediate goods and

services are traded in ragmented and internationally dispersed production processes. GVCs are typically

coordinated by TNCs, with cross-border trade o inputs and outputs taking place within their networks o

afliates, contractual partners and arms-length suppliers. TNC-coordinated GVCs account or some 80 per

cent o global trade.

GVCs lead to a signicant amount o double counting in trade about 28 per cent or $5 trillion o the

$19 trillion in global gross exports in 2010 because intermediates are counted several times in worldexports, but should be counted only once as value added in trade. Patterns o value added trade in

GVCs determine the distribution o actual economic gains rom trade between individual economies and

are shaped to a signifcant extent by the investment decisions o TNCs. Countries with a greater presence

o FDI relative to the size o their economies tend to have a higher level o participation in GVCs and to

generate relatively more domestic value added rom trade.

The development contribution o GVCs can be signicant. In developing countries, value added trade

contributes nearly 30 per cent to countries GDP on average, as compared with 18 per cent in developed

countries. And there is a positive correlation between participation in GVCs and growth rates o GDP

per capita. GVCs have a direct economic impact on value added, jobs and income. They can also be

an important avenue or developing countries to build productive capacity, including through technology

dissemination and skill building, thus opening up opportunities or longer-term industrial upgrading.


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KEY MESSAGES xi

However, participation in GVCs also involves risks. The GDP contribution o GVCs can be limited i countries

capture only a small share o the value added created in the chain. Also, technology dissemination, skill

building and upgrading are not automatic. Developing countries ace the risk o remaining locked into

relatively low value added activities. In addition, environmental impacts and social eects, including on

working conditions, occupational saety and health, and job security, can be negative. The potential

ootlooseness o GVC activities and increased vulnerability to external shocks pose urther risks.

Countries need to make a strategic choice to promote or not to promote participation in GVCs. They

need to careully weigh the pros and cons o GVC participation and the costs and benefts o proactive

policies to promote GVCs or GVC-led development strategies, in line with their specifc situation and actor

endowments. Some countries may decide not to promote it; others may not have a choice. In reality,

most are already involved in GVCs to a degree. Promoting GVC participation implies targeting specifc

GVC segments; i.e. GVC promotion can be selective. Moreover, GVC participation is only one aspect o a

countrys overall development strategy.

Policy matters to make GVCs work or development. I countries decide to actively promote GVC participation,

policymakers should frst determine where their countries trade profles and industrial capabilities standand then evaluate realistic GVC development paths or strategic positioning. Gaining access to GVCs

and realizing upgrading opportunities requires a structured approach that includes embedding GVCs in

industrial development policies (e.g. targeting GVC tasks and activities); enabling GVC growth by creating

a conducive environment or trade and investment and by putting in place inrastructural prerequisites; and

building productive capacities in local frms and skills in the local workorce. To mitigate the risks involved

in GVC participation, these eorts should take place within a strong environmental, social and governance

ramework, with strengthened regulation and enorcement and capacity-building support to local frms or

compliance.

UNCTAD urther proposes three specifc initiatives:

t Synergistic trade and investment policies and institutions.Trade and investment policies oten work

in silos. In the context o GVCs they can have unintended and counterproductive reciprocal eects.

To avoid this, policymakers where necessary, with the help o international organizations should

careully review those policy instruments that simultaneously aect investment and trade in GVCs; i.e.

trade measures aecting investment and investment measures aecting trade. Furthermore, at the

institutional level, the trade and investment links in GVCs call or closer coordination and collaboration

between trade and investment promotion agencies.

t Regional industrial development compacts. The relevance o regional value chains underscores the

importance o regional cooperation. Regional industrial development compacts could encompass

integrated regional trade and investment agreements ocusing on liberalization and acilitation, and

establishing joint trade and investment promotion mechanisms and institutions. They could also

aim to create cross-border industrial clusters through joint fnancing or GVC-enabling inrastructure

and joint productive capacity-building. Establishing such compacts requires working in partnership

between governments in the region, between governments and international organizations, and

between the public and private sectors.

t Sustainable export processing zones (EPZs). Sustainability is becoming an important actor or

attracting GVC activities. EPZs have become signifcant GVC hubs by oering benefts to TNCs

and suppliers in GVCs. They could also oer in addition to or in lieu o some existing benefts

expanded support services or corporate social responsibility (CSR) eorts to become catalysts or

CSR implementation. Policymakers could consider setting up relevant services, including technical

assistance or certifcation and reporting, support on occupational saety and health issues, and

recycling or alternative energy acilities, transorming EPZs into centres o excellence or sustainable

business. International organizations can help through the establishment o benchmarks, exchanges

o best practices and capacity-building programmes.


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxii

OVERVIEW

GLOBAL INVESTMENT TRENDS

FDI recovery unravels in 2012

Global oreign direct investment (FDI) ell by 18 per cent to $1.35 trillion in 2012. This sharp decline was in

stark contrast to other key economic indicators such as GDP, international trade and employment, which all

registered positive growth at the global level. Economic ragility and policy uncertainty in a number o major

economies gave rise to caution among investors. Furthermore, many transnational corporations (TNCs)

reprofled their investments overseas, including through restructuring o assets, divestment and relocation.

The road to FDI recovery is thus proving bumpy and may take longer than expected.

UNCTAD orecasts FDI in 2013 to remain close to the 2012 level, with an upper range o $1.45 trillion

a level comparable to the pre-crisis average o 20052007 (fgure 1). As macroeconomic conditions

improve and investors regain confdence in the medium term, TNCs may convert their record levels o cashholdings into new investments. FDI ows may then reach the level o $1.6 trillion in 2014 and $1.8 trillion in

2015. However, signifcant risks to this growth scenario remain. Factors such as structural weaknesses in

the global fnancial system, the possible deterioration o the macroeconomic environment, and signifcant

policy uncertainty in areas crucial or investor confdence might lead to a urther decline in FDI ows.

Developing economies surpass developed economies as recipients o FDI

FDI ows to developing economies proved to be much more resilient than ows to developed countries,

recording their second highest level even though they declined slightly (by 4 per cent) to $703 billion in

2012 (table 1). They accounted or a record 52 per cent o global FDI inows, exceeding ows to developed

economies or the frst time ever, by $142 billion. The global rankings o the largest recipients o FDI alsoreect changing patterns o investment ows: 9 o the 20 largest recipients were developing countries

(fgure 2). Among regions, ows to developing Asia and Latin America remained at historically high levels,

but their growth momentum weakened. Arica saw a year-on-year increase in FDI inows in 2012 (table 1).

Figure 1. Global FDI fows, 20042012, and projections, 20132015(Billions of dollars)

Source: UNCTAD, World Investment Report 2013.

500

1 000

1 500

2 000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


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OVERVIEW xiii

Developing economies outows reached $426 billion, a record 31 per cent o the world total. Despite

the global downturn, TNCs rom developing countries continued their expansion abroad. Asian countries

remained the largest source o FDI, accounting or three quarters o the developing-country total. FDI

outows rom Arica tripled while ows rom developing Asia and rom Latin America and the Caribbean

remained at the 2011 level.

The BRICS countries (Brazil, the Russian Federation, India, China and South Arica) continued to be the

leading sources o FDI among emerging investor countries. Flows rom these fve economies rose rom

$7 billion in 2000 to $145 billion in 2012, accounting or 10 per cent o the world total. Their TNCs are

becoming increasingly active, including in Arica. In the ranks o top investors, China moved up rom the

sixth to the third largest investor in 2012, ater the United States and Japan (fgure 3).

FDI ows to and rom developed countries plummet

FDI inows to developed economies declined by 32 per cent to $561 billion a level last seen almost

10 years ago. Both Europe and North America, as groups, saw their inows all, as did Australia and New

Zealand. The European Union alone accounted or almost two thirds o the global FDI decline. However,

inows to Japan turned positive ater two successive years o net divestments.

Outows rom developed economies, which had led the recovery o FDI over 20102011, ell by 23 per cent

to $909 billion close to the trough o 2009. Both Europe and North America saw large declines in their

outows, although Japan bucked the trend, keeping its position as the second largest investor country in

the world.

Table 1. FDI fows by region, 20102012(Billions of dollars and per cent)

Region FDI infows FDI outfows

2010 2011 2012 2010 2011 2012World 1 409 1 652 1 351 1 505 1 678 1 391Developed economies 696 820 561 1 030 1 183 909Developing economies 637 735 703 413 422 426Arica 44 48 50 9 5 14Asia 401 436 407 284 311 308

East and South-East Asia 313 343 326 254 271 275South Asia 29 44 34 16 13 9West Asia 59 49 47 13 26 24

Latin America and the Caribbean 190 249 244 119 105 103Oceania 3 2 2 1 1 1

Transition economies 75 96 87 62 73 55Structurally weak, vulnerable and smalleconomies

45 56 60 12 10 10

Least developed countries 19 21 26 3.0 3.0 5.0Landlocked developing countries 27 34 35 9.3 5.5 3.1Small island developing States 4.7 5.6 6.2 0.3 1.8 1.8

Memorandum: percentage share in world FDI fowsDeveloped economies 49.4 49.7 41.5 68.4 70.5 65.4Developing economies 45.2 44.5 52.0 27.5 25.2 30.6Arica 3.1 2.9 3.7 0.6 0.3 1.0Asia 28.4 26.4 30.1 18.9 18.5 22.2

East and South-East Asia 22.2 20.8 24.1 16.9 16.2 19.8South Asia 2.0 2.7 2.5 1.1 0.8 0.7West Asia 4.2 3.0 3.5 0.9 1.6 1.7

Latin America and the Caribbean 13.5 15.1 18.1 7.9 6.3 7.4Oceania 0.2 0.1 0.2 0.0 0.1 0.0

Transition economies 5.3 5.8 6.5 4.1 4.3 4.0Structurally weak, vulnerable and smalleconomies

3.2 3.4 4.4 0.8 0.6 0.7

Least developed countries 1.3 1.3 1.9 0.2 0.2 0.4Landlocked developing countries 1.9 2.1 2.6 0.6 0.3 0.2Small island developing States 0.3 0.3 0.5 0.0 0.1 0.1



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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxiv

Internationalization o SOEs and SWFs maintains pace

The number o State-owned TNCs increased rom 650 in 2010 to 845 in 2012. Their FDI ows amounted

to $145 billion, reaching almost 11 per cent o global FDI. The majority o the State-owned enterprises

(SOEs) that acquired oreign assets in 2012 were rom developing countries; many o those acquisitions

were motivated by the pursuit o strategic assets (e.g. technology, intellectual property, brand names) and

natural resources.

FDI by sovereign wealth unds (SWFs) in 2012 was only $20 billion, though it doubled rom the year beore.

Cumulative FDI by SWFs is estimated at $127 billion, most o it in fnance, real estate, construction and

utilities. In terms o geographical distribution, more than 70 per cent o SWFs FDI in 2012 was targeted at

developed economies. The combined assets o the 73 recognized SWFs around the world were valued at

an estimated $5.3 trillion in 2012 a huge reservoir to tap or development fnancing.

Growing oshore fnance FDI raises concerns about tax evasionOshore fnance mechanisms in FDI include mainly (i) oshore fnancial centres (OFCs) or tax havens and (ii)

special purpose entities (SPEs). SPEs are oreign afliates that are established or a specifc purpose or that

have a specifc legal structure; they tend to be established in countries that provide specifc tax benefts or

SPEs. Both OFCs and SPEs are used to channel unds to and rom third countries.

Investment in OFCs remains at historically high levels. Flows to OFCs amounted to almost $80 billion in

2012, down $10 billion rom 2011, but well above the $15 billion average o the pre-2007 period. OFCs

account or an increasing share o global FDI ows, at about 6 per cent.

SPEs play an even larger role relative to FDI ows and stocks in a number o important investor countries,

acting as a channel or more than $600 billion o investment ows. Over the past decade, in most economies

Developing economies

Developed economies

Transition economies

14

14

16

20

25

2628

28

29

30

45

51

57

57

62

65

65

75

121

168

20 Sweden (38)

19 Kazakhstan (27)

18 Colombia (28)

17 Indonesia (21)

16 France (13)

15 India (14)

14 Spain (16)

13 Luxembourg (18)

12 Ireland (32)

11 Chile (17)

10 Canada (12)

9 Russian Federation (9)

8 Singapore (8)

7 Australia (6)

6 United Kingdom (10)

5 British Virgin Islands (7)

4 Brazil (5)

3 Hong Kong, China (4)

2 China (2)

1 United States (1)

(x) = 2011 ranking

Figure 2. Top 20 host economies, 2012(Billions of dollars)



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OVERVIEW xv

that host SPEs, these entities have gained importance in investment ows. In addition, the number o

countries oering avourable tax treatment to SPEs is on the increase.

Tax avoidance and transparency in international fnancial transactions are issues o global concern that

require a multilateral approach. To date, international eorts on these issues have ocused mostly on OFCs,

but SPEs are a ar larger phenomenon. Moreover, FDI ows to OFCs remain at high levels. Addressing

the growing concerns about tax evasion requires reocusing international eorts. A frst step could be

establishing a closed list o benign uses o SPEs and OFCs. This would help ocus any uture measures

on combating the malign aspects o tax avoidance and lack o transparency.

International production growing at a steady pace

In 2012, the international production o TNCs continued to expand at a steady rate because FDI ows, even

at lower levels, add to the existing FDI stock. FDI stocks rose by 9 per cent in 2012, to $23 trillion. Foreign

afliates o TNCs generated sales worth $26 trillion (o which $7.5 trillion were or exports), increasing by

7.4 per cent rom 2011 (table 2). They contributed value added worth $6.6 trillion, up 5.5 per cent, whichcompares well with global GDP growth o 2.3 per cent. Their employment numbered 72 million, up 5.7 per

cent rom 2011.

The growth o international production by the top 100 TNCs, which are mostly rom developed economies,

stagnated in 2012. However, the 100 largest TNCs domiciled in developing and transition economies

increased their oreign assets by 20 per cent, continuing the expansion o their international production

networks.

Reinvested earnings: a source o fnancing or long-term investment

Global FDI income increased sharply in 2011, or the second consecutive year, to $1.5 trillion, on a stock

o $21 trillion, ater declining in both 2008 and 2009 during the depths o the global fnancial crisis. FDI

Figure 3. Top 20 investor economies, 2012(Billions of dollars)


20 Luxembourg (30)

19 Ireland (167)

18 Norway (19)

17 Chile (21)

16 Singapore (18)

15 Mexico (28)14 Italy (9)

13 Republic o Korea (16)

12 Sweden (17)

11 France (8)

10 British Virgin Islands (10)

9 Switzerland (13)

8 Russian Federation (7)

7 Canada (12)

6 Germany (11)

5 United Kingdom (3)

4 Hong Kong, China (4)

3 China (6)

2 Japan (2)1 United States (1)

(x) = 2011 ranking

329

17

19

21

21

23

2630

33

37

42

44

51

54

67

71

84

84

123

33

Developing economies

Developed economies

Transition economies


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxvi

income increased or each o the three major groups o economies developed, developing and transition with the largest increases taking place in developing and transition economies. The rates o return on

FDI are 7 per cent globally, and higher in both developing (8 per cent) and transition economies (13 per

cent) than in developed countries (5 per cent). O total FDI income, about $500 billion was retained in host

countries, while $1 trillion was repatriated to home or other countries (representing on average 3.4 per cent

o the current account payments). The share o FDI income retained is highest in developing countries; at

about 40 per cent it represents an important source o FDI fnancing. However, not all o this is turned into

capital expenditure; the challenge or host governments is how to channel retained earnings into productive

investment.

REGIONAL TRENDS IN FDI

Arica: a bright spot or FDI

FDI inows to Arica rose or the second year running, up 5 per cent to $50 billion, making it one o the ew

regions that registered year-on-year growth in 2012. FDI outows rom Arica almost tripled in 2012, to $14

billion. TNCs rom the South are increasingly active in Arica, building on a trend in recent years o a higher

share o FDI ows to the region coming rom emerging markets. In terms o FDI stock, Malaysia, South

Arica, China and India (in that order) are the largest developing-country investors in Arica.

FDI inows in 2012 were driven partly by investments in the extractive sector in countries such as the

Democratic Republic o the Congo, Mauritania, Mozambique and Uganda. At the same time, there was

an increase in FDI in consumer-oriented manuacturing and services, reecting demographic changes.

Table 2. Selected indicators o FDI and international production, 19902012

Value at current prices(Billions o dollars)

Item 199020052007pre-crisisaverage

2010 2011 2012

FDI inows 207 1 491 1 409 1 652 1 351

FDI outows 241 1 534 1 505 1 678 1 391

FDI inward stock 2 078 14 706 20 380 20 873 22 813

FDI outward stock 2 091 15 895 21 130 21 442 23 593

Income on inward FDI 75 1 076 1 377 1 500 1 507Rate o return on inward FDI (per cent) 4 7 6.8 7.2 6.6

Income on outward FDI 122 1 148 1 387 1 548 1 461Rate o return on outward FDI (per cent) 6 7 6.6 7.2 6.2

Cross-border M&As 99 703 344 555 308

Sales o oreign afliates 5 102 19 579 22 574 24 198 25 980

Value added (product) o oreign afliates 1 018 4 124 5 735 6 260 6 607Total assets o oreign afliates 4 599 43 836 78 631 83 043 86 574

Exports o oreign afliates 1 498 5 003 6 320 7 436 7 479

Employment by oreign afliates (thousands) 21 458 51 795 63 043 67 852 71 695

Memorandum:

GDP 22 206 50 319 63 468 70 221 71 707

Gross fxed capital ormation 5 109 11 208 13 940 15 770 16 278

Royalties and licence ee receipts 27 161 215 240 235

Exports o goods and services 4 382 15 008 18 956 22 303 22 432



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OVERVIEW xvii

Between 2008 and 2012, the share o such industries in the value o greenfeld investment projects grew

rom 7 per cent to 23 per cent o the total.

FDI in and rom developing Asia loses growth momentumFDI ows to developing Asia decreased by 7 per cent to $407 billion in 2012. This decline was reected

across all subregions but was most severe in South Asia, where FDI inows ell by 24 per cent. China

and Hong Kong (China) were the second and third largest FDI recipients worldwide, and Singapore, India

and Indonesia were also among the top 20. Driven by continued intraregional restructuring, lower-income

countries such as Cambodia, Myanmar, the Philippines and Viet Nam were attractive FDI locations or

labour-intensive manuacturing. In West Asia, FDI suered rom a ourth consecutive year o decline. State-

owned frms in the Gul region are taking over delayed projects that were originally planned as joint ventures

with oreign frms.

Total outward FDI rom the region remained stable at $308 billion, accounting or 22 per cent o global

ows (a share similar to that o the European Union). The moderate increase in East and South-East Asia

was oset by a 29 per cent decrease in outows rom South Asia. Outows rom China continued to grow,

reaching $84 billion in 2012 (a record level), while those rom Malaysia and Thailand also increased. In West

Asia, Turkey has emerged as a signifcant investor, with its outward investment growing by 73 per cent in

2012 to a record $4 billion.

FDI growth in South America oset by a decline in Central America and theCaribbean

FDI to Latin America and the Caribbean in 2012 was $244 billion, maintaining the high level reached in

2011. Signifcant growth in FDI to South America ($144 billion) was oset by a decline in Central America

and the Caribbean ($99 billion). The main actors that preserved South Americas attractiveness to FDI are

its wealth in oil, gas and metal minerals and its rapidly expanding middle class. Flows o FDI into naturalresources are signifcant in some South American countries. FDI in manuacturing (e.g. automotive) is

increasing in Brazil, driven by new industrial policy measures. Nearshoring to Mexico is on the rise.

Outward FDI rom Latin America and the Caribbean decreased moderately in 2012 to $103 billion. Over hal

o these outows originate rom OFCs. Cross-border acquisitions by Latin American TNCs jumped 74 per

cent to $33 billion, hal o which was invested in other developing countries.

FDI ows to and rom transition economies all

Inward FDI ows in transition economies ell by 9 per cent in 2012 to $87 billion. In South-East Europe,

FDI ows almost halved, mainly due to a decline in investments rom traditional European Union investors

suering economic woes at home. In the Commonwealth o Independent States, including the RussianFederation, FDI ows ell by 7 per cent, but oreign investors continue to be attracted by the regions

growing consumer markets and vast natural resources. A large part o FDI in the Russian Federation is due

to round tripping.

Outward FDI ows rom transition economies declined by 24 per cent in 2012 to $55 billion. The Russian

Federation continued to dominate outward FDI rom the region, accounting or 92 per cent o the total.

Although TNCs based in natural-resource economies continued their expansion abroad, the largest

acquisitions in 2012 were in the fnancial industry.


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxviii

A steep all in FDI in 2012 reverses the recent recovery in developed economies

The sharp decline in inows reversed the FDI recovery during 20102011. Inows ell in 23 o 38 developed

economies in 2012. The 32 per cent nosedive was due to a 41 per cent decline in the European Union

and a 26 per cent decline in the United States. Inows to Australia and New Zealand ell by 13 per cent

and 33 per cent, respectively. In contrast, inows to Japan turned positive ater two successive years o

net divestment. Also, the United Kingdom saw inows increase. The overall decline was due to weaker

growth prospects and policy uncertainty, especially in Europe, and the cooling o o investment in extractive

industries. In addition, intracompany transactions e.g. intracompany loans, which by their nature tend to

uctuate more had the eect o reducing ows in 2012. While FDI ows are volatile, the level o capital

expenditures is relatively stable.

Outows rom developed countries declined by 23 per cent, with the European Union down 40 per cent

and the United States down 17 per cent. This was largely due to divestments and the continued wait and

see attitude o developed-country TNCs. FDI ows rom Japan, however, grew by 14 per cent.

FDI ows to the structurally weak and vulnerable economies rise urther in 2012

FDI ows to structurally weak, vulnerable and small economies rose urther by 8 per cent to $60 billion in

2012, with particularly rapid growth in FDI to LDCs and small island developing States (SIDS). The share o

the group as a whole rose to 4.4 per cent o global FDI.

FDI inows to least developed countries (LDCs) grew robustly by 20 per cent and hit a record high o

$26 billion, led by strong gains in Cambodia, the Democratic Republic o the Congo, Liberia, Mauritania,

Mozambique and Uganda. The concentration o inows to a ew resource-rich LDCs remained high.

Financial services continued to attract the largest number o greenfeld projects. With greenfeld investments

rom developed countries shrinking almost by hal, nearly 60 per cent o greenfeld investment in LDCs was

rom developing economies, led by India.

FDI to landlocked developing countries (LLDCs) reached $35 billion, a new high. The Silk Road economies

o Central Asia attracted about 54 per cent o LLDC FDI inows. Developing economies became the largest

investors in LLDCs, with particular interest by TNCs rom West Asia and the Republic o Korea; the latter

was the largest single investor in LLDCs last year.

FDI ows intosmall island developing States (SIDS) continued to recover or the second consecutive year,

increasing by 10 per cent to $6.2 billion, with two natural-resources-rich countries Papua New Guinea, and

Trinidad and Tobago explaining much o the rise.

INVESTMENT POLICY TRENDSMany new investment policies have an industry-specifc angle

At least 53 countries and economies around the globe adopted 86 policy measures aecting oreign

investment in 2012. The bulk o these measures (75 per cent) related to investment liberalization, acilitation

and promotion, targeted to numerous industries, especially in the service sector. Privatization policies

were an important component o this move. Other policy measures include the establishment o special

economic zones (SEZs).


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxx

Rise o regionalism brings challenges and opportunities

Investment regionalism is gaining ground: 8 o the 10 other IIAs concluded in 2012 were regional ones.

Furthermore, this year, at least 110 countries are involved in 22 regional negotiations. Regionalism canprovide an opportunity or rationalization. I parties to nine such negotiations (i.e. those where BITs-type

provisions are on the agenda) opted to replace their respective BITs with an investment chapter in the

regional agreement, this would consolidate todays global BIT network by more than 270 BITs, or close to

10 per cent.

New IIAs tend to include sustainabledevelopmentriendly provisions

IIAs concluded in 2012 show an increased inclination to include sustainable-development-oriented

eatures, including reerences to the protection o health and saety, labour rights and the environment.

These sustainable development eatures are supplemented by treaty elements that more broadly aim to

preserve regulatory space or public policies in general or

to minimize exposure to investment litigation in particular.

Many o these provisions correspond to policy options

eatured in UNCTADs Investment Policy Framework or

Sustainable Development (IPFSD).

Opportunities or improving the IIA regime

Countries have several avenues or improving the IIA

regime, depending on the depth o change they wish

to achieve. These include the contracting States right

to clariy the meaning o treaty provisions (e.g. through

authoritative interpretations), the revision o IIAs (e.g.

Figure 5. Trends in IIAs, 19832012


0

500

1 000

1 500

2 000

2 500

3 000

3 500

0

50

100

150

200

250

BITs Other IIAs All IIAs cumulative

Average o1 IIA

per week

AnnualnumberoIIAs

CumulativenumberoIIAs

Average o 4IIAs per week

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

Figure 6. Cumulative number o BITs that canbe terminated or renegotiated

Beore

2014

2014 2015 2016 2017 2018 By end

2018

1,325 75

57

5447

40

1,598


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OVERVIEW xxi

through amendments), the replacement o older IIAs (e.g. through renegotiation), or the termination o IIAs

(either unilaterally or by mutual consent). Treaty expiration can support several o the above options. By the

end o 2013, more than 1,300 BITs will be at the stage where they could be terminated or renegotiated at

any time, creating a window o opportunity to address inconsistencies and overlaps in the multi-aceted

and multi-layered IIA regime, and to strengthen its development dimension (fgure 6). In taking such actions,

countries need to weigh the pros and cons in the context o their investment climate and their overall

development strategies.

InvestorState arbitration: highest number o new cases ever

In 2012, 58 new known investorState dispute settlement (ISDS) cases were initiated. This brings the

total number o known cases to 514 and the total number o countries that have responded to one or

more ISDS cases to 95. The 58 cases constitute the highest number o known ISDS claims ever fled in

one year and confrm oreign investors increased inclination to resort to investorState arbitration. In light

o the increasing number o ISDS cases and persistent concerns about the ISDS systems defciencies,

the debate about the pros and cons o the ISDS mechanism has gained momentum, especially in those

countries and regions where ISDS is on the agenda o IIA negotiations.

InvestorState arbitration: sketching paths towards reorm

The unctioning o ISDS has revealed systemic defciencies. Concerns relate to legitimacy, transparency,

lack o consistency and erroneous decisions, the system or arbitrator appointment and fnancial stakes.

As a response, UNCTAD has identifed fve broad paths or reorm: promoting alternative dispute resolution,

modiying the existing ISDS system through individual IIAs, limiting investors access to ISDS, introducing

an appeals acility and creating a standing international investment court. IIA stakeholders are prompted to

assess the current system, weigh the available options and embark on concrete steps or reorm. Collective

eorts at the multilateral level can help develop a consensus about the preerred course o reorm and waysto put it into action.

GLOBAL VALUE CHAINS AND DEVELOPMENT

Trade is increasingly driven by global value chains

About 60 per cent o global trade, which today amounts to more than $20 trillion, consists o trade in

intermediate goods and services that are incorporated at various stages in the production process o

goods and services or fnal consumption. The ragmentation o production processes and the international

dispersion o tasks and activities within them have led to the emergence o borderless production systems.

These can be sequential chains or complex networks, their scope can be global or regional, and they are

commonly reerred to as global value chains (GVCs).

GVCs lead to a signifcant amount o double counting in trade, as intermediates are counted several times

in world exports but should be counted only once as value added in trade. Today, some 28 per cent o

gross exports consist o value added that is frst imported by countries only to be incorporated in products

or services that are then exported again. Some $5 trillion o the $19 trillion in global gross exports (in 2010

fgures) is double counted (fgure 7). Patterns o value added trade in GVCs determine the distribution o

actual economic gains rom trade to individual economies.

The spread o GVCs is greater in some industries where activities can be more easily separated, such as

electronics, automotive or garments, but GVCs increasingly involve activities across all sectors, including

services. While the share o services in gross exports worldwide is only about 20 per cent, almost hal (46


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxxii

per cent) o value added in exports is contributed by services-sector activities, as most manuacturing

exports require services or their production.

The majority o developing countries are increasingly participating in GVCs. The developing-country sharein global value added trade increased rom 20 per cent in 1990 to 30 per cent in 2000 to over 40 per cent

today. However, many poorer developing countries are still struggling to gain access to GVCs beyond

natural resource exports.

Regional value chain links are oten more important than global ones, especially in North America, Europe,

and East and South-East Asia. In the transition economies, Latin America and Arica, regional value chains

are relatively less developed.

GVCs are typically coordinated by TNCs

GVCs are typically coordinated by TNCs, with cross-border trade o inputs and outputs taking place

within their networks o afliates, contractual partners and arms-length suppliers. TNC-coordinated GVCsaccount or some 80 per cent o global trade. Patterns o value added trade in GVCs are shaped to a

signifcant extent by the investment decisions o TNCs. Countries with a higher presence o FDI relative to

the size o their economies tend to have a higher level o participation in GVCs and to generate relatively

more domestic value added rom trade (fgure 8).

TNCs coordinate GVCs through complex webs o supplier relationships and various governance modes,

rom direct ownership o oreign afliates to contractual relationships (in non-equity modes o international

production, or NEMs), to arms-length dealings. These governance modes and the resulting power

structures in GVCs have a signifcant bearing on the distribution o economic gains rom trade in GVCs and

on their long-term development implications.

Figure 7. Value added in global exports, 2010


$ Trillions ESTIMATES

Double counting(oreign value

added in exports)

Global gross exports Value added in trade

~19 ~5

~1428%


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OVERVIEW xxiii

TNC decisions on where to invest and with whom to partner are driven by GVC locational determinants

that depend on the GVC segment, task or activity. Locational determinants or GVC segments are oten

dierent, and ewer, than those or vertically integrated industries i.e. the determinants or electronics

assembly activities are ewer than those or investment in the electronics industry as a whole. For many

GVC segments, there are relatively ew make or break locational determinants that act as preconditions

or countries access to GVCs.

GVCs can make an important contribution to development, but GVC participationis not without risks

GVCs spread value added and employment to more locations, rather than hoarding them only in those

locations that are capable o carrying out the most complex tasks. As such, they can accelerate the catch-

up o developing countries GDP and income levels and lead to greater convergence between economies.

At the global level, that is the essential development contribution o GVCs.

At the country level, domestic value added created rom GVC trade can be very signifcant relative to the size

o local economies. In developing countries, value added trade contributes nearly 30 per cent to countries

GDP on average, as compared with 18 per cent or developed countries. There is a positive correlation

between participation in GVCs and GDP per capita growth rates. Economies with the astest growing GVC

participation have GDP per capita growth rates some 2 percentage points above the average. Furthermore,

GVC participation tends to lead to job creation in developing countries and to higher employment growth,

even i GVC participation depends on imported contents in exports.

But the experience o individual economies is more heterogeneous. The value added contribution o GVCs

can be relatively small where imported contents o exports are high and where GVC participation is limited to

lower-value parts o the chain. Also, a large part o GVC value added in developing economies is generated

by afliates o TNCs, which can lead to relatively low value capture, e.g. as a result o transer pricing or

income repatriation. However, even where exports are driven by TNCs, the value added contribution o

local frms in GVCs is oten very signifcant. And reinvestment o earnings by oreign afliates is, on average,

almost as signifcant as repatriation.

Figure 8. Key value added trade indicators, by quartile o inward FDI stock relative to GDP, 2010

1st quartile(Countries with high FDIstock relative to GDP)

2nd quartile

3rd quartile

4th quartile(Countries with low FDIstock relative to GDP)

34%

24%

17%

18%

Foreign value addedin export GVC participation

Contribution o value addedtrade to GDP

58%

54%

47%

47%

37%

30%

24%

21%



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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxxiv

As to employment gains, pressures on costs rom global buyers oten mean that GVC-related employment

can be insecure and involve poor working conditions, with occupational saety and health a particular

concern. Also, stability o employment in GVCs can be low as oscillations in demand are reinorced along

value chains and GVC operations o TNCs can be ootloose. However, GVCs can serve as a mechanism

to transer international best practices in social and environmental issues, e.g. through the use o CSR

standards, although implementation o standards below the frst tier o the supply chain remains a challenge.

Longer-term, GVCs can be an important avenue or developing countries to build productive capacity,

including through technology dissemination and skill building, opening up opportunities or industrial

upgrading. However, the potential long-term development benefts o GVCs are not automatic. GVC

participation can cause a degree o dependency on a narrow technology base and on access to TNC-

coordinated value chains or limited value added activities.

At the frm level, the opportunities or local frms to increase productivity and upgrade to higher value added

activities in GVCs depend on the nature o the GVCs in which they operate, the governance and power

relationships in the chain, their absorptive capacities, and the business and institutional environment in the

economy. At the country level, successul GVC upgrading paths involve not only growing participation inGVCs but also higher domestic value added creation. At the same time, it involves gradual expansion o

participation in GVCs o increasing technological sophistication, moving rom resource-based exports to

exports o manuactures and services o gradually increasing degrees o complexity.

Countries need to make a strategic choice whether to promote or not to promoteGVC participation

Countries need to careully weigh the pros and cons o GVC participation, and the costs and benefts o

proactive policies to promote GVCs or GVC-led development strategies, in line with their specifc situation

and actor endowments. Some countries may decide not to promote GVC participation. Others may not

have a choice: or the majority o smaller developing economies with limited resource endowments thereis oten little alternative to development strategies that incorporate a degree o participation in GVCs. The

question or those countries is not so much whetherto participate in GVCs, buthow. In reality, most are

already involved in GVCs one way or another. Promoting GVC participation requires targeting specifc GVC

segments, i.e. GVC promotion can be selective. Moreover, GVC participation is one aspect o a countrys

overall development strategy.

Policies matter to make GVCs work or development

I countries decide to actively promote GVC participation, policymakers should frst determine where their

countries trade profles and industrial capabilities stand and evaluate realistic GVC development paths or

strategic positioning.

Gaining access to GVCs, benefting rom GVC participation and realizing upgrading opportunities in GVCs

requires a structured approach that includes (i) embedding GVCs in overall development strategies and

industrial development policies, (ii) enabling GVC growth by creating and maintaining a conducive investment

and trade environment, and by providing supportive inrastructure and (iii) building productive capacities in

local frms. Mitigating the risks involved in GVC participation calls or (iv) a strong environmental, social and

governance ramework. And aligning trade and investment policies implies the identifcation o (v) synergies

between the two policy areas and in relevant institutions (table 3).

Embedding GVCs in development strategy. Industrial development policies ocused on fnal goods and

services are less eective in a global economy characterized by GVCs:


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OVERVIEW xxv

Table 3. Building a policy ramework or GVCs and development

Key elements Principal policy actions

Embedding GVCs in development

strategy

x Incorporating GVCs in industrial development policies

x Setting policy objectives along GVC development paths

Enabling participation in GVCsx Creating and maintaining a conducive environment or trade and investment

x Putting in place the inrastructural prerequisites or GVC participation

Building domestic productive

capacity

x Supporting enterprise development and enhancing the bargaining power o local frms

x Strengthening skills o the workorce

Providing a strong environmental,

social and governance ramework

x Minimizing risks associated with GVC participation through regulation, and public andprivate standards

x Supporting local enterprise in complying with international standards

Synergizing trade and investmentpolicies and institutions

x Ensuring coherence between trade and investment policiesx Synergizing trade and investment promotion and acilitationx Creating Regional Industrial Development Compacts

Source: UNCTAD.

t GVC-related development strategies require more targeted policies ocusing on fne-sliced activities

in GVCs. They also increase the need or policies dealing with the risk o the middle-income trap, as

the ragmentation o industries increases the risk that a country will enter an industry only at its low-

value and low-skill level.

t GVCs require a new approach to trade policies in industrial development strategies, because protective

trade policies can backfre i imports are crucial or export competitiveness. Trade policies should

also be seen in light o the increased importance o regional production networks as GVC-based

industrialization relies on stronger ties with the supply base in neighbouring developing economies.

t The need to upgrade in GVCs and move into higher value added activities strengthens the rationale

or building partnerships with lead frms or industrial development. At the same time, GVCs call or

a regulatory ramework to ensure joint economic and social and environmental upgrading to achieve

sustainable development gains.t Finally, GVCs require a more dynamic view o industrial development. Development strategy and

industrial development policies should ocus on determinants that can be acquired or improved

in the short term and selectively invest in creating others or medium- and long-term investment

attractiveness, building competitive advantages along GVCs, including through partnerships with

business.

For policymakers, a starting point or the incorporation o GVCs in development strategy is an

understanding o where their countries and their industrial structures stand in relation to GVCs. That

should underpin an evaluation o realistic GVC development paths, exploiting both GVC participation and

upgrading opportunities. UNCTADs GVC Policy Development Tool can help policymakers do this.


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Enabling participation in GVCs. Enabling the participation o local frms in GVCs implies creating and

maintaining a conducive environment or investment and trade, and putting in place the inrastructural

prerequisites or GVC participation. A conducive environment or trade and investment reers to the overall

policy environment or business, including trade and investment policies, but also tax, competition policy,

labour market regulation, intellectual property, access to land and a range o other policy areas (see

UNCTADs Investment Policy Framework or Sustainable Development, IPFSD, which addresses relevant

trade and other policy areas). Trade and investment acilitation is particularly important or GVCs in which

goods now cross borders multiple times and where there is a need to build up productive capacity or

exports.

Providing reliable physical and sot inrastructure (notably logistics and telecommunications) is crucial or

attracting GVC activities. Developing good communication and transport links can also contribute to the

stickiness o GVC operations. As value chains are oten regional in nature, international partnerships or

inrastructure development can be particularly benefcial.

Building domestic productive capacity. A number o policy areas are important or proactive enterprise

development policies in support o GVC participation and upgrading: First, enterprise clustering mayenhance overall productivity and perormance. Second, linkages development between domestic and

oreign frms and inter-institution linkages can provide local SMEs with the necessary externalities to cope

with the dual challenges o knowledge creation and internationalization, needed or successul participation

in GVCs. Third, domestic capacity-building calls or science and technology support and an eective

intellectual property rights ramework. Fourth, a range o business development and support services

can acilitate capacity-building o SMEs so they can comply with technical standards and increase their

understanding o investment and trade rules. Fith, there is a case or entrepreneurship development policy,

including managerial and entrepreneurial training and venture capital support. Sixth, access to fnance or

SMEs helps to direct development eorts at the upstream end o value chains where they most directly

beneft local frms.

Furthermore, an eective skills development strategy is key to engagement and upgrading in GVCs, and toassist SMEs in meeting the demands o their clients with regard to compliance with certain CSR standards.

It can also acilitate any adjustment processes and help displaced workers fnd new jobs.

Policymakers should also consider options to strengthen the bargaining power o domestic producers vis-

-vis their oreign GVC partners, to help them obtain a air distribution o rents and risks and to acilitate

gaining access to higher value added activities in GVCs (WIR 11).

Providing a strong environmental, social and governance ramework. A strong environmental, social and

governance ramework and policies are essential to maximizing the sustainable development impact o

GVC activities and minimizing risks. Host countries have to ensure that GVC partners observe international

core labour standards. Equally important are the establishment and enorcement o occupational saety,

health and environmental standards in GVC production sites, as well as capacity-building or compliance.

Buyers o GVC products and their home countries can make an important contribution to saer production

by working with suppliers to boost their capacity to comply with host country regulations and international

standards, and avoiding suppliers that disrespect such rules.

Suppliers are increasingly under pressure to adapt to CSR policies in order to ensure their continuing role

in GVCs. EPZs are an important hub in GVCs and present an opportunity or policymakers to address CSR

issues on a manageable scale. Policymakers could consider adopting improved CSR policies, support

services and inrastructure in EPZs (e.g. technical assistance or certifcation and reporting, support on

occupational saety and health issues, recycling or alternative energy acilities), transorming them into

centres o excellence or sustainable business and making them catalysts or the implementation o CSR.

Governments or zone authorities could opt to oer such benefts in addition to or instead o some o the


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OVERVIEW xxvii

existing benefts oered to frms in EPZs. Benefts or frms could include cost sharing, harmonization o

practices, reduced site inspections and others. International organizations can help through the establishment

o benchmarks, acilitation o exchanges o best practices, and capacity-building programmes.

A host o other concerns and corporate governance issues should be addressed to minimize risks

associated with GVCs. These include transer pricing, where GVCs have the duplicate eect o increasing

the scope or transer price manipulation and making it harder to combat, to the detriment o raising

fscal revenues or development. In addition, to saeguard industrial development processes, governments

should seek to oster resilient supply chains that are prepared or and can withstand shocks, and recover

quickly rom disruption.

Synergizing trade and investment policies and institutions.As investment and trade are inextricably linked

in GVCs, it is crucial to ensure coherence between investment and trade policies. Avoiding inconsistent

or even sel-deeating approaches requires paying close attention to those policy instruments that may

simultaneously aect investment and trade in GVCs, i.e. (i) trade measures aecting investment and (ii)

investment measures aecting trade.

At the institutional level, the intense trade and investment links in GVCs call or closer coordination between

domestic trade and investment promotion agencies, as well as better targeting o specifc segments o

GVCs in line with host countries dynamic locational advantages. A number o objective criteria, based on

Figure 9. Regional Industrial Development Compacts or regional value chains


Regional Industrial

Development Compact

Partnership between governments

in regions

Partnership

between the

public and

private sectors

Partnership

between

governments andinternational

organizations

Partnership between trade and

investment promotion agencies

Integrated trade and investmentagreement (liberalization

and acilitation)

Joint trade and investmentpromotion mechanisms

and institutions

Joint GVCenabling

inrastructuredevelopment

projects

Joint GVCprogrammes tobuild productive

capacity orregional value

chains


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World Investment Report 2013: Global Value Chains: Investment and Trade for Developmentxxviii

a countrys GVC participation and positioning, can help determine the most appropriate institutional set-up

or trade and investment promotion.

Synergies should be sought also through integrated treatment o international investment and trade

agreements. Regional trade and investment agreements are particularly relevant rom a value chainperspective, as regional liberalization eo

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