20 August 2004
SMALL COUNTRIES INVEST RELATIVELY MORE ABROAD THAN BIG ONES
do countries stack up in terms of their outward foreign direct investment (FDI)
performance against each other? Which
have seen greater increases in the transnationalization of their economies?
UNCTAD’s new Outward FDI Performance Index, the results
of which were released in Geneva on 19 August, measures the relative importance
of a country’s outward FDI against its economic size as measured by GDP.
(More precisely, the Index is calculated as the share of a country’s
outward FDI in world FDI as a ratio of its share in world GDP.)
“The Index shows that small developed and developing countries invest
relatively more abroad than big ones and that there is greater potential for
outward FDI for some big countries”, says Karl P. Sauvant, Director of
UNCTAD’s Investment Division.
speaking, the Index reflects two sets of factors that determine outward FDI by
transnational corporations (TNCs) headquartered in a given country.
Or, to put it in other terms, differences in the Index values among
countries reflect differences in these two sets of factors determining outward
FDI by TNCs headquartered in different countries:
“Ownership advantages”, or firm-specific competitive strengths of TNCs (such
as innovation, brand names, managerial and organizational skills, access to
information, financial or natural resources, and size and network advantages)
that they are exploiting abroad or wish to augment through foreign expansion.
“Location factors”, which reflect primarily economic factors conducive to
the production of different goods and services in home and host economies, such
as relative market size, production or transport costs, skills, supply chains,
infrastructure and technology support.
by the competitive pressures of a globalizing world economy, both factors work
together to lead firms -- large and small ones, from developed and developing
countries alike -- to invest abroad by establishing foreign affiliates.
These affiliates then become a source of the competitive strength of
their respective corporate networks.
Bearing in mind the nature and origin of some FDI flows and stocks (“Roundtripping” where investment is made abroad for tax reasons and ends up back in the home country, is one such problem), the ranking of countries by Index values confirms the expectations:
Relatively small economies (e.g., Denmark, Finland, Netherlands, Sweden and
Switzerland) figure prominently on the top of the list.
This suggests that these economies have highly competitive enterprises
with ownership advantages that enable them to compete successfully in
international markets, overcoming the disadvantages of operating in foreign
locations. On the other hand, it
also reflects the relatively small size of markets in their home economies,
which is what drives them to expand abroad.
-- Countries at the top of the Index also include a number of developing economies from South-East Asia (e.g., Hong Kong (China), Malaysia and Singapore). Firms from these relatively small, open economies are subject to the same competitive pressures of the globalizing world economy as their counterparts from developed countries, and are, thus, increasingly building up their competitive strength for expanding through FDI.
A number of economies have seen an improvement in their outward FDI performance over the past 15 years. The fact that their FDI grew faster than their share of global GDP indicates that their enterprises are building ownership advantages rapidly and/or are increasingly choosing to exploit their advantages by establishing operations in foreign locations.