Business News

October, 2002

Book Review

Role of TNCs

A guide to how the developing countries can benefit from the transnational companies.

Improving export competitiveness helps countries to develop. And the changing international production system of transnational companies (TNCs) can play a key role in providing opportunities as well as challenges for developing countries and economies in transition. This is what United Nations Conference on Trade and Development (UNCTAD) has concluded in the World Investment Report 2002 (WIR02) released on September 17.

Subtitled “Transnational Corporations and Export Competitiveness”, the report however also cautions that “the development gains from export expansion cannot be taken for granted.”

The reasons are obvious. As the UNCTAD report explains, even though export-oriented foreign direct investment (FDI) will help a developing country to increase exports, the foreign affiliates also import. In some cases, the net foreign exchange earnings may be small, and high export value may coexist with low level of value added.

In this situation, it is a challenge for the developing country which hosts FDI to benefit from the assets that the TNCs command. UNCTAD says, much depends on the strategies pursued by TNCs on the one hand, and the corresponding host-country capabilities and policies, on the other.

TNCs can contribute to the upgrading of a country’s competitiveness by shifting from low-productivity, low-technology activities to high-productivity, high-technology ones and progressively developing backward linkages with domestic enterprises. The message for developing countries desirous of benefiting from foreign investment is that they should first link up with the international production systems of the TNCs and then try to benefit more from them.

But the second part of this strategy is tricky. First, while competing to attract FDI, countries may tend to race to the bottom (reducing the duties and labour standards) and race to the top (by increasing the incentives) so that the benefits to the exchequer completely vanish. Second, when they succeed to attract FDI on the strength of low labour wages at present, gradually the wage rate will rise as the productivity improves. Eventually, the benefit of wage differential may vanish and the export competitiveness too will vanish prompting the FDI to go out in search of alternate location.

What WIR02 has recommended as a solution is a targeted marketing to attract foreign investment, which, however, must be in line with the broad development objective of the country. The last of the three parts of the WIR02 and two of its eight chapters are devoted on the extensive analysis of policy measures and the targeted promotion strategy. UNCTAD has even developed a training program on investor targeting (3-8 days workshop), and it is claimed that Egyptian diplomats have benefited from this training.

FDI Performance Index 2002

Releasing the WIR02, UNCTAD has also published FDI Performance Index which measures a country’s share in global FDI inflows as a proportion of its share in global GDP.

The index ranks Nepal 133rd among 140 countries for the period 1998-2000. It is 13 rungs down from the rank Nepal had in the same index for the period 1988-90.

The highest slots have gone to Belgium and Luxembourg (combined), Hong Kong, Angola, Ireland and Malta who secured the first five positions respectively for being able to attract very high share of FDI compared to their share in world GDP.

In South Asia and around, India ranked 119 against China’s 47 and Pakistan‘s 114. While Sri Lanka is placed at 103, Bangladesh is 122. Bhutan and Maldives are not figured in the list.

In 1988-90, Singapore was ranked the first and it was followed by Hong Kong and Papua New Guinea. The ranking of countries in South Asia and around during 1988-90 was such: Bangladesh 127, China 61, India 121, Pakistan 77, Sri Lanka 85 and Nepal 120.

But a low place in the FDI performance ranking does not necessarily mean a bad performance. A country may be receiving the same amount in of FDI as in the previous period, but if its GDP has increased meanwhile substantially its ranking will slide down. Or a country may experience a sudden surge in FDI and then stabilize there. Moreover, like Japan, some countries may not be welcoming FDI. Unfortunately, non of these are the causes of the slide of Nepal’s ranking.

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