Transnational Corporations - Volume 20, Issue 1, 2013

The western financial and economic crisis that began in 2008 was the worst for 70 years – by far more severe than, for example, the Asian financial crisis in the 1990s and the post-September 11, 2001 crisis. Among its many effects has been a significant downturn in global foreign direct investment (FDI), a phenomenon whose impact has been different in developing and developed economies. Since economic growth is the single most important FDI determinant for attracting investment, the global economic slowdown, accentuated by the crisis, rendered key markets less attractive for foreign investors – and hence depressed FDI flows. This impact was aggravated by severe restrictions on the ability of firms to invest abroad.

The paper compares the current FDI recession with FDI responses to past economic crises. While the decline in outflows from developed countries has been similar in magnitude to that in previous recessions, the recovery in FDI has been much slower than in the past. Inflows to emerging markets, which remained stable during previous economic crises, have experienced an overall decline. Both patterns indicate that the global scale of the current crisis has had a different and more marked FDI response than after earlier individual country crises. Compared with other global economic downturns since the 1970s, the current FDI recession has also been greater in magnitude. (The exception to this was the large FDI plunge in the early 2000s, despite the much smaller economic crisis at the time.) To the extent past FDI patterns can provide relevant insights to the current FDI slump, this could indicate that global FDI flows may remain below 2007 levels until at least 2014. The paper concludes by recommending policymakers to not just further liberalize FDI regimes – the typical response to earlier crises – but rather to use the downturn to completely rethink their FDI policies, with an enhanced focus on promotion of “sustainable FDI”.

In the past 10 to15 years, Western transnational corporations (TNCs) have been joined by at least three new players on the foreign direct investment (FDI) stage: sovereign wealth funds (SWFs), private equity firms and emerging market TNCs. This article considers how “new” these players are, their contribution to global FDI outflows, how they were affected by the financial crisis, and their likely future role. I conclude that, with a few exceptions, SWFs will continue to be marginal FDI players, despite their high visibility. Private equity firms will play a highly volatile role, varying from marginal at times to important at others. Emerging market TNCs, on the other hand, are already quite important and will become even more so, as emerging markets become prime movers of the global economy. I contend that this is to be welcomed, because emerging market TNCs contribute to sustainable development in ways that Western TNCs cannot, given their distinctive capabilities in making and selling products for price-sensitive customers, and their competence in some green technologies. In the long term, the financial crisis will prove merely to have accelerated the inevitable rise of emerging markets as both sources and destinations for FDI.

Both positive contributions and negative damages from foreign direct investment are greater than even the most sophisticated of today’s models and estimating techniques can portray. Securing these positive contributions and avoiding the negative damages requires strategies to correct for market failures, to supply public goods and international standards, to capture positive externalities and limit negative externalities. Members of international civil society, labour groups, corporate social responsibility advocates, international donors, and multilateral lenders should fashion their agenda more closely – as outlined here – to provide those external pressures and actions needed to optimize the impact of mainstream transnational corporate activities on host country growth and welfare. The findings reported here should not in any way undercut the efforts of those who simply want to pressure transnational corporations to “give back” more to the communities where they operate. Corporate charity surely has its place, but the pro-poor sustainable development policy community will want to focus on the larger – and in many ways more important – set of targets sketched out here.

As is well-known to readers of this journal, foreign direct investment (FDI) is undertaken by transnational corporations (TNCs). In many ways FDI is not a financial investment decision, rather it is a micro-level, firm-driven, strategy decision. Thus FDI and TNC strategy need to be carefully distinguished from financial (portfolio) investment decisions which are country-level, macroeconomic, decisions. This distinction between FDI and portfolio investment has eluded many commentators on the international financial crisis. For example, although large banks and financial institutions are types of TNCs, their firm-level strategic FDI decisions need to be distinguished from country-level macroeconomic trade and financial imbalances. In this paper, we attempt to work through the logic of this distinction between FDI and portfolio investment to analyse the international financial crisis.

This article examines the connection between insolvency law and sustainable recovery from financial difficulty or crisis and economic development. Set against the backdrop of the recent history of insolvency reform, it considers the convergence that has emerged on the goals and objectives for insolvency law and the need for, and desirability of, a universal insolvency regime that would facilitate the treatment of cross-border cases, particularly those affecting transnational corporations (TNCs). It highlights some of the difficulties associated with achieving such a regime, challenging the political and practical feasibility of that achievement. It concludes by reflecting on what has been achieved in the last 20 years and how that has paved the way for future developments.