TNCs’ role in mobilizing financial resources and the impact on investment

Globalizing is shrinking deeply day by day because of some reasons. As an example we can refer to foreign direct investment. Foreign direct investment inflows globally continued to rise by 30% in 2007: at $1,833 billion, they reached a new record level. It must be mentioned, that previous all-time high set was reached in 2000. It is also said, that the financial and credit crisis, which began to affect several economies in late 2007, did not have a significant impact on the volume of FDI inflows that year, but it has added new uncertainties and risks to the world economy. Therefore, this might have a dampening effect on global FDI in 2008-2009. Following table shows the tendency of foreign direct investment. Undoubtedly, the impact of transnational corporations increases in the world economy respectively with foreign direct investment.

Direct investments’ volume is becoming higher year by year.(2.2-table) As we know transnational corporations are main source of direct investment. That’s why, we are able to say that the role and impact of TNCs in the world economy tend to grow in future.

Table 2.2 - Possible growth direct investments’ volume

Expanding and upgrading infrastructure in keeping with developing countries’ growing requirements calls for substantial investment in infrastructure industries, which are typically capital-intensive due to the physical facilities and networks that they involve. Many projects are very large and are characterized by economies of scale. They require huge capital outlays, while the stream of returns on capital is spread over many years. Thus the risks to investors are typically high. Mobilizing the necessary financial resources from domestic or international capital markets is difficult for public or private enterprises in many developing countries. This has led a number of countries to open up to FDI and/or encourage other modes of TNC involvement, such as build-own-operate (BOO), build-own-transfer (BOT) or rehabilitate-own-transfer (ROT) concession arrangements. Indeed, TNCs may have a number of competitive advantages that enable them to contribute to the mobilization of financial resources for boosting investment in infrastructure industries, while also being directly involved in undertaking the investments and production activities for the provision of infrastructure services.

Financial strength and large cash flows are competitive advantages that foster rapid expansion of many TNCs operating in infrastructure. In addition, large and well-established firms are able to raise funds from home-country and international markets as well as from host developing-country markets, where the latter exist. This ability to mobilize and harness external financial resources for investment is particularly evident in concessions such as BOTs, in which a high proportion of the costs are covered by debt. However, the extent to which TNCs can contribute to financial resources for investment in infrastructure also depends on host-country conditions and objectives, the specific infrastructure needs of a country and the gaps in domestic (State and private) resources and capabilities.

In the early 1990s, as more and more developing countries began to open up their infrastructure industries to private national and foreign companies, it was believed that TNCs could play a key role in securing financial resources to reduce the persistent gap between infrastructure needs and investments by the State, which was the main provider of the services. At the time, many of the countries concerned, especially in Latin America and Africa, were heavily indebted and turned to the private sector, including TNCs. Since then, the financial situation has improved for some economies, but the investment gap in infrastructure still remains very large in the developing world as a whole. Thus the ability of TNCs to mobilize financial resources for investment remains an important consideration for many countries. Indeed, TNC participation in infrastructure in developing countries has resulted in the inflow of substantial financial resources. One indicator, allowing for data limitations, is the stock of infrastructure FDI in developing countries, which surged 29-fold between 1990 and 2006: from $6.8 billion to $199.4 billion. Another measure, the foreign investment commitments in private participation in infrastructure (PPI) projects (which include FDI, but also other investments that are an element of concessions), also indicates that TNCs have mobilized significant resources for investment in developing countries. During the period 1996–2006 such commitments amounted to about $246 billion. The impact on infrastructure investment in developing countries arising from this mobilization of financial resources by TNCs is discussed below, including variations by region, industry and country.

Overall impact of TNC involvement on infrastructure investment in developing countries. Not all financial resources mobilized by TNCs constitute investment or an addition to productive assets for a host industry or country. One reason is that a proportion of FDI by TNCs is used to purchase privatized enterprises, which represents a transfer of ownership, but not new capital stock. But at the same time other forms of TNC participation also include investment. This is especially true of concessions, which involve large amounts of investment to build new or improve existing infrastructure. During the period 1996–2006, according to data on the breakdown of foreign investment commitments (referred to in the discussion below as TNC commitments), 52% of TNC participation, by value, in the infrastructure industries    of developing countries was in the form of FDI, while the remaining 48% was in the form of concessions. This nearly equal ratio of concessions to FDI implies a possibly greater overall impact on investment in infrastructure industries than that suggested by data on the stock of FDI. Because some relevant data are not available, it is not possible to give a precise figure for the impact of TNCs, but it is certainly appreciable and likely to be higher than that suggested by FDI data alone.

In addition to their direct impact on investment, the entry and operations of TNCs can indirectly influence investment levels in host country infrastructure industries through their effects on investments of domestic firms – whether state-owned enterprises or private enterprises. These effects can vary: TNC involvement may “crowd in” other investors; or an increase in the competitive advantages of domestic enterprises through diffusion of technology and other know how from TNC operations may enable them to invest in new areas; or, taxes paid by TNCs could potentially be used for further infrastructure investments by the State. On the other hand, a fall in investment levels might occur from the “crowding-out” of investors, for example because of competition, when domestic enterprises are still at an early stage of development or due to anti-competitive behavior by TNCs.

A consequence of investment in infrastructure by foreign companies in the 1990s was a decline in public investment in the sector across much of Latin America and parts of Africa. In expectation of a large-scale increase in private sector investment, many governments in Latin America – faced with persistent budgetary gaps – cut back drastically on public expenditure in infrastructure in the early 1990s. Between 1980–1985 and 1996–2001, total expenditure on infrastructure investment in seven major Latin American economies taken together declined from a weighted average of 3.7% of GDP to 2.2%, even though private investment (primarily by TNCs) in the industries actually rose from 0.6% to 1.4% of GDP, albeit with considerable differences between countries. An important lesson from the Latin American experience is that TNC participation should not be considered sufficient to meet a country’s investment needs in infrastructure; rather, it should be viewed as an important supplement and complement to domestic investment. Developing countries should therefore strengthen and improve the capabilities of their State-owned enterprises (where these continue to play a role), while at the same time encouraging their domestic private sector to develop the necessary expertise and financial capabilities to participate effectively in infrastructure industries.

Variations in the impact of TNC involvement on investment, by industry, region and country. As mentioned earlier, investments by TNCs in infrastructure projects in developing countries amounted to $246 billion during the period 1996– 2006, or an average of 28.5% of total investment commitments. This share indicates an appreciable contribution by TNCs to infrastructure investment in developing countries, as a whole. Differences exist in the degree of TNCs’ impact on the level of investments by industry, region and country, judging from the variations in the shares of TNCs in total private sector infrastructure investment commitments.

By infrastructure industry, TNCs’ shares in PPI(private participation in infrastructure) investment commitments during the period 1996– 2006, were highest in telecommunications (35.2%) and electricity (30.0%) and lowest in water (25.2%) and transport (19.3%). Apart from this, according to the World Bank’s PPI database, other notable variations included: a significant drop in the share of TNCs in energy investments in South Asia between 1996–2000 and 2001–2006, primarily reflecting difficulties faced by India in realizing its strategy towards attracting infrastructure TNCs; a decline in TNC participation in the telecommunications industry in East Asia and South-East Asia and Latin America and the Caribbean during the period 2001– 2006, reflecting the growing strength of domestic companies in these regions very large swings in TNC investment commitments in transport in nearly all regions between 1996–2000 and 2001–2006, possibly reflecting developments in a number of the sub-industries involved; and increases in TNCs’ share in overall private investment commitments in water in some regions and sub regions between 1996–2000 and 2001–2006, reflecting the efforts of countries to improve access to safe, clean water for their populations.

Regionally, the share of TNCs in total PPI commitments ranged from 19.8% in Asia in 1996– 2006 (with the lowest share in South Asia and highest in West Asia) to 35.5% in Africa and 33.3% in Latin America and the Caribbean. The variation in the share of TNCs in PPI investment commitments during the period 1996–2006 was even greater by country, with 75% of economies (out of 105 for which data are available) indicating a share above the overall average of 28.5%. The overall average share is low because a number of countries with large total investment commitments have below-average figures for the share of TNCs in these commitments, including Brazil, China, India, Malaysia, Mexico and

South Africa.

In a large number of countries the share of TNCs in total PPI investment commitments is significant: between 28% and 50%; and in a number of them the share is even higher, in the 50%–75% range. Furthermore, for nearly one fifth of countries (20) TNCs’ share in total private sector investment commitments is 75% or more. This group includes 13 least developed countries, among them Burundi, Chad, Guinea-Bissau, Haiti, Maldives, Samoa and Sudan. Their high share of TNC participation implies that for many least developed countries TNCs are more or less the private infrastructure sector.