The share of the services sector in total foreign direct investment (FDI) stock(1) now amounts to some 60% at the global level, compared to less than 50% a decade ago, according to new estimates released by UNCTAD today. At the same time, a new pattern of services FDI has emerged, with financial and trading services, the traditional bulwarks of services stock, ceding ground to new industries.
The overall rise in services stock - which applies to both developed and developing countries, and to both inward and outward investment - is mirrored by a decline in the share of manufacturing in FDI inward stock, from more than 40% in 1990 to 35% today (figure 1). The share of the primary sector also fell, from 10% to 6%.
Finance and trading stock decreased from 65% of all inward services stock in 1990 to 45% in 2001, while that of the new FDI service industries - including power generation and distribution, telecommunications and business services - rose from 17% to 44% (table 1).
The growth of FDI in services reflects two factors, UNCTAD finds: the rise of the services economy in developed countries, where it now accounts for an average two thirds of GDP; and the opening up to FDI in services of all groups of economies. As many services are neither tradeable nor storable, but must be produced where they are consumed, FDI is the dominant means of delivering them to foreign markets. In addition, host-country regulations often require local establishment for the delivery of services.
The fact that services affiliates abroad are increasingly established by manufacturers in support of trade and other operations abroad also helps the ascendance of services in FDI(2). Their expansion is further fuelled by information and communication technologies that make services, especially information-intensive ones, more tradeable across borders and allow the emergence of international services production networks. Among the "up-and-coming" services industries are power generation and distribution (electricity, gas and water), telecommunications, and business services, such as machinery and equipment rental, computer-related activities, research and development, and advertising.
In all industries, developed countries continue to dominate outward FDI stock (table 2); developing countries and the countries of Central and Eastern Europe account for less than 10% of the total in many industries. Outward FDI from these two groups of countries is fuelled by services FDI, in particular trade-supporting and niche FDI in services: trading and finance affiliates, and business activities serving emigrants from developing home countries.
In absolute terms, FDI stock has grown in all sectors and almost all industries (tables 1 and 2). Even in agriculture, hunting, forestry and fishing, traditionally not an important FDI, inward FDI stock more than doubled between 1990 and 2001. Inward stock in services, however, quintupled.
In the primary sector, FDI is determined primarily by resource endowments, not by the industrial characteristics that affect investment in manufacturing and services. In resource-intensive activities, FDI is concentrated in countries that have high-quality, low-cost resources in abundance. While developing countries are rich in natural resources and attract considerable FDI, few internationally competitive firms in the primary sector come from these countries.
In the manufacturing sector, the two industries with the largest FDI - chemicals and electronics - accounted for one third of manufacturing FDI inward stock in 1990 and 30% in 2001 (tables 1 and 2). As manufacturing is a mature sector, none of its individual industries is as dynamic in terms of FDI growth as many services industries. Thus, the shares of almost all manufacturing industries in total FDI stock have fallen over the years in developed and developing countries alike.
The traditional concentration of FDI services stock on financial and trading services reflected the early international expansion of trading companies (e.g. Japanese sogo shoshas(3) and Western European traders) and transnational banks following their customers abroad. Although these trends continue, these industries are not as dynamic as other services industries, such as power generation and distribution (which registered a 13-fold increase in inward FDI stock between 1990 and 2001), telecommunications (including storage and transport - a nearly 15-fold increase), and business activities (ninefold). Other dynamic services include health services (including social services) and education, where stock has increased, respectively, by 12 and five times over the same period; nonetheless, the absolute size of the stock in these activities is still very small (table 1).
FDI in most industries not only originates in developed countries but is also invested primarily in them, typically because this is where the markets are. But there are some notable exceptions: in construction, for example, the FDI stock in developing countries exceeds that in developed countries, and the picture is similar in electricity, gas and water, where the stock size is not very different in the two country groups (table 1). In most manufacturing industries, the stock in developing countries is still several times smaller than in developed countries. But the gap is shrinking: developing countries´ manufacturing stock has risen from one fifth that of the industrial world in 1990 to one half in 2001. Food, beverages and tobacco, wood, machinery and equipment, and especially coke and petroleum products were among the industries to see the biggest reduction in this gap.
