Investment sans equity

The focus of UNCTAD's World Investment Report 2011 is on a fast growing but less understood facet of international production and commerce. The term ‘cross-border non-equity modes' (NEMs) appears to be an inelegant description of the fairly common activities of transnational corporations (TNCs), such as contract manufacturing, services outsourcing, contract farming, franchising, licensing, and contractual management. However, it does effectively signify the one common element in them: the absence of an equity investment while contracting out manufacturing or licensing patents and processes to a firm located in the host country. International production is not exclusively about foreign direct investment (FDI) and trade. Investments that fund mergers and acquisitions and greenfield investments involve capital flows across borders. Hence it is customary to classify them as ‘cross-border FDI'. On the other hand, the NEMs are a mechanism that allows transnational corporations to coordinate activities in their global value chains and influence the management of host country firms without acquiring equity stakes in those firms.

The NEMs, which generated at least $2 trillion in sales globally in 2010, have acquired a significant presence particularly in many developing countries, including India, where governments have tended to put a cap on FDI in many sectors. Under the NEM arrangement, a TNC gains access to the productive capacity of a local partner without putting money into it. In some industries, major NEM firms, including those from developing countries, have become multinationals in their own right. Notable examples from India are software companies that have carved a niche for themselves in the technology outsourcing space. In the process of servicing their clients, they have expanded and established themselves in many countries. Development benefits flowing from NEMs are significant. In many countries, for example, their value addition is as high as 15 per cent of GDP. They employ 18-21 million workers worldwide, a chunk of them in developing countries, aside from boosting entrepreneurial skills and exports. On the negative side, the working conditions are known to be poor at least in some of the NEMs in developing countries. In the West, consumer groups have exposed the seamy side of some contract manufacturing units that have sacrificed safety and environmental standards for short-term profits. It is imperative for the developing countries to beware of the risk of getting tied up with low-value activities and adopt policies aimed at maximising benefits from the integration of domestic firms into global value chains.

Recommended for you