Launching of the World Investment Report 2011 “Non-Equity Modes of International Production and Development” – Address by Mr. Raymond Mbilinyi, The Acting Executive Director of Tanzania Investment Centre (TIC) at the UN Offices Dar es Salaam

I am indeed very grateful privileged and honored by UNCTAD and the UN System here in Tanzania for giving me the opportunity to launch the World Investment Report 2011 which focuses on “Non-Equity Modes of International Production and Development” These modes, with growing interest by transnational corporations (TNCs), present opportunities for developing and transition economies to integrate more closely into the rapidly evolving global economy, to strengthen the potential of their home-grown productive capacity, and to improve their international competitiveness.

The Report, as always, also examines recent trends in FDI flows and policies. Global FDI has not yet recovered fully to its pre-crisis level, but seems likely to do so this year. This recovery will represent both a huge opportunity and a challenge for policymakers in all countries. Above all, the challenge for the development community and in particular Tanzania will be to make investment work towards achieving the Millennium Development Goals as outlined in our vision 2025.

I am happy to note that the timing for this report is coinciding with the launch of The Tanzania Five Years Development Plan (2011/2012 – 2015/2016) by He. Dr. Jakaya Mrisho Kikwete, The President of The United Republic of Tanzania in Dodoma on 7th June 2011. This report is an important tool towards the implementation of the five core priorities of the plan.

Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in 2010, but were still 15 per cent below their pre-crisis average. This is in contrast to global industrial output and trade, which were back to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.4–1.6 trillion, and approach its 2007 peak in 2013. This positive scenario holds, barring any unexpected global economic shocks that may arise from a number of risk factors still in play.The slow recovery of FDI flows in 2010 masked starkly divergent trends among regions, sectors and modes of FDI:

• While East and South-East Asia and Latin America experienced strong growth in FDI inflows (with increases of 34 and 14 per cent, respectively), those to Africa, South Asia, West Asia, and transition economies, as well as those to developed countries as a whole, continued to decline.

• FDI in manufacturing bounced back in the aftermath of the crisis, while services-sector FDI is still in decline.

• Cross-border mergers and acquisitions (M&As) are picking up (there value increased by 36 per cent in 2010), yet greenfield projects – which account for the majority of FDI – still fell

Here with the discovery of oil Uganda has clearly led investment inflows followed by Tanzania.2010 was notable in that, for the first time, developing and transition economies absorbed more than half of global FDI inflows, some $642 billion or 52 per cent of global FDI flows. As international production and, recently, international consumption shift to developing and transition economies, TNCs are increasingly investing in both efficiency- and market-seeking projects in those countries. However, FDI flows to the poorest regions continued to fall – a matter of grave concern. Africa, least developed countries, landlocked developing countries and small island developing States all experienced declines in FDI flows.

Developing and transition economies also generated nearly 30 per cent of global outflows – a record level at $388 billion – with much of the investment directed to other countries in the South. This reflects the growing confidence and dynamism of emerging-market TNCs and demonstrates the growing importance of these economies as sources of international investment.

International production is expanding, with foreign sales, employment and assets of TNCs all increasing. TNCs’ production worldwide generated value-added of approximately $16 trillion in 2010, about a quarter of global GDP. Foreign affiliates of TNCs accounted for more than one-tenth of global GDP and one-third of world exports. Let me now turn to recent policy trends related to FDI. Investment liberalization and promotion remained the dominant element in 2010, with 68 per cent of measures identified in 2010 in a direction more favourable to FDI. However, the risk of investment protectionism has increased as investment-related restrictions and administrative procedures have accumulated over the past years. Almost one-third of measures in 2010 relate to regulation or restriction of FDI, compared to only 2 per cent of measures at the start of the decade.

As far as international investment policies are concerned, the regime of international investment agreements is at a crossroads. With close to 6,100 treaties, many ongoing negotiations and multiple dispute-settlement mechanisms, it has come close to a point where it is too big and complex to handle for governments and investors alike, yet remains inadequate to cover all possible bilateral investment relationships (which would require a further 14,100 bilateral treaties). The policy discourse about the future orientation of the IIA regime and its development impact is intensifying. Recent years have witnessed a comeback of industrial policies. As a result, these policies increasingly interact with FDI policies. This interaction poses important challenges for making the two policies work together for development. Striking a balance between building stronger domestic productive capacity, on the one hand, and avoiding investment and trade protectionism, on the other hand, is key, as is enhancing international coordination and cooperation.

A final important development on the policy front is CSR. The investment policy landscape is influenced more and more by a myriad of voluntary corporate social responsibility (CSR) standards. Governments can maximize development benefits deriving from these standards through appropriate policies, such as harmonizing corporate reporting regulations, providing capacity-building programmes, and integrating CSR standards into international investment regimes
Let me return to the special topic of this year's WIR: non-equity modes of international production.In today’s world, policies aimed at improving the integration of developing economies into global value chains must look beyond FDI and trade. Policymakers need to consider non-equity modes (NEMs) of international production. NEM activities can be found throughout the global value chains of TNCs. They include contract manufacturing, services outsourcing, contract farming, franchising, licensing, management contracts, and other types of contractual relationship through which TNCs coordinate the activities of host-country firms, without owning a stake in those firms. Cross-border NEM activity worldwide is significant and particularly important in developing countries like Tanzania. It is estimated to have generated over $2 trillion of sales in 2009. Contract manufacturing and services outsourcing accounted for $1.1–1.3 trillion, franchising $330–350 billion, licensing $340–360 billion, and management contracts around $100 billion. In most cases, NEMs are growing more rapidly than the industries in which they operate

NEMs can yield significant development benefits. A key advantage of NEMs is that they are flexible arrangements with local firms, with a built-in motive for TNCs to invest in the viability of their partners through dissemination of knowledge, technology and skills. This offers host economies considerable potential for long-term industrial capacity-building through a number of key development impact channels such as employment, value added, export generation and technology acquisition.

NEMs employ an estimated 14–16 million workers in developing countries. Contract manufacturing and services outsourcing in industries such as garments, footwear and electronics account for the bulk of employment generation. NEMs also generate significant value added in developing countries, representing up to 15 per cent of GDP in some economies. Their exports account for 70–80 per cent of global exports in several industries. Overall, NEMs can support long-term industrial development by building productive capacity, including through technology dissemination and domestic enterprise development, and by helping developing countries gain access to global value chains. In Mozambique, for instance, contract farming has led to some 400,000 smallholders participating in global value chains.

In the sugar Industry in Tanzania, almost 60 per cent of the total feed stock required by Ilovo (TNC from South Africa) is provided by contract farmers. NEMs also pose risks for developing countries. Employment in contract manufacturing can be highly cyclical and easily displaced. The value added contribution of NEMs can appear low if assessed in terms of the value captured out of the total global value chain. And concerns exist that TNCs may use NEMs to circumvent social and environmental standards. For example, working conditions in NEMs based on low-cost labour have often been a concern. Over recent years, corporate social responsibility standards have often focused on the operations of TNCs, which have been pushed to influence their NEM partners through codes of conduct, to promote international labour standards and good management practices.A final concern relates to long-term industrial development. Developing countries need to mitigate the risk of remaining locked into low-value-added activities and becoming overly dependent on TNC-owned technologies and TNC-governed global value chains.Policy matters. Maximizing development benefits from NEMs requires action in four areas. First, NEM policies need to be embedded in overall national development strategies, aligned with trade, investment and technology policies and addressing dependency risks. Second, governments need to support efforts to build domestic productive capacity to ensure the availability of attractive business partners that can qualify as actors in global value chains. Third, promotion and facilitation of NEMs requires a strong enabling legal and institutional framework, as well as the involvement of investment promotion agencies in attracting TNC partners. Finally, policies need to address the negative consequences and risks posed by NEMs by strengthening the bargaining power of local NEM partners, safeguarding competition, protecting labour rights and the environment.Foreign direct investment is a key component of the world's growth engine. However, the post-crisis recovery in FDI has been slow to take off and is unevenly spread, with especially the poorest countries still in "FDI recession". Many uncertainties still haunt investors in the global economy. National and international policy developments are sending mixed messages to the investment community. And investment policymaking is becoming more complex, with international production evolving and with blurring boundaries between FDI, non-equity modes and trade. The growth of NEMs poses new challenges but also creates new opportunities for the further integration of developing economies into the global economy. The World Investment Report 2011 aims to help developing-country policymakers and the international development community navigate those challenges and capitalize on the opportunities for their development gains.I am very happy to report that Investors are still confident with the effort the government of Tanzania is doing to improve the investment climate thus why we have noted the growth of FDI inflows to Tanzania by 8.5 % ( From 645 million USD in 2009 to 700 USD in 2010) contrary to 9.0 % decline experienced by Africa overall 2010 inflows.We need to build the capacity of Domestic Investors to be ready to take advantage of “Non Equity Modes of International Production” for the sustainable investment and our National economic Growth.