By Kathryn McConnell
Washington File Staff Writer

Washington -- Multinational corporations are expected to delay investment decisions this year and next as a result of the recent declines in global stock markets and the potential for military actions in response to the September 11 terrorist acts, says Harvard Economist Jeffrey Sachs.

"We already see whole industries in deep financial trouble" because of the terrorist attacks, Sachs said during a September 17 briefing on the United Nations' World Investment Report 2001. The report, released September 19, notes that after a record high level of foreign direct investment (FDI) in 2000 -- $1,300,000 million -- foreign investment in 2001 is expected to decline for the first time in a decade.

Sachs said one place the current economic uncertainties are not likely to have a "huge effect" is in Mexico. There could be some degree of a "safe-haven" effect if U.S. investors start shifting from Asia to Latin America, he said. Mexico is a partner with the United States and Canada in the North American Free Trade Agreement (NAFTA), which has encouraged trade and investment.

One lesson of the past ten years, Sachs said, is that FDI is an "engine for development." He said because of large flows of FDI from the United States, which introduced technological improvements, and the opening of markets as a result of NAFTA, Mexico's economy has been transforming and modernizing.

Mexico, however, could experience a slowdown in growth because of a drag in U.S. economic activity, he said.

He said Brazil also shows benefits of FDI but Argentina does not because it has concentrated foreign investment in infrastructure and domestic sectors such as banking and not in the "internationally competitive part of its economy."

India's progress has been hampered by both a regulatory and political environment that makes it difficult for corporations to invest and slow progress in privatization. Indian has been losing capital investment and markets to China, Sachs said, adding that India's incoming FDI is less than one-tenth of China's.

"The view of many governments now is that it is not enough to be open for investment but that investment should be targeted to certain sectors," Sachs said.

The World Investment Report, which is principally an historical document and does not take into account revised investment plans as a result of the recent terrorism, says foreign investment continues to be unevenly spread geographically, with the United States, Japan and the European Union (EU) accounting for 71 percent of the world's investment inflows and 82 percent of outflows in 2000. The EU gained as both a recipient and source of FDI in 2000. The United States remained the world's largest FDI recipient with $281,000 million in incoming foreign investment.

Northeast Asia -- Hong Kong, China, Korea and Taiwan -- "was the brightest spot for FDI in the developing world," with $143,000 million in inflows, a 44 percent increase over 1999, the report notes. Some transnational companies may be "parking" funds in Hong Kong in anticipation of China's entry into the World Trade Organization (WTO), it said. Inflows into South Asia were almost unchanged in 2000 but still below a 1997 peak. Input into Asia's nine least developed countries was "very low" at $461 million.

Inflows to Central and Eastern Europe increased 9 percent to a record high of $27,000 million in 2000 with two-thirds going to three countries -- Poland, Czech Republic and Russia. Foreign investment declined in absolute terms in Africa -- to $9,100 million -- and Latin America -- to $86,000 million, for the first time since the mid-1990s. Flows to Africa's 34 least developed countries dropped to $3,900 million. More than 60,000 transnational companies control 800,000 foreign affiliates, the report said.

During the past 15 years the number of countries that receive more than $1,000 million in FDI a year more than doubled to 51, the report noted. But because of the expected slowdown in investment, countries are urged to "target the right investors for their own development priorities and enhance the benefits of current and future investment," said Dr. Karl Sauvant in an opening statement at the briefing. "The competitiveness of the domestic enterprise sector is crucial" to sustain FDI inflows, according to Sauvant, chief economist of the United Nations Conference on Trade and Development (UNCTAD).

The more advanced the level of technology in an industry, the more geographically concentrated investment is, the report said. Investment in biotechnology, semiconductors and television and radio receivers is more concentrated than in the food and beverages industry.

The report encourages foreign investors to develop "backward linkages" by which foreign affiliates buy components or services from local companies. It adds that policy makers in host countries can encourage affiliates to use local suppliers by addressing obstacles to investment, by better promoting their country's benefits, such as skilled labor, and by setting up national investment promotion agencies.

Countries making the most progress attracting investment are those that invest in education, technical skills and research, said Persephone Economou, an UNCTAD economist and one of the report's authors. "Cheap labor in absolute terms is less of an attractive feature" for investors, she said.