Werner Corrales-Leal; ICTSD/UNCTAD Presentation at the International Seminar “FDI Policies and Regulation: How to Fost

1. SPACES FOR POLICY IN INTERNATIONAL RULES FOR INVESTMENT AN APPROACH FOR MAKING INTEGRATION SUPPORTIVE OF SUSTAINABLE DEVELOPMENT Werner Corrales-Leal; ICTSD/UNCTAD Presentation at the International Seminar “FDI Policies and Regulation: How to Foster Economic Development” Organized by CUTS, UNCTAD an DFID, Geneva January 2004

2. LIST OF CONTENTS An approach for making trade integration supportive of sustainable development. Market-friendly use of active policies related to FDI: A case in the Oil Sector . A summary: Key considerations on future FDI rules

3. PART ONE An approach for making trade integration supportive of sustainable development.

4. An approach for making trade integration supportive of sustainable development SOME IMPACTS OF LIBERALISATION ON DEVELOPING ECONOMIES WORTH TO CONSIDER • Specific impacts on the productive bases of developing countries Net positive creation of trade; trade flows grow faster than GDP “Natural advantages”confirmed as bases for further specialization Most trade and FDI flows occur within TNC chains and networks 40% of K flows to arbitrage; high proportion of FDI does not generate X 90% of K flows to twenty “emerging markets” (50% in the 80s) Success story of a few countries: Active policies for competitiveness • Impacts on inequalities, at international and country level LDCs marginalisation; no sign of convergence; uneven “Welfare Gains” External shocks: financial volatility, declining and unstable X prices Destruction of traditional SMEs’ networks with no substitutes Precarious employment conditions become structural after Adjustment

5. An approach for making trade integration supportive of sustainable development THE NEED FOR ACTIVE POLICIES IN THE SUPPLY SIDE: LIBERALISATION IS NOT ENOUGH • Reduce dependency on current trade in commodities Basis and intensity of competition erode capabilities for reinvestment Commodity production has very limited networking or spill-over effects • Promote learning and innovation; increase internal multipliers “Global Chain Optimisation”: Strengthen Clusters and insertion to Chains Motivate and promote Innovation and Technological Capacity Building A “Levelled playing field ” to negotiate alliances and complementarities • Modify dynamics of investment in extreme resource-based cases Extreme productivities, appreciated exchange rates and competitiveness • Domestic and Foreign Investment go to non-tradable and commodities

6. ENTERPRISE DEVELOPMENT, PRODUCTIVITY & INVESTMENT POLICIES POLICIES FOR INNOVATION AND TECHNOLOGICAL UPGRADING RULES IN THE SPACE FOR DEVELOPMENT POLICIES MARKET ACCESS AND FAIR TRADE RULES An approach for making trade integration supportive of sustainable development HOW INTERNATIONAL TRADE RULES MAY INFLUENCE THE CAPACITY FOR POLICY INTERVENTIONS SUPPLY SIDE TRADE-SUPPORTED POLICIES SOCIALLY AND ENVIRONMENTALLY-FOCUSED POLICIES FOR COMPETITIVENESS DEMAND SIDE TRADE-SUPPORTED POLICIES NATIONAL POLICIES FOR INTERNATIONAL TRADE AND INTEGRATION MANAGING TRADE INTEGRATION TRADE NEGOTIATIONS

7. An approach for making trade integration supportive of sustainable development MANAGING TRADE INTEGRATION: ENHANCE POLICIES’ CONTRIBUTIONS TO DEVELOPMENT GOALS • Aims of development strategy • Active trade-related policies Enhance social effectiveness of economic policy ENTERPRISE DEVELOPMENT AND CLUSTERING, PRODUCTIVITY & INVESTMENT POLICIES Improve internal multipliers of export-led growth Improve productivity through technology & innovation POLICIES FOR INNOVATION AND TECHNOLOGICAL UPGRADING Enhance market access and trade defence capacity Secure equilibrium and stability in external flows POLICIES AND RULES MAKING IN INTERNATIONAL TRADE AND INTEGRATION Increase knowledge content & diversification in exports Environmental concerns as cross-cutting policy issues

8. An approach for making trade integration supportive of sustainable development MANAGING TRADE INTEGRATION: AFFECT THE RATIONALE OF TRADE SURPLUS APPROPRIATION • Impinge on factors explaining growth in revenues and competitiveness • Active policies affecting Static factors: • Export growth based on market access • Rents related to productivity, based on “Best Global Practices” • Productive linkages and networking enhancing domestic multipliers Active policies enhancing Dynamic factors ( Rents related to innovation ): • Knowledge-enhanced productivity; Innovation in processes and attributes … • Strategic marketing; differentiation; life cycles of products.. • Relieve constraints for “adding value” or appropriating trade surplus Effective market access: Ease traditional barriers and improve access to GVCs Diversification: Move away from extreme competition in commodities Negotiations in Policy Space: Level the playing field for Supply-side Policies Networks and institutions: Frameworks for learning and multiplying effects

9. An approach for making trade integration supportive of sustainable development SHOULD CURRENT OPPORTUNITIES FOR WTO-CONSISTENT ACTIVE POLICIES BE ABANDONED? • Examples of market-consistent trade policy instruments Conditioned access to FDI, as “benefit” in sectors reserved for national investment Focalized FDI promotion; incentives to ToT, R&D, Clustering and SME development Government and STEs procurement promoting technological capacity building Coordinated implementation of IPR , Competition rules and R&D programmes • Multilateral disciplines and issues that should be revisited or reoriented TRIMs; TRIPs, GATS, Subsidies, Government Procurement Special and Differential Treatment; “Spaces for Development Policies” in general Eventual negotiations on investment, competition and trade facilitation in WTO

10. PART TWO Market-friendly use of active policies related to FDI: A case in the Oil Sector

11. Market-friendly use of active policies related to FDI: A case in the Oil sector VENEZUELA 1980: CHALLENGES IN THE OIL SECTOR RELATED TO TECHNOLOGICAL CAPABILITIES • Strategic need to reduce Technological Dependence on TNCs Pre-existing contracts for the provision of technology and engineering Only 15% of the engineering & capital goods procurement was national • Objective shortages in Technological Capabilities in the Country Almost inexistent R&D Capabilities in the sector (PDVSA or elsewhere) Only 5 construction management firms capable of major assignments About 20 engineering companies for projects of medium complexity Very limited local capacity for production of capital goods • Doubts and confidence 5 years after the nationalization process Public doubts about the success of the Capacity Building Program Decision to face the program on a “Market Friendly” basis Firm commitment of PDVSA and the Venezuelan private sector

12. Market-friendly use of active policies related to FDI: A case in the Oil sector THE STRATEGY FOR TECHNOLOGICAL UPGRADING AND CAPACITY BUILDING • Creation of a High Quality Research & Development Organization Creation and development of INTEVEP Establishment policy for Transfer of Technology on Commercial Basis Massive program for training human resources in research fields • Promotion of Capital Goods Manufacturing and Service SMEs Implementation of Quality Assurance and Competitiveness Programs Export Promotion Program Incentives for Chains of Suppliers Development Programs • Promotion of Engineering and Construction Management firms Non Mandatory Performance Requirements for Joint Ventures Reform of Contracting Practices introducing Project Disaggregation Continuous Improvement and Quality Control Practices in all Contracts

13. Investment : US$ 2,500 MM 100 90 80 70 Evolution 60 Trend % 50 40 30 20 10 0 80 82 84 86 88 90 92 94 96 98 2000 Market-friendly use of active policies related to FDI: A case in the Oil sector LONG-TERM EVOLUTION OF THE ENGINEERING AND CONSTRUCTION SERVICES 1980 - 2000 Very high improvement in Technological Capabilities Highly skilled jobs, sources of “Value Added” and backward links created Further evolution of Engineering & Construction to “Integrated Services”

14. PART THREE A summary: Key considerations on future FDI rules

15. A summary: Key considerations on future FDI rules IMPACTS OF THE TERMS OF AGREEMENT ON POLICY SPACES AND INVESTOR’S DECISIONS 1/2 DECISION FACTORS OF THE INVESTOR DEVT POLICY SPACES TERMS OF AGREEMENT PROPERTY RIGHTS FREEDOM IN MANAGEMENT INMUNITY PRESCRIPTION Admission and establishment + • Sectors reserved to national investment - Post-diversification to Other sectors Promotion for National and Regional players Equitable treatment Technological Capacity Building Clustering, SME Networking - Pre- establishment Risks NT pre-establishment + - • MFN considering regional agreements - + - + - Negative Impact Positive Impact

16. A summary: Key considerations on future FDI rules IMPACTS OF THE TERMS OF AGREEMENT ON POLICY SPACES AND INVESTOR’S DECISIONS 2/2 DECISION FACTORS OF THE INVESTOR DEVT POLICY SPACES TERMS OF AGREEMENT PROPERTY RIGHTS FREEDOM IN MANAGEMENT INMUNITY PRESCRIPTION Performance Requirements - PR related to trade + + + + PR related to R&D and TT Hands Off - + PR related to K association + + - Promotion for National and Regional players Technological Capacity Building Clustering, SME Networking Rules on Investor practices • Effective sanctions to uncompetitive practices + - • Limitations to unfriendly Take Overs of local firms + - + - + - Negative Impact Positive Impact