In addition to their direct impact on investment, the entry and operations of TNCs can indirectly influence investment levels in host country infrastructure industries through their effects on investments of domestic firms – whether SOEs or private enterprises (WIR99).
These effects can vary: TNC involvement may "crowd in" other investors (e.g. successful operations by the TNC may encourage investment by domestic enterprises through their "demonstration effect") (examined further in section B.1); or an increase in the competitive advantages of domestic enterprises through diffusion of technology and other know how from TNC operations may enable them to invest in new areas (section B.1); or, taxes paid by TNCs could potentially be used for further infrastructure investments by the State (section C).
On the other hand, a fall in investment levels might occur from the "crowding out" of investors, for example because of competition, when domestic enterprises are still at an early stage of development or due to anti-competitive behaviour by TNCs (section B.2).
Box IV.1 The Angola China partnership in infrastructure investment
A strategic partnership was established between the Governments of Angola and China to finance and undertake infrastructure investments in 2004. Rich in oil and gas, but few other natural or man made resources and in need of massive and speedy rehabilitation of its infrastructure after decades of civil war, Angola concluded an agreement with China, whereby, in return for providing China with a secure supply of oil, Angola would receive large oil-backed loans for rehabilitating and expanding its infrastructure. An important element of the agreement is that the bulk of the work would be undertaken by Chinese TNCs, but after a process of competitive bidding by at least three Chinese companies.
A number of other African countries, notably the Democratic Republic of the Congo, are considering similar strategic partnerships with China. Countries such as India are also showing interest in similar collaboration in Africa (section III.D). It is too early to assess the effectiveness of the Angola China arrangement, especially compared to other approaches. But given the pressing infrastructure needs of a number of countries in Africa, their lack of domestic public and private capabilities in these industries, and the opportunity to use (future) trade surpluses to pay for (current) infrastructure investment, it is understandable that their governments are tempted by this approach.
Source: UNCTAD, based on Corkin, 2008; Pradhan, 2008; Chan, 2007; and Corkin and Burke 2006. A number of Chinese companies, such as China Road and Bridge Corporation (CRBC), Jiangsu International and ZTE Corporation, are already working on infrastructure projects throughout Angola. A few have partnerships with Angolan firms and TNCs from other countries (such as Galf Engineering, a German firm specializing in road building).
A consequence of investment in infrastructure by foreign companies in the 1990s was a decline in public investment in the sector across much of Latin America and parts of Africa. In expectation of a large scale increase in private sector investment, many governments in Latin America - faced with persistent budgetary gaps - cut back drastically on public expenditure in infrastructure in the early 1990s (Calderon et. al., 2003, Calderon and Serven, 2004; Serven 2007, Kirkpatrick et al., 2006).
Between 1980-1985 and 1996-2001, total expenditure on infrastructure investment in seven major Latin American economies taken together declined from a weighted average of 3.7% of GDP to 2.2%, even though private investment (primarily by TNCs) in the industries actually rose from 0.6% to 1.4% of GDP (Calderon and Serven, 2004), albeit with considerable differences between countries.
An important lesson from the Latin American experience is that TNC participation should not be considered sufficient to meet a country's investment needs in infrastructure; rather, it should be viewed as an important supplement and complement to domestic investment. Developing countries should therefore strengthen and improve the capabilities of their State owned enterprises (where these continue to play a role), while at the same time encouraging their domestic private sector to develop the necessary expertise and financial capabilities to participate effectively in infrastructure industries (chapter V).