Global Capitalism and the Flow of Foreign Direct Investment to Non-Core Nations, 1980-1996: A Quantitative, Cross-National Analysis

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Introduction

Over the past twenty-five years, a substantial quantitative cross-national (QCN) literature has emerged that examines the consequences of foreign direct investment (FDI or investment by core-based multinational corporations) within the developing world (Bornschier and Chase-Dunn 1985; London 1987; London and Williams 1988, 1990; Huang 1995; Shen and Williamson 1997; by contrast, Firebaugh 1992). Most of these studies provide empirical support for aspects of a broadly interpreted dependency theory, especially the idea that peripheral dependence on international factors is associated with negative effects on the development of Third World countries. Some of the documented effects produced by dependence include: slowing of economic growth (Bornschier and Chase-Dunn 1985), increasing of income inequality (Bornschier and Chase-Dunn 1985), and lowering of basic needs provision (London and Williams 1988, 1990; Huang 1995). To date, however, little empirical research has been conducted on the determinants of variation in FDI location (Crenshaw 1991; London and Ross 1995). Crenshaw's (1991) study of foreign direct investment as a dependent variable is an interesting exploratory search for plausible determinants of change in foreign direct investment, but it is not formulated in terms of a coherent theory. On the other hand, London and Ross (1995) use a coherent, theoretically informed explanation of the movement of capital: the theory of global capitalism. Originating with concern for the restructuring and deindustrialization of the United States and other core countries, but holding significant implications for non-core countries, the theory of global capitalism (Ross and Trachte 1990) focuses on the destination of mobile capital (FDI) rather than on the consequences of its arrival. Using data for 1968 to 1978, the London and Ross (1995) study tests and finds empirical support for aspects of global capitalism theory, especially the propositions that investors from the core nations seek out (a) Third World labor that is more docile and less costly than in the industrial regions of the world and (b) Third World authoritarian political climates that welcome foreign investment (see below for a detailed analysis and description of both the theory of global capitalism and the work of London and Ross 1995).

The flow of foreign direct investment from core countries to non-core countries has increased dramatically in recent years. Mallampally and Sauvant (1999:34) write:

   Foreign direct investment has grown at a phenomenal rate
   since the early 1980s. Such investment, made by multinational
   business enterprises in foreign countries to control
   assets and manage production activities in those countries,
   has been growing faster than both international trade and
   international output. Between 1980 and 1997, international
   FDI flows from nearly 54,000 transnational corporations
   have increased at a rate of about 13 percent annually. The
   share of developing countries in total FDI inflows has
   increased from just 3 percent in 1980 to 14 percent in 1997.

Furthermore, according to a more recent report of the United Nations Conference on Trade and Development (UNCTAD), total foreign direct investment in 1999 increased to a record $827 billion (United Press International 2000). Although a large portion of this increase was accounted for by corporate investment in the United States and the European Union, flows of foreign direct investment to developing countries for 1999 were up by 15 percent from the 1998 fiscal year to $198 billion (United Press International 2000). Moreover, UNCTAD reports that the "prime investment movers ... were transnational corporations with international production facilities. Such companies now number 60,000 and boast more than 500,000 foreign affiliates, accounting for an estimated 25 percent of global production. Their combined sales of $11 trillion in 1998 exceeded global exports by $4 trillion" (Business Week 1999:28). …