Foreign Direct Investment

Foreign Direct Investment

Foreign Direct Investment

Foreign Direct Investment


Offering European and Asian perspectives, this text addresses the role, the determinants and economic effects of foreign direct investment (FDI). It provides a blend of informal discussion, recent theory and empirical analysis on FDI.


Over the last decade Foreign Direct Investment (FDI) has become one of the main vehicles for the increasing integration of the world economy. Although meanwhile almost all countries have started to compete eagerly for FDI, the consequences of increasing FDI flows are still open to doubt. The Asian crisis especially has reminded us that an understanding of the underlying principles, the determinants and effects of FDI is necessary for a proper assessment of adequate policy measures.

This volume contains a collection of the proceedings of a joint conference by the University of Innsbruck (Austria) and the National Chengchi University (Taipei, Taiwan). Offering European and Asian perspectives, the book addresses the role, the determinants and the economic effects of FDI.

After a short introduction to the development and structure of FDI and a brief survey of investment theory, Chen describes the FDI decision by posing five questions – namely whether, where and when to invest, how to invest, and finally, how to finance.

Subsequently he proposes a general framework for the analysis of FDI and discusses in detail vertical and horizontal FDI. Also within this framework he studies two decisions of multinational enterprises (MNE): the location of the headquarters of MNE and optimal financial funds for FDI projects. In the following section Chen sheds light on the effects of FDI in a general equilibrium framework: effects on international trade, on investment expenditures, on the international transmission of financial shocks and on stock prices. In addition to his microeconomic analysis, Chen presents a macroeconomic model for a small, open economy in the last section of this chapter. This allows him to analyze the interdependence between FDI and international financial flows and their combined effects on exchange rates, stock prices and their fluctuations.

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