Academic journal article National Institute Economic Review

The Growth of Foreign Direct Investment in Europe

Academic journal article National Institute Economic Review

The Growth of Foreign Direct Investment in Europe

Article excerpt


Increasing attention has been paid in Europe in recent years to the question of why firms invest abroad. This reflects both the rapid growth in foreign direct investment within Europe, along with recent improvements in the quality and availability of data. At the heart of the debate is a focus on the costs and benefits of foreign investment, such as whether inward investment affects employment and economic growth and whether outward investment is simply 'job exporting', with firms moving to low-cost, labour-abundant locations. An understanding of the motives behind firms' decisions to invest overseas is of particular importance for the UK, whose aggregate stocks of outward and inward foreign direct investment reached 30 per cent and 21 per cent of GDP respectively at the end of 1995.

In this article we attempt to place these issues within the wider context of the ongoing evolution of European Union institutions and policies and the growing debate within the UK over the impact of deeper European integration. We investigate the factors affecting FDI flows, the possibilities for government policies to have an effect on such flows, and the implications of flows for home and host economies. Many of these issues are investigated further in Bartell and Pain (1997b). In addition we identify a number of issues which we feel should be at the core of the future research agenda in this area and discuss possible extensions to our work programme on the location of production and its implementation in a general equilibrium context.

Table 1. Global foreign direct investment stocks

                   1980           1985           1990        1995

Outward FDI

$ billion         513.7          685.5         1684.1      2730.1
% of GDP            4.9            5.9            8.1         9.7


$ billion         501.9          657.4         1606.2      2503.2
% of GDP            6.8            6.1           10.6        13.2
% of total         97.7           95.9           95.4        91.7


$ billion         213.2          286.5          777.2      1208.8
% of GDP            7.4            7.1           13.8        17.4
% of total         41.5           41.8           46.1        44.3

Inward FDI

$ billion         481.9          734.9         1716.9      2657.9
% of GDP            4.6            6.3            8.3         9.4


$ billion         356.4          526.3         1361.4      1922.0
% of GDP            4.8            4.9            9.0        10.1
% of total         74.0           71.6           79.3        72.3


$ billion         185.0          226.5          712.2      1028.1
% of GDP            6.4            5.6           12.7        14.8
% of total         38.4           30.8           41.5        38.7

Source: Authors' calculations from UNCTAD (1996), and OECD National
Accounts. Differences in national definitions explain the
discrepancy between total outward and inward investment.

How Large is Foreign Investment?

Foreign direct investment (FDI) has expanded rapidly throughout the world economy over the past two decades, helped by the removal of many national barriers to capital movements. The aggregate stock of FDI in the world economy is estimated to have risen from 4 1/2 per cent of world output in 1975 to 9 1/2 per cent in 1994, with the value of sales by the foreign affiliates of domestic companies exceeding the value of world exports by around one-quarter(1). New investments have increasingly been concentrated within developed economies and within non-manufacturing industries. These developments have been accompanied by significant changes in trade patterns and have led to renewed interest in the impact of multinational enterprises on growth and employment in developed economies.

The broad pattern of foreign direct investment stocks can be seen in Table 1. It is clear that the vast majority of investments have been between developed countries, particularly within the OECD. …

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