Foreign Direct Investment Fuels Global Growth

Global Finance, January 1997 | Go to article overview

Foreign Direct Investment Fuels Global Growth


Companies invested $100 billion in operations in emerging economies in 1995, compared with $22 billion in new portfolio equity investments. FDI is the largest item in all net private capital flows to developing countries.

One of the clearest signs of the globalization of the world economy is the surge in foreign direct investment (FDI), as more and more corporations establish or expand their operations outside their home countries. Developed nations such as the United States still receive the bulk of this inward flow of private capital, but developing economieswhich once were only marginal beneficiaries of crossborder investments-are moving to the forefront of this trend.

With the opening of economies in Latin America and Central Europe, plus the phenomenal growth of emerging Asian economies in recent years, major new markets are materializing, and corporations from the industrialized world are moving into them at an unprecedented pace. They are pursuing two key objectives: the establishment of footholds in the domestic markets of high-growth emerging economies and the creation of efficient new operating bases to service global customers from anywhere in the world.

According to the World Investment Report 1996 (WIR '96), published by the United Nations Conference on Trade and Development (UNCTAD), total FDI flows into developed and developing countries surged by 40%, to $315 billion, in 1995-the last year for which data are available. Of this, $100 billion went to developing countries, an increase of 15% over 1994. By comparison, portfolio equity flows into the developing countries totaled only about $22 billion in 1995. FDI-as opposed to loans or portfolio investment-has become the single largest item in all net private capital flows to developing countries, accounting for 54% of the total.

The distribution of these flows, however, is skewed toward a handful of major target countries, with most smaller developing nations receiving only small amounts of new direct investment. Even though FDI to the 48 least developed countries increased by 29% in 1995, according to WIR '96, the combined total was still only $1.1 billionjust about 1% of FDI into emerging economies overall. In Central and Eastern Europe, new FDI nearly doubled in 1995, but the regional total was merely $12 billion.

The source of most of the FDI flows is multinational corp( rations based in North America and Western Europe. Increasingly their investments in developing countries are shifting toward infrastructure projects-part in

response to the spread of privat ration programs which have opened telecommunications, energy and transportation sectors to private capital in recent years. The impact of this trend is clear with a region-by-region analysis.

DEVELOPING ASIA

China dominates the scene as the largest single recipient of FDI, accounting for $38 billion alone in 1995. WIR '96 concludes that the rush into China may finally be slowing, partly because the Chinese government itself is moving to screen FDI projects more carefully and to avoid overheating the domestic economy. In the rest of the region, 58% of new FDI went to just 10 developing Asian countries other than China. Combined FDI for Indonesia, Malaysia, the Philippines, and Thailand jumped from $8.6 billion in 1994 to $14 billion in 1995, for example.

Despite increases in absolute dollar terms, according to WIR '96, FDI flows into South Asia and West Asia remained modest in 1995, at $2. …

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