Foreign Direct Investment: Global Trend and Pattern

- M. TAHLIL AZIM
Abstract
Foreign Direct Investment (FDI) has registered a tremendous growth for the last four decades.
The stock of FDI reached about $3.2 trillion in 1996 rising from $2 trillion in 1993 and $1 trillion in
1987. Sales and assets of TNCs are growing faster than world GDP, exports and gross fixed capital
formation. The increased flows of FDI indicates the growing internationalisation and integration of
economic activities around the globe. At the same time, with the gradual change in the motives for
FDI as well as the shift of some location specific advantages from developed to developing countries,
the patterns and trends of FDI has been experiencing a significant change in recent past. The motives
of the TNCs have been shifting from more conventional resource or market seeking to efficiency or
strategic asset seeking. Comparative cost factor has become the principal driving force for
international production. Remarkable changes are also visible in the forms and sectorial pattern of
international investments. The purpose of this paper is to trace the trajectory of the recent flows of
FDI from global and regional perspective and to explore the reasons behind the prevailing trend and
patterns.

SECTION - 1
Introduction
The Phenomenon of Foreign Direct Investment (FDI), 1 as a manifestation of
internationalisation and integration of economic life constitutes the basic dictum of our age.
With the tremendous explosion in transportation and communication technology along with
continuous liberalisation of trade and investment regime, the national economies are
undoubtedly becoming steadily more integrated as cross border flows of trade, investment
and financial capital increase. The centre of gravity of internationalisation of business activity
is shifting from trade to factors of production themselves. Sourcing, manufacturing and
assembling outside the home countries in the form of FDI are very much common today. The
total value of international production of a company with foreign operations is already set to
exceed by far the exports of goods from major countries. This process of internationalisation
is going on and seems to have no limit. With the growing importance of FDI, recently it has
been receiving serious attention as a Multinational Corporate phenomenon on the one hand

The author is Assistant Professor, Department of Management, and Chittagong University. The views expressed in this
article are author's own.
1
'FDI' is defined as an investment, which is made to acquire a lasting interest in an enterprise operating in an economy other
than that of the investor, the investor's purpose being to have an effective voice in management of the enterprise. In addition
to equity participation, it also includes other non-equity forms of investment and control, such as, sub-contracting, management contract, turnkey agreement, franchising, licensing and product sharing. [IMF, ( 1993), "Balance of Payment manual"].

and the policies of the Government on the other. At the same time the world has been
experiencing a significant change in the pattern and trend in the flows of FDI. The motives of
the TNCs have been shifting from more conventional resource or market seeking to
efficiency or strategic asset seeking. Production in the host country is no more strictly related
to the resource base or the market size of the economy. Comparative cost factor has become
the principal driving force of such production. Forms of international investment also have
remarkably changed from Greenfield investment to merger & acquisition and from
majority/wholly owned to low equity or non-equity forms of participation. Along with these
waves, the hegemony of developed countries as the source and recipient of FDI is gradually
eroding in favour of their developing counterparts, especially East and South-East Asia. The
objective of this paper is to trace the trajectory of the recent flows of FDI from global and
regional perspective and to explore the reasons behind the prevailing trend and patterns. The
discussion of the issue was mainly centred around the groups of countries based on both state
of economic development (according to IMF/WB) and geographical location. However, the
outstanding performance of individual countries was also discussed separately. The
discussion took place in several sections. Section 2 highlighted the overall trend of FDI in the
world economy, section 3 focused on the FDI outflow and the centres of origin, section 4
covered FDI inflow or destination of FDI, section 5 highlighted the recent shifts in the form
of foreign investment in the global economy, section 6 was meant to pore some lights on
sectoral pattern of FDI. Finally in section 7, there would be a brief conclusion about the
general trend and pattern of FDI in the world economy. In our analysis we used data till 1996.
Besides, the study was plagued with some limitations. It did not cover any in-depth economic
analysis of world-wide trend and pattern of FDI. Nor it was meant to justify any theoretical
approach of FDI available in existing literature. The analysis was mainly based on previous
studies on FDI in both developed and developing countries.
SECTION - 2
Overall Trend of FDI
FDI has been growing rapidly in the recent past, faster, indeed than international trade
(See Table 1). FDI flows2 set a new record in 1996 with an increase in inflow by 10% to
$349 billion while outflows rose by 2% to $ 347 billion. Growth rate of FDI inflow (10.3%)
exceeded the growth in the nominal value of world GDP and international trade, which
expanded by 6.6% and 4.5% in 1996 respectively. The stock of FDI reached about $ 3.2
trillion in 1996, rising from $ 2 trillion in 1993 and $ 1 trillion in 1987. Sales and assets of
2

Foreign direct investment inflows and outflows comprise capital received and invested in an FDI enterprise respectively.
There are three components in FDI: equity capital, reinvested earnings and intra-company loans. (a) Equity capital is the
foreign direct investor's purchase of shares of an enterprise in a country other than its own. (b) Retained earnings comprise
the direct investor's share of earnings not distributed as dividends by affiliates or earnings not remitted to the investor. Such
retained profits by affiliates are reinvested. (c) Intra-company loan or intra-company debt transactions refer to short or long
term borrowings and lending of funds between direct investors and affiliate enterprise. (World Investment Report, 1997, P.
295).

TNCs are growing faster than world GDP, exports and gross fixed capital formation. About
44,000 TNCs with almost 280,000 foreign affiliates are active today through a wide variety
of equity and non-equity link-ups and investment channels.
The level of FDI flows in the past few years suggests that the world is in the midst of
another FDI boom, with a boom defined as beginning the year in which, after a decline in
FDI flows, they have fully recovered to the previous level.
The first FDI boom took place in 1979-81. It was a short-lived boom, after the second oil
crisis at the end of the 1970s, was led by major oil producing countries on the inward side.
Saudi Arabia was the second largest FDI recipient after the United States during that period.
The boom of FDI outflows was led by the Netherlands, the United Kingdom- the home
countries of the major petroleum TNCs.
The world experienced the second FDI boom in 1986-1990. Many countries emerged as
important sources of FDI most notably, Japan which became the largest outward investor.
Investment flows were influenced by heightened protectionist pressures beginning of
widespread FDI liberalisation rapid economic growth in developing countries and
development and adoption of information and telecommunication technology by firms. The
1986-1990 FDI boom was actually a developed-country phenomenon.
The current boom started since 1995 can be attributed to the rise of China as a major
recipient country and the emergence of France, Germany and a number of developing
countries on the outflow side, and the Latin American countries on the inflow side.

Table 1: Selected Indicators of FDI and International Production, 1988-1996

(Billions of Dollar and percentage)
Value at current prices

Annual Growth Rate

(Billion Dollars)

(per cent)

Items
1988-92

93

94

95

96

1988-92

93

94

95

96

FDI inflows

177.3

218 238.7

317

349

24

40

96

FDI outflows

208.5

239

251

339

247

11

38

2.4

GDP at factor
cost

28264

30142

9.5

6.6

Exports

5848

6111

16.2

4.5

Source: UNCTAD, Division of TNC and Investment.

SECTION - 3
FDI Outflows : Centre of Origin
The volume of FDI outflow from both developed and developing countries has been
showing an increasing trend since 1991. As a group, the developed countries invested $295
billion abroad in 1996 compared to $ 291 billion in 1995. They accounted for around 85 per
cent of all direct investment outflows. Nevertheless considerable recent growth has been
occurred in direct investment from the developing countries. Their share of global outflows
grew from 4 per cent in 1991 to 15 per cent in 1996 (See Table 2). A cursory look at the
figure below shows that the trend of FDI outflow from all the major regions of the world Developed countries, South, East and South-East Asia and Latin and the Caribbean, is
increasing. However, the parallel trend of Developed countries with that of the world
indicates the groups sheer dominance in shaping global pattern of FDI outflow.

Figure 1: FDI Outflows by Home Region, 1986-1996

400000
350000

World

300000
250000
Developed
Countries

200000
150000

Latin and the

Caribbean

100000
50000
0
-50000

1985-1990
(Annual
Average)

1991

1992

1993

1994

1995

1996

South, East and

South East Asia

Source : World Investment Report, 1997.

The plenteous outflow of FDI from developed countries is associated with what Dunning
(1988) called the ownership and internalisation advantages of the investing firms. Most of the
TNCs- the main actors of FDI are located in these countries. According to the UNCTAD
sources, 88 per cent of the foreign assets and 87 of the top 100 TNCs are located in the EU,
Japan and the United States. Technological superiority of the MNEs from developed
countries is often considered as a plausible ownership advantage over local counterparts and
Research and Development (R&D) intensity defined as R&D expenditure as a proportion of
sales is the most commonly used proxy variable for technological competence. Many
researchers [Pugel (1978, 1981), Grubauge (1987), Lall (1980), Wolf (1977), Bergsten, Horst
4

and Moran (1978) for US FDI, Pearce (1989) for world leading MNEs and Swedenbourg
(1979) for Swedish FDI] found very clear positive relationship between R&D intensity and
overseas production by the companies. Moreover, technological innovation based on R&D
often gives rise to undesire to protect this advantage through internalisation rather than to
risk unauthorised diffusion through licensing, which in turn motivates FDI.
Among the developed countries, the Triad (EU, US and Japan) accounted for 90 per cent
of the groups both inflows and outflows in 1996. EU remained the largest home region as 60
per cent. of outward fund of the developed countries originated from this region. In 1996, the
United States was the largest host and home country of FDI at $85 billion mark, investing
abroad $31 billion more than the second largest home country the United Kingdom.
Sustained economic growth in many countries was a major cause of high US FDI outflows.
Favourable growth prospects and large and growing consumer market in developing
countries encouraged increased interest from The United States TNCs. However, the US
outflows to EU declined to 43% in 1996 compared to 50% in 1995. This is mainly due to
sluggish economic growth in 1996 and perhaps, more importantly, due to the end of a major
phase of adjustment by United States TNCs to regional integration on Europe. In investing
abroad the United States and the United Kingdom were followed by Germany, France and
Japan(See figure 2).
Figure 2. FDI Outflows in 1995 and 1996
(Top 15 Countries)

100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0

1996

Source: World Investment Report, 1997.

Spain

Singapore

Sweden

Norway

Italy

Canada

Belgi/L.Bourg

Switzerland

The Netherlands

Japan

France

Hong Kong

Germany

UK

USA

1995

Among the developing countries, South, East and South-East Asia is the major home
region for outward FDI flows. In 1996 it accounted for 89 per cent of FDI outflows from all
the developing countries. Hong Kong, Republic of Korea, Taiwan and China of this region
dominate the outflows from developing countries. Investment outflows from the South, East
and South-East Asia rose by 10% in 1996 to $46 billion, with Hong Kong topping the league.
The regions outstanding position in outflow race is due to the fact that 28 of the top 50 TNCs
from developing countries are based in the region and accounted for two-third of the foreign
assets.
Table 2: FDI Outflows, 1991-96
(Billions of Dollar and percentage)
FDI Outflows, 1991 - 96
Areas
1991

1992

1993

1994

1995

1996

Developed Countries

189.7

179.6

204.8

209.7

291.2

295

Developing Countries

8.3

21.6

0.34

40.7

47

51.4

Central & Eastern Europe

0.04

0.1

0.2

0.67

0.42

0.62

All Countries

198.1

201.4

239

251

339

347

EDI percentage
Developed Countries

95

89

85

83

86

85

Developing Countries

10

14

16

14

14.7

Central & Eastern Europe

0.02

0.05

0.09

0.27

0.12

0.18

All Countries

100

100

100

100

100

100

Source: UNCTAD, Division of TNC and Investment.

The increased FDI from developing countries in general, can be attributed to a number of
reasons like, search of natural resources, response to restrictions imposed by industrialised
countries, the need for increased co-operation among themselves, back-up support from home
governments and location tournaments among the host countries in the form of generous
incentive packages. Most of the developing countries that pioneered outward investment,
such as Republic of Korea, Singapore, Hong Kong, Taiwan, etc. are resource poor. There
main inducement for investing abroad came from their need to secure stable supplies at
reasonable prices. With the gradual industrialisation, the developing NICs experienced an
increased export of manufactures to the advanced countries. The effects of this particular
growth in exports were two folds. Firstly, they (NICs) lost their GSP 3 (Generalised System of
3

Preferential import restrictions extended by industrial countries to developing countries.

Preference) status and secondly, they faced newer restrictions on their exports. It eventually
generated export oriented FDI in other developing countries to take advantages of their GSP
status and quota facilities in one hand and FDI in advanced countries to jump over the
restrictions directly on the other. Investments by Korean electronic firms in Europe and US
are an example of this sort. In the wake of development constraints created by the recession
in the industrial countries during the early 1980s especially limitation to market access in
developed economies for developing country exports and the emergence of trading blocs
among them, regional co-operation efforts gained momentum in the Asia & Pacific region
and elsewhere. In Asia and Pacific region the co-operation effort was further reinforced by
their shared characteristics in development process. Among them the following seem to have
been most significant: a high and rising share of manufactures to total exports, a highly
dynamic private entrepreneur class, a dedicated and generally well trained labour force as
well as governments, willing and able to intervene to ensure continuing high rates of growth.
Such co-operation, in turn induced cross border mutual flows of capital in productive
ventures. One explanation of FDI originating from developing countries is attributed to what
is called packing order approach related to their ability to grafting imported technology to
local economies, both domestic and foreign. Many FDI from Hong Kong, Republic of Korea,
Brazil and India in relatively labour intensive and technologically standardised products such
as textiles, foot wears, etc. and the unsophisticated product lines of electric and electronic
application are of this nature. (Euh and Min, 1987).

SECTION - 4
FDI Inflows: Location of Investment
The major recipients of FDI are industrial countries receiving about 60 per cent of World
FDI inflows in 1996. They received $208 billion in 1996 as compared to $205 billion in
1995. However, their share is steadily decreasing while the share of their developing
counterparts is steadily increasing. The share of developing countries in FDI inflows
increased from 26% in 1991 to 37% in 1996. (See per centage figures in Table 3). The figure
below demonstrates the steady growth of FDI inflows to the developing countries, especially
into South, East and South-East Asia while the trend for developed countries is often
fluctuating and at times stagnant.

Figure 3: FDI Inflows by Host Regions, 1985-1996

Millions of Dollar

400000
World

350000
300000

Developed Countries

250000
200000

Latinand the
Caribbean

150000
100000

Central and Eastern

Europe

50000
0
1985-

1992

1994

1996

South, East and

South

1990(Annual
Average)

Source: World Investment Report, 1997.

Higher percentage of share for developed countries can be attributed to a number of
reasons. Most investments have been market seeking, and the developed countries offer
biggest market with strong effective demand. The study of Papanastassiou and Pearce (1990),
Swedenbourg (1979), Green and Cunningham (1975), Dunning (1980) and many others
found host country GDP- frequently used as a measure of the market size, to be a significant
determinant of inward FDI in a particular country. While political turmoil in many
developing countries discourages investment, lowest perceived risk in doing business in
developed countries induces the firms to invest with confidence. The industrial nations,
through the OECD are committed to liberalising direct investment among the members, and
they are parties to the declaration on International Investment and Multinational Enterprises.
The OECD operates under the principles that foreign controlled companies should be treated
no less favourably than domestic ones in such areas as taxes, access to local capital and
government procurement. (Daniel and Rodeboug, 1998, p. 358).
In 1996, the United States was the largest host country of FDI at $85 billion mark
receiving $42 billion more than the second host country China. The United States absorbs
one of every four dollars spent on FDI in the world. The inflows of FDI to the United States
were stimulated by the continued strength of the US economy and its favourable impact on
profitability. Besides, being a hub of science and technological development, the United
States attracts many technology hungry investments from all over the world. Most Korean
and Taiwanese investments in Silicon Valley are essentially technology and R&D listening in
nature. In 1996, among the developed countries, US was followed by the United Kingdom,
France, Belgium/Luxembourg and Canada as major host countries (See Figure - 4).

Figure 4. FDI Inflow in 1995 and 1996

(Top 15 Countries)

Millions of Dollars

90000
80000
70000
60000
50000

1996

40000

1995

30000
20000
10000

Poland

Malaysia

Sweden

Australia

The Netherlands

Canada

Mexico

Indonesia

Singapore

Brazil

Belgi/ L.bourg

France

United Kingdom

China

United States

Source: World Investment Report, 1997.

Japan is well known for being a small FDI recipient. It received only $.04 billion and $.2
billion in 1995 and 1996 respectively. Such a poor performance of Japan as a recipient can be
attributed to the following reasons. Keiretsu that favours doing business within the Japanese
group is a strong reason behind the situation. Lawrence (1991) argued that the Keiretsu
structure of firms, whereby a large industrial conglomerate has several lower tires of
suppliers linked but not owned by the parent company, restricted imports. He found
evidences to demonstrate that these quasi hierarchies discriminated against outside suppliers.
The extreme difficulties of acquiring Japanese companies is another case in question. This
factor was highlighted by Mason (1992) and Wakasugi (1991) in their study of Japan as a
FDI recipient country. Both authors contended that merger and acquisitions, particularly in
the case of hostile take-overs, are a form of business activity fundamentally unsuited to the
Japanese market. The cross shareholding of large Japanese corporations together with their
ties to financial institutions are set to provide Japanese corporations with the long term
relationships which have been credited with the success of Japanese firms by virtue of
cultivating a vision for the long run, giving minimal scope for acquisition or merger by
outside firms. Other factors responsible for meagre FDI flows into Japan are lengthy testing
and product approval periods for new foreign products so as to satisfy standards and
certificates, Government Administrative guidelines, policies and regulations that lack clarity
and transparency, complicated distribution system that is difficult to penetrate and high cost
of doing business in Japan, such as high wage and rental. (Yoshimoti and Graham, 1996, P.
XV).

Table 3: FDI Inflows, 1991-96

(Billions of Dollar and percentage)
Areas

FDI inflows (billions of dollar)

1991

1992

1993

1994

1995

1996

Developed countries

114.7

119.6

138.6

142.3

205.8

208.2

Developing

41.6

49.6

73.1

90.4

96.3

129

Central & Eastern Europe

2.45

4.44

6.2

5.89

14.3

12.2

All countries

158.9

173.7

218

238.7

317

FDI Percentage
Developed countries

72.15

67

63

60

65

60

Developing countries

26

28

33.5

38

30

37

Central & Eastern Europe

1.2

2.3

2.7

2.1

4.4

3.4

All countries

100

100

100

100

100

100

Source: UNCTAD, Division of TNC and Investment.

The developing countries have been steadily becoming important region for FDI. They
received $129 billion in 1996, compared to $96 billion in 1995. Inflows of FDI to South, East
and South-East Asia rose 25% in 1996 to a record $81 billion. It absorbed about two-third of
all developing countries FDI inflows. The large scale inflow of FDI into the region is
associated with the emergence of the region as the growth centre with higher capacity to
absorb increased flow of capital, accelerated intra-regional investment and the injection of
Japanese fund. According to World Investment Report (1997, P. 48), the geographical
pattern of recent Japanese FDI outflows has changed since the peak period of Japanese FDI
in the late 1980s and is the shift from developed countries towards South, East and SouthEast Asia. This reflects changes in Japanese TNCs strategic priority. Their aim now is to
maximise production efficiency and profitability - a shift, which favours investment in South,
East and South-East Asia. In that region, the ratio of current income to sales by Japanese
subsidiaries is more than twice than that in the United States or Europe. China, with $42
billion in 1996, was the largest FDI recipient among developing countries and the second
largest in the world. In fact, China has been experiencing such tremendous growth FDI since
1999.
The market seeking motivation of MNCs entering in China against the back-drop of its
endorsement of a transition to a socialist market economy was the main reason for recent
surge in FDI inflows to the economy. A 1996 survey of 500 Canadian firms with an
established interest in Chinese companies by Canada-China Business Council indicated that
85 per cent were investing to gain access to the Chinese market. MNCs have long coveted for
Chinas potential as a market because of its large population (1.3 billion). In addition, its

10

purchasing power has been increasing because of economic growth. During the 1980s its
increase in manufacturing output of 14.4 per cent a year was the fastest rate among the
worlds fifty largest economies. This has translated into consumer spending. Besides the
market size, the companies have also been attracted to China because of its resources. For
example, there have been substantial investments in the exploration and production of oil and
coal, and almost 20 per cent of US-owned FDI in China is in the petroleum sector. In
addition, companies have looked at China as a source of inexpensive labour, particularly as
unemployed labour supplies have decreased and as labour rates have increased in some other
Asian economies (e.g. Singapore, Hong Kong, and Taiwan) that no longer can be considered
cheap labour sources. Finally, many companies have been drown recently to China because
there are few, if any, major countries in which they have not already established a strong
presence. Their earlier exclusion of China from their investment plan was due primarily to
Chinas effective prohibition of foreign investment from 1949 to 1979- the first thirty years
of communist rule in China. (Daniel and Rodebaugh, 1998, P. 445).
Foreign direct investment in Central and Eastern Europe has been on rise since the
collapse of communism in the region. It rose from $2.4 billion in 1991 to $14.3 billion in
1995 and fell to $12.2 billion in 1996. The increasing trend of FDI into Central and Eastern
Europe is attributed to its closer trade links with the European Union and the active
marketisation process. However, some efficiency seeking investments are also pouring into
the region. As TNCs, especially automobile manufacturers are taking advantages of the
availability of skilled, low-cost labour in several countries of the region.
In 1996, FDI flows to Latin America and Caribbean increased significantly by 52% to
nearly $39 billion - a record level. The region accounted for 30% of all developing countries.
The driving forces behind this increase in inflow of FDI in Latin America and Caribbean
region are twofold. Firstly, the initiation of comprehensive economic reform including
massive privatisation and significant liberalisation of conditions under which foreign
investors operate. Secondly, the reactivation of regional and sub-regional integration through
bilateral investment treaties and trade and integration agreements.
FDI inflows into Africa increased 5.3% to almost $5 billion in 1996. Nigeria, Egypt and
Morocco topped the African league of largest recipient in 1996. 48 least developed countries
have captured very little of the increase in FDI flows into developing countries during 1990s.
They received a mere .5% of world FDI flows in 1996. Small size of their domestic markets,
poor infrastructure facilities, adverse climatic conditions, remote geographical or land locked
position (in case of some countries), political instability and poor resource base are their
principal drawbacks accounted for such poor FDI performance.
Gradual increase in FDI inflow to the developing countries, in general, are mainly
associated with their change in attitudes towards FDI and the change of investment climate.

11

Dunning (1997, P.209-211) gave a number of possible explanations for the changing attitudes
to the FDI. The first is the renewed faith of most countries in the working of the market
economy, as demonstrated, for example, by the wholesale privatisation of state owned assets,
and the deregulation and liberalisation of markets over the last 8-10 years. The second
explanation is the increasing globalisation of economic activity and the integration of
international production and cross border markets by MNEs. The third reason is that the key
ingredients of contemporary economic growth of created assets, such as technology,
intellectual capital, learning experience and organisational competence, are not only
becoming more mobile across national boundaries, but also becoming increasingly housed in
MNE systems. Fourthly, a growing number of economies- especially in East Asia- are now
approaching the take-off stage in their economic development, and that as a result, the
competition for the worlds scarce resources of capital, technology and organisational skills is
becoming increasingly intensive. The fifth is that the economic structures of the major
industrialised nations are converging, one result of which is that competition between firms
from these nations is becoming both more intra-industry and more pronounced. The sixth
explanation is that the criterion for judging the success of FDI by host governments has
changed over the years, and changed in a way which has made for a less confrontational and
a more co-operative stance between themselves and foreign investors. More particularly, the
emphasis of evaluating foreign activity over the past two decades has switched from the
direct contribution of foreign affiliates to its wider impact on the upgrading of the
competitiveness of a host countrys indigenous capabilities and the promotion of its dynamic
comparative advantage. And the last reason is that the learning experience of countries about
what MNEs can and cannot do for host countries has enabled their governments better to
understand and assess its consequences and to take action to ensure that it more efficiently
promotes their economic and social goals. The change of investment climate in the
developing countries are initiated by private sector led growth strategy followed by massive
structural adjustment measures like privatisation of state owned industries, commercialisation
of existing public enterprises, gradual lifting of tariff and non-tariff barriers, financial sector
reform, development of capital markets, infrastructure development, formation of export
processing zones, initiation of generous incentive packages including tax advantages, profit
repatriation facilities and others as well as the promotional measures to attract more FDI. In
short, the change of investment climate in developing countries are marked by the significant
shift of state role in business from an overseer to a facilitator and in case of FDI their role go
even further to be an active marketer. Attracting more FDI is now viewed as an important
part of their foreign diplomacy.
One recent trend very much related to increased inflow of FDI into developing countries
has been the use of specialised export oriented subsidiaries by TNCs. This attempt seeks to
use particular location advantages of host countries (for example efficient low cost labour) to

12

perform distinct elements in the companys over all operations (for example assembly, labour
intensive processing stages) as effectively as possible. The implementation of these
operations has been supported by institutional factors from both the home country and host
country sides. From the home-country side, the availability of favourable value added tariff
provisions has meant that the cost of transshipment of components etc. involved in this
process are less likely to cancel out the cost saving benefits gained in the overseas operations.
From the host country side, the establishment of export processing zones- usually providing
infrastructure, tax concessions and a free trade environment- has also served to assist the
growth of specialised operations of Transnational Corporations. (UNCTAD, 1992, P. 26-27).
One important fact about recent FDI flows is its intra-regional character. More than half of
total FDI inflow to EU has come from EU members over the past decades. In 1996, about 40
per cent of total FDI into South, East and South-East Asia was originated from the region
itself. Around a quarter of FDI into Latin and the Caribbean region in 1996 were of intraregional origin. This particular trend in FDI flows is in commensurate with the recent surge
of economic regionalism around the world.
As far as the foreign direct investment vis-a-vis the gross capital formation is concerned,
it is found that the proportion of FDI in world capital has been increasing steadily from 3.1%
in 1991 to 5.2% in 1995. FDI as a constituent of capital is more crucial in Latin and the
Caribbean followed by South, East and South-East Asia and Central and Eastern Europe. In
1995, among the developed countries the inflow of FDI as a per centage of gross capital
formation was highest in Sweden, Belgium, Luxembourg, UK, The Netherlands and
Switzerland. In Latin and the Caribbean it was Saint Vincent and Granadines, Bolivia,
Trinidad and Tobago, Dominica and Guyana, while in South-East Asia China, Singapore and
Malaysia topped the list in this regard.
Figure 5. FDI Inflow as percentage of Gross Capital Formation
12
World
10
Developed

Percentage

8
Countries
6

Latin and the Caribbean

South, East and South -East Asia

Central and Eastern Europe

2
Least Developed Countries
0
1985-1990
(Annual
Average)

1991

1992

1993

Source: World Investment Report, 1997.

13

1994

1995

The figure above shows the plausible role of FDI inflow in capital formation in Latin and
the Caribbean, Central and Eastern Europe and South-East Asia. However, FDI inflow
constitutes rather meagre portion of capital in the developed countries. The worst case is for
the 48 least developed countries where FDI accounts for only around 2% of their gross
capital.

SECTION - 5
Forms of Foreign Investment
In contrast to the 1950s and 1960s, when Greenfield FDI was the most popular mode of
market entry, cross-border merger and acquisition (M&A) have been used increasingly as a
major means of entering foreign markets since mid-1980s. Cross-border M&A rose during
the past six years, to a record $275 billion (including some minority held transactions
classified as portfolio investment) in 1996, an increase of 16% over the 1995 level ($237
billion). Transnational Corporations based in the United States and the United Kingdom were
the biggest players, accounting for 40% of the value of purchases in majority-held M&A and
57% of sales in 1996. Though Japanese TNCs still prefer Greenfield investments as their
mode of entry, they have been shifting recently to merger and acquisition. In his study of
New Forms of International Investment on North-South context, Oman (1984) observed
that the independent non-equity (licensing, production sharing, sub-contracting, franchising,
management contract, technical assistance, turnkey contract, etc.) forms of involvement in
developing countries increased relative to traditional majority owned direct investment during
the period 1970-1981. He also noticed that such low-equity or non-equity forms of
involvement were more marked in Asia than in other developing regions. Production sharing
contracts had been very much common in extractive industries, especially in petroleum and
metal mining, turnkey contract and technical assistance in infrastructure projects and subcontracting and licensing in manufacturing. Group of Thirty (1987) pointed to the
international sub-contracting as a growing practice of many international companies, what
they called foreign direct investment without investment because it did not represent FDI in
the accepted sense. In such cases, the international company does not have equity in the
subcontractor. However, as often happens, being the biggest single or only customer of the
subcontractor, the local company has in effect been brought into existence and is kept in
being by the international company. In this way, the international company creates, in another
country, a new enterprise, employment and also the generation of foreign exchange earnings
for the subcontractors country of domicile.

14

SECTION -6
Sectorial Trend of FDI Flows
The compositions of FDI across industries have undergone changes in favour of services
sector. Over time, the proportion of FDI accounted for raw materials including mining,
smelting and petroleum has declined. (Daniel and Rodebough, 1998, P. 359). Now the scope
for investment in extractive sector has almost been saturated and the non equity or low equity
forms of investment replaced the traditional wholly or majority owned green field investment
in the primary sector The portion of FDI in manufacturing, especially resources based
production grew steadily from 1920s to the early 1980s, but has since stabilised. Since early
1980s FDI in technology intensive manufacturing as well as services sector has been on rise.
By 1990, services accounted for about 50% of world stock of FDI, followed by
manufacturing and primary sector (See Table 4). The main reason behind the rise of service
sector as a recipient of FDI is its increasing internationalisation. For many service industries,
particularly intermediate inputs onto the production chain and those, which are in
circulation activities, the initial stimulus to their internationalisation was the rapid growth
and global spread of TNCs in manufacturing industries. As manufacturing TNCs have
proliferated globally so, too, have the major banks, advertising agencies, legal firms,
property companies, freight corporations, travel and hotel chains, insurance companies, car
rental firms and credit card enterprises. In many respects internationalisation both of
manufacturing and business service activities has become mutually reinforcing. (Dicken,
1992, P. 355).
Table 4. Sectorial Composition of Outward FDI Stock
of the Major Home Countries (Percentage)
Home country
Year
Primary Secondary
Tertiary
Sector
Sector
Sector
France
1987
9
50
46
1991
9
44
47
Germany
1985
4
43
53
1992
2
39
59
Japan
1985
17
29
52
1993
5
27
59
United Kingdom
1984
33
32
35
1991
18
36
46
United States
1985
15
44
41
1992
7
42
51
Source: UNCTAD, Division of TNC and Investment.

15

Total
100
100
100
100
100
100
100
100
100
100

SECTION -7
Conclusion
The volume of both outflow and inflow of FDI in the world economy has been
increasing steadily. At times it grows even faster than the world GDP and trade. It indicates
that the economic activities around the world are getting more interconnected through
investment networks. In many cases, especially in electronics, automobiles, petro-chemicals
and constructions, the arms length trade transactions are being replaced by the cross border
production of goods and services. From the regional perspective, developed countries still
dominate the FDI scenario. They absorbed around 60 per cent of world inward FDI and
supplied 85 per cent of total outward flows. However their dominance has been dwindling
gradually. On the other hand, the share of developing countries as the recipient of FDI has
been showing an increasing trend. Now they absorbed around 40 per cent of total inward
FDI. Among the developing countries the South, East and South-East Asia has emerged as a
major destination of FDI. Signs of prospects are also on the sight for Latin and the Caribbean
and Central and Eastern Europe as the recipient of FDI. Renewed faith and attitude towards
foreign investment and the change of business climate as well as excellent performance of the
domestic firms in many developing countries are the main reasons behind this growing
inflow of FDI. However, the outflow of FDI is still a developed country phenomenon. The
share of developing countries in this regard is still very meagre. Nevertheless, the outward
FDI from ths group, especially from South, East and South-East Asia has been growing,
though the tempo is very slow. Along with the current waves of regional integration, the
intra-regional FDI got its momentum in recent years and has become a vivid future of the
worldwide flows of finance capital. A significant shift also took place in relation to the forms
of foreign investment. Conventional Greenfield investment is giving way to the merger and
acquisition and many other low-equity and non-equity forms of international investment
modes. The sectoral recipe of FDI also underwent a radical change. Service sector replaced
the dominance of primary and manufacturing sectors as the major FDI recipient.

16

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18

Appendix
1. Data table for Figure: 1
FDI outflow by home region, 1985-1996
(Millions of Dollar)
Home Region

1985-1990
(Annual
Average)

1991

1992

1993

1994

1995

1996

World

155578

198143 201465 239090

251117 338729

346824

Developed Countries

145005

189782 179671 204818

209726 291271

294732

Latin and the Caribbean

1354

-453

2561

2264

4171

3919

3850

South, East and

South-East Asia

7378

8151

17380

30280

34804

41627

45675

Source: World Investment Report, 1997.

2. Data Table for Figure: 2
FDI outflow, 1995 and 1996
(Top 15 Countries, Millions of Dollar)
Country

1996

Rank

1995

Rank

United States
United Kingdom
Germany
Hong Kong
France
Japan
The Netherlands
Switzerland
Belgium and Luxe mbourg
Canada
Italy
Norway
Sweden
Singapore
Spain

84902
53499
28652
27000
25186
23440
19984
10484
8983
7543
5866
5320
4847
4800
4629

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

92929
42360
34890
25000
18734
22510
13250
11851
11399
5761
6925
2847
10733
3906
3635

1
2
3
4
6
5
7
8
9
12
11
17
10
14
15

Source: World Investment Report, 1997.

19

3. Data Table for Figure: 3

FDI inflow by home region, 1985-1996
(Millions of Dollar)
Home Region

1985-1990
(Annual
Average)
141930

1991

1992

1993

1994

1995

1996

World
158936 173761 218094 238738 316524 349227
Developed Coun116744
114792 119692 138762 142395 106876 108226
tries
Latin and the
8145
15356 16204 18072 16974 25424 38563
Caribbean
Central and Eastern
449
2448
4444
6287
5882
14317 12261
Europe
South, East and
12357
21228 27668 47278 55718 65175 81241
South-East Asia
Source: World Investment Report, 1997.

4. Data Table for Figure: 4

Country
United States

FDI inflow, 1995 and 1996

(Top 15 Countries, Millions of Dollar)
1996
Rank
1995
84629
1
60848

Rank
1

China
United Kingdom

42300
30053

2
3

35849
22030

2
4

France
Belgium and Luxe mbourg

20809
13920

4
5

23735
10299

3
9

Brazil

9500

4859

13

Singapore
Indonesia

9440
7960

7
8

6912
4348

12
14

Mexico
Canada

7535
6681

9
10

6963
10786

11
7

The Netherlands

6290

11

10766

Australia
Sweden

6043
5486

12
13

14251
14273

6
5

Malaysia
Poland

5300
5196

14
15

4132
3659

15
16

Source: World Investment Report, 1997.

20

5. Data Table for Figure: 5

FDI inflow as a percentage of Gross Capital Formation, by Region (1985-1995)
(percentage)
Home Region

1985- 1990
(Annual
Average)

1991

1992

1993

1994

1995

World

5.4

3.1

3.3

4.4

4.5

5.2

Developed
Countries

5.5

3.2

3.2

3.7

3.5

4.4

Latin and the Caribbean

11.3

7.8

8.1

7.2

10.3

11.0

South, East and South -East Asia

9.7

3.8

4.7

7.5

8.3

9.0

Central and Eastern Europe

1.0

0.4

0.8

7.9

5.0

5.2

Least Developed Countries

2.3

2.4

2.0

2.1

1.3

1.3

Source: World Investment Report, 1997.

21