Foreign Direct Investment in the Global Economy

Definition of the concept of foreign direct investment (FDI)

Foreign direct investment is a complex economic phenomenon that has been involving much consideration during the whole period of its existence. It is a form of international cooperation that has been treated as a threat to national welfare first of all, and besides as a threat to the development of third world countries. The mechanism of FDI is producing direct financial investment in different spheres of the economy of other countries. Of course, it is done with the benefit for the company making the investment, which is consequently done with the under-developed countries as purposes for investment. FDI is a multifaceted notion, understanding which on all levels of its existence is essential for building up further knowledge in the sphere:

While at its most basic level foreign direct investment is a dollar of capital crossing an international border, in reality, the issues surrounding FDI are more complex. FDI is essentially a package of potentially wealth-creating assets that can have a significant impact on home and host countries. The issues relating to FDI range from theories of commercial presence and management issues to the impact of FDI on trade employment, wages, intellectual property and development (Bora 1).

As one can see from the quotation, FDI has a far-reaching effect both on the economy of the country that produces the investment and the country that is the recipient of the investment. It directly influences the number of working places, the rate of currency, the overall state of the economy, and other economy-related issues that directly shape the well-being of the countries.

Investing is always reasoned and grounded, thus presupposing the expectation of profit by the investor. However, there is a question on whether the recipient country benefits or loses from FDI. In general, FDI is nowadays considered to have an overall positive effect on the economy of the recipient country – but first of all, it is necessary to define the ways by which FDI is done. According to the information of the US Department of Commerce, there is some difference between types of investment:

FDI is generally divided into two categories: greenfield investment, which is the creation of new enterprises and the development or expansion of production facilities, and mergers and acquisitions, which involve the purchase of an existing enterprise (US Department of Commerce 2).

The ways FDI influences the economy of the country are varied and diverse. One thing an economist would understand is that the high level of FDI in some countries denotes its attractiveness for investment and hence signals about its stability and welfare. The first advantage FDI offers to the recipient country is the creation of new jobs. Countries that invest money in other countries’ economies supply only pure capital and do not involve a labor force of their own. Thus, launching a new business creates a number of new jobs for the residents of the recipient country.

t is also proved that multinational corporations, as compared to national ones, pay higher salaries. This is done to increase competitiveness and to survive in the foreign market by offering more profitable conditions. Another advantage is FDI’s direct influence on exports. Having more enterprises that have the status of multinational corporations enhances its interrelations with the foreign affiliates, intensifies international trade, and increases the volumes of exported goods (US Department of Commerce 2).

All in all, it is notable that the high level of FDI encourages development, research, innovations and competition. Fair competition has always been the fairest and the best condition for the encouragement of movement forward, so FDI produces the stimulus that makes companies develop and implement innovation and improvement to survive in the free market.

The Relation of FDI to Globalization (Free Trade and Global Finance)

It is notable that in the course of emerging signs of globalization with the coming MNCs and FDI the countries were suspicious about these tendencies as they thought it would cause negative consequences and would impair the development of certain countries giving the advantage to others in all terms, including financial. However, with the recognition of the role of the global space in the development on the individual, local, national, international, and global scale it became clear for the global community that cooperation is the key to success, raising revenues and simplified conditions of work.

The mobility of the labor force, the global capital movement – all these phenomena became the logical consequences of globalization which is still considered a controversial event. The importance of globalization as the global development trend has been recognized long ago; however, it is hard to estimate whether it causes a positive or a negative change.

There are many reasons for these debates as different countries experience different effects of globalization – some of them gain power and dominate the culture, the commerce, form the global trends, and create millions of working places generally shaping the global policy, while others lose their identity, become impaired and neglected, surrender under the pressure of globalization that is often referred to as ‘Americanization’ nowadays and have to give up a certain measure of authenticity and specificity.

It is hard to judge whether FDI and the establishment of multinational corporations are the sole reasons for globalization to have such a dramatic effect upon all aspects of life of different countries. However, it is clear that foreign direct investment involves the direct participation of one country in the life, economy, state of affairs of another country, simply interfering with its normal activity on all world arenas. This happens on a voluntary basis as the country being open for foreign investment agrees to experience the effect this investment may potentially have. However, the influence may often go far beyond the expected measure and become the guiding pattern of economic activity, business and social life, thus substantiating the national influential bodies, which may be unacceptable by the recipient country.

The issue of the strength of the company that makes FDI into another country is decisive in the point of projecting whether it will have much influence on the target market or not – free trade is a chance for everyone. The principles of free trade belay the fundamental opportunity for every organization to conduct its business independently from borders and limitations – the success of its undertaking depends on other factors that have to be taken into consideration by its management department. Hence, free trade opens the doors of all daring businessmen to all corners of the world depending on how far their ambitions may reach.

Global trade and global finance that result from it are also a direct consequence of foreign direct investment – if the companies did not develop and did not establish their affiliates in other countries, they would not generate such multifaceted and multichannel cooperation on the international level. FDI enables multinational corporations not only to establish their facilities in the target area but also to achieve a certain measure of direct participation in the economic life of the recipient country. Consequently, they pay taxes to the budget of the recipient country, they pay salaries to their workers thus contributing to its GDP – they actually take part in the formation of the national economy and become its integral part.

Judging from the considerations mentioned above, it is highly possible to say that FDI is directly connected with globalization and promotes it – by establishing multinational corporations and making the activity of certain spheres monopolized by them, thus making the sphere more homogeneous and well-organized it adds to the general trend of globalization that is observed in the contemporary period of time.

Patterns of total, inward and outward FDI of the major economies of the world: the USA, the EU, China, Brazil and India

The global recession influenced the trends of distribution of FDI in the major economies of the world. However, some trends are still pursued as these countries remain too powerful to be dramatically affected by the change. While discussing the FDI distribution and tendencies it is necessary to distinguish inward, outward and total FDI figures for the discussed countries.

Speaking about the inward foreign direct investment, it is necessary to note the positive tendency for India that is keeping pace with the most actively developing countries of the contemporary reality, which may be illustrated by its occupying the second place after China according to the information for 2007. According to the UNCTAD survey report, China has received 52% of respondents’ voices with India receiving 41%, the USA receiving 36%, Russia receiving 22% and Brazil having 12% (UNCTAD Report).

According to the information from the survey, India has made a huge step forward as compared to former years (2006 – inward FDI index equaling 113, 2005 – 121). The improvement could be seen by the fact that in 2005-2006 India occupied only the fourth place in the list of FDI-attractive countries. After 2007, however, one can trace another tendency – the influence of recession changed the state of affairs. According to the interim report 2009, during 2007-2008 India received $32.4 billion of FDI, during April-November 2008 the total amount of FDI was 23.3 billion US dollars – 45% growth over the corresponding period in 2007 (India: Interim Budget 2009, 4). This positive tendency signals the successful way of overcoming the crisis by India compared to the previous year.

Proceeding to the information on the EU, its activity before the recession looked the following way. Its outward FDI decreased by 15%, inflows declined by 46% as well (European Union Foreign Direct Investment Yearbook 1999-2004, 6-7).

In 2008 the EU received 40% of the global FDI, USA remained the leader of FDI inflow. Brazil also took a beneficial position as it was named in the list of the most favorable FDI destinations for the period of 2007-2009 in the region of Latin America. FDI of Brazil despite the crisis doubled to $35 billion in 2007, proving that the crisis was not an obstacle to its development. The tendency of FDI change in Brazil before the crisis may be seen in Table 1:

FDI in Brazil – tendencies of change.
Table 1. FDI in Brazil – tendencies of change.

The last country worth attention in the present paper is China – the indisputable leader in the growth of potential and tempos of development. Before the recession, China illustrated the example of a country steadily increasing its popularity for FDI, except from 2006 when it experienced a palpable decrease, which can be seen from Table 2:

Tendencies of change in the rates of FDI in China, 2001-2006.
Table 2. Tendencies of change in the rates of FDI in China, 2001-2006.

For the period of the world crisis China has also been affected to a certain extent, but not in all spheres – it is stated to experience the decrease in the number of established enterprises, but it witnessed the increase of utilized capital as compared to 2007 (-23,7% and +23.6% accordingly). This tendency is a truly positive one as compared to the fall of FDI in 2006 (Economy of China 2008/2009 29).

These are the major tendencies traced in the five major economies of the world for the previous decades and years of the recession – it is evident that some of them experience the rise notwithstanding the global negative tendencies in the economy; others suffer heavily from the negative impact of the recession. In general, the tendency in inward FDI investment on the global scale may be traced with the help of Table 3 – it includes explicit information about the trends that were observed in the discussed countries and over the world at the turn of the century. Table 4 sums all findings up and illustrates the general tendencies in FDI change during the decade before the recession.

Regional Allocation of FDI Inflows, 1990 – 2001.
Table 3. Regional Allocation of FDI Inflows, 1990 – 2001 (Billions of US dollars).

It is highly important to mind that the rating of countries most attractive for FDI has been changing much within the past decade or so – some countries that had never been influential in the world economy have come to the fore and managed to win a profitable position on the economic map of the world. Thus, it is possible to make an inference that it is the shift of global needs that leads to changes of such type – global business, technology, and innovation needs change with the flow of time, so the capital inflow is being planned according to the projected outcome.

Direct Investment Capital Flows, 1990-2001.
Table 4. Direct Investment Capital Flows, 1990-2001 (Billions of US Dollars).

The Future of FDI after the Global Recession

The future of FDI is not hard to predict after the end of the recession as the global tendencies will remain relatively the same in a couple of years as they are now. The essence of the distribution of FDI among the countries is the level of their attractiveness for investors. This attractiveness is a compound phenomenon consisting majorly of the spheres of activity the countries specialize in that can be interesting and potentially profitable, thus causing interest with the expectation of future and present benefits.

Making conclusions from this basis, one can predict that China and India with their heavy emphasis on the development of innovative computer, software, and IT technologies will remain the leaders in the distribution of FDI for a considerable period of time. The USA as one of the superpowers in the world political map, despite its temporary loss of attractiveness for FDI, is likely to return its world-leading position by the end of the recession in case it pursues a wise policy in advertising and publicizing its planned economic activity to turn the attention of investors to itself again.

In general, one can surely say that the Asian tigers and the rising potential of Latin America will play a significant role in the formation of distribution patterns of FDI in the nearest future – however, predicted figures will be proved only with the end of the recession and the return to normal economic and investment activity.