Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Maps below show net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, North West Europe and Japan). But flows to non-industrialized countries are increasing.

What the maps suggest

These maps suggest growing inflows of foreign direct investment in the 1990s. In 1970 and 1980, large parts of Africa, Latin America and Asia had zero or small inflows of foreign investment. By 1999 large parts of Asia, Africa and Latin America, as well as all of North America and large parts of Europe, have FDI inflows greater than 1% of GDP.

This expansion of foreign investment into the global South indicates increasing global economic integration. However, much of this expansion may be due to sale of state enterprises, known as privatization, rather than the setting up of new factories (Sutcliffe 2001: 78). And, FDI is heavily concentrated in only a few, industrializing nations.  In 1997 nearly 71% the foreign direct investment in developing countries (the global South) went to just 9 nations, and of that over 30% was invested in China alone (Todaro, 2000: 578).

Whether you see expansion of foreign direct investment as positive or negative may depend on your ideas about social change (see also "For and Against" button below).

The data

These data show flows of money, as a proportion of GDP, giving a foreign investor a lasting management interest (10 percent or more of voting stock) in an enterprise. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. "Net inflows" means that these figures are inflows minus outflows of money. Negative numbers mean that outflows of investment (or reinvestment of profits outside the country) exceed inflows. FDI is investment in productive assets, not financial assets. It does not include short-term flows of money, such as portfolio investments and foreign exchange dealings.

Source: World Development Indicators (World Bank 2001 CD ROM).

Foreign investment - for and against

After World War II, when many colonized countries gained independence, officials in the new governments believed that foreign investment, foreign ownership of production, was neocolonialism, a continuation of colonialism in economic form. Acting on these ideas, many governments of newly independent countries nationalized foreign owned industry. This meant that the factory, mine or other enterprise was taken over and run as a state enterprise.

In recent years, recognition of the low productivity of state enterprises has contributed to the reversal of the trend toward nationalization. Many state enterprises have been privatized, that is, turned into privately owned corporations.

There is now consensus among governments of industrialized and non-industrialized countries that foreign direct investment is desirable, even essential, for economic growth and poverty reduction. Many questions remain about how foreign investment should be regulated (Zarsky 2002).

Kiely (1998: Ch 5) summarizes some of the arguments for and against Transnational Corporations and the capital investment they bring. Critics of foreign investment have suggested that it led to dependent, or restricted, development. Supporters have suggested that foreign investment can bring capital and technology, develop skills and linkages and increased employment and incomes.

References and further reading

Easterly, W. R. (2001). The elusive quest for growth: economists' adventures and misadventures in the tropics. Cambridge, Mass., MIT Press. See particularly Chapter 3 "Solow's surprise: Investment is not the key to growth".

Kiely, Ray (1998). Industrialization and development: a comparative analysis. London, Bristol, Pa., UCL Press. See particularly, Chapter 5 "Late industrialization and the global economy", for a discussion of debates about the role of Transnational Corporations and foreign investment.

Sutcliffe, Robert B. (2001). 100 ways of seeing an unequal world. London; New York:, Zed Books.

Todaro, Michael (2000) Economic Development. Adison Wesley Longman.

Wade, Robert (1998). "The coming fight over capital flows." Foreign Policy 113 (Winter)(41).

Zarsky, L. (2002). Foreign Direct Investment: No Miracle Drug. Ultimate Field Guide to the US Economy: http://www.fguide.org/Bulletin/fdinodrug.htm.