Foreign Direct Investment in Developing Countries

• Author: Padma Mallampally and Karl P. Sauvant
• Position: Senior Transnational Corporations Affairs Expert, UNCTAD, Geneva/Chief, International Investment, Transnationals, and Technology Flows Branch, Division on Investment, Technology, and Enterprise Development, UNCTAD, Geneva

Foreign direct investment has grown at a phenomenal rate since the early 1980s, and the world market for it has become more competitive. Developing countries are becoming increasingly attractive investment destinations, in part because they can offer investors a range of "created" assets.

ONE STRIKING feature of the world economy in recent decades has been the growth of foreign direct investment (FDI), or investment by transnational corporations or multinational enterprises in foreign countries in order to control assets and manage production activities in those countries.

Growth of FDI

Since the early 1980s, world FDI flows, now attributable to almost 54,000 transnational corporations, have grown rapidly-faster than either world trade or world output (Table 1). During 1980-97, global FDI outflows increased at an average rate of about 13 percent a year, compared with average rates of 7 percent both for world exports of goods and nonfactor services and for world GDP (at current prices) during 1980-96. In 1998, global FDI inflows increased for the seventh consecutive year, and outflows for the third consecutive year, to reach some $430-440 billion. (In principle, world FDI flows measured in terms of annual inflows should be equal to those measured in terms of annual outflows. In practice, however, because of differences in national methodologies and coverage, they are not.)

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

The increase in direct investment flows has laid the foundation for a marked expansion of international production by transnational corporations, which now have an estimated $3.4 trillion invested in about 449,000 foreign affiliates throughout the world. The value of sales by these foreign affiliates has increased more rapidly than that of foreign trade (world exports), reaching an estimated $9.5 billion.

As FDI flows have grown in volume, they have also become more widely dispersed among home (outward investor) and host (recipient) countries. Developing countries' share in total FDI inflows rose from 26 percent in 1980 to 37 percent in 1997, and their share in total outflows rose from 3 percent in 1980 to 14 percent in 1997. Firms based in industrial countries are still the primary source of FDI, but direct investment originating in developing countries has more than doubled since the mid-1980s. Industrial countries as a group also attract the greater proportion of such investment, but their share is eroding as developing countries become increasingly attractive destinations for investment.

Among developing countries, though, the distribution of world FDI inflows is uneven. In 1997, for example, developing Asia received 22 percent; Latin America and the Caribbean, 14 percent; and...