Question

Analyze the pattern of trade and foreign direct investment (FDI) during the past 40 years. What are the implications of this trend for U.S. corporations?

Answer 1

Foreign direct investment takes place when foreign firm decides to invest in a production unit in the host country, with control over its assets.

KEY FEATURES OF FDI

1. It is commonly made in open economies that offered a skilled work force and good growth prospects for the investors in comparison to tightly regulated economies.

2. It is a long term commitment as there is no intention to seek quick capital gains.

3. As per organization for economic cooperation and development investment of 10% or above from overseas is considered as FDI.

4. FDI not only requires capital investment but also requires management as well as technology.

5. It increases the productive capacity of the target company.as it involves creation of physical assets. This helps in generating employment opportunities and economic growth.

6. It establishes an effective control in the company in which the investment is made.

Foreign investment fall into four principal categories

Commercial loans

Official flows

FDI and

Foreign portfolio Investment

Determinents of pattern of FDI

Conceptually FDI takes place when a foreign firm decides to invest

in the production unit with control over asets.

FDI can be made in a variety of ways including the opening of a subsidiary or associate company in a foreign country.acquiring a control Interest in an existing foreign company.

Pattern of FDI

The share of service sector in total FDI now amounts to more than 50% at the global level compared to less than 50% of a decade ago. At the same time new pattern of FDI emerged with finance and trade sharing services.

The overall rise in services stock which applies to both developed and developing countries and to both inward and outward investment is mirrored by a decline in the share of manufacturing in FDI inward stock from more than 40% in 1990 to 35%. The share of the primary sector also fell from 10% to 6%.

Finance and trading stock decreased from 65% of all inward services stock in 1990 to 45% in 2001 while that of the new FDI service industries rose from 17% to 44%.

The growth of FDI in services reflects two factors UNCTAD finds the rise of the services economy in developed countries where it now accounts for an average two thirds of GDP.  

In absolute terms FDI stock has grown in all sectors and almost all industries.

Implications of trends in FDI

FDI can play an important role in financing development,

with multi national enterprises also providing employment, technology transfer and access to international markets. Between 2005 and 2014 FDI flows to non OECD countries more than double in absolute terms since 2012, these countries receive more than 50% of the global total compared to 35% in 2005. Recently however some types of international investment in emerging and developing economies have started to decline. There are important warning signs that these investment flows could experience a sharp slowdown over the coming years.