Foreign Direct Investment

A long-term capital flow or investment in which a nonresident entity has significant management control of voting stock (10% or more) over an enterprise in a foreign or host country. Unlike short-term capital flows, foreign direct invest ment (FDI) is not immediately susceptible to reversibil ity. The bulk of FDI activities in developing countries are undertaken by multinational or transnational corporations. A transnational corporation is a firm that is head quartered in a home country but controls assets of enterprises that are central to its profitability in foreign or host countries.

Supporters and critics of FDI have made passionate arguments to show the benefits and drawbacks of FDI. In the 1960s and 1970s, many developing countries adopted steps to discourage FDI because of its extractive or exploitative tendencies. The era of the 1960s and 1970s coincided with the dawn of colonialism for most countries, and the bitter effects of colonialism had not subsided.

Political and legal institutions were mostly weak and susceptible to corruption in the developing countries. As such, foreign investors were closely associated with corruption and a new form of imperialism closely entwined with the extraction of raw materials and mining. In the mid-1980s, however, developing countries adopted measures to increase the flow of long-term capital in order to augment the paucity of national saving, finance investment, create jobs, import innovation, [Page 207]and position themselves favorably in the global econ omy. FDI also flows North (to rich countries), but in rel ative terms, the bulk of FDI tends to flow South (to poor countries).

Although FDI is sought to improve the economic prospects and performance of countries, it continues to generate issues involving the repatriation of profits, taxes, and control over natural resources (sovereignty). Some economists classify FDI activities under three broad areas— (1) natural resources, such as petroleum, minerals, and agricultural production; (2) manufacturing and services, such as apparel and processed food; and (3) labor-intensive manufacturing, such as apparel, electronics, textiles, and toys. The efficacy of FDI ultimately depends on the pur pose and nature of long-term investment, as much as the policies and institutions in the host and parent countries. For more information, see Perkins, Radlet, and Lindauer (2006) and Stiglitz (2003).