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Role of FDI in Developing Countries: Basic Concepts and Facts

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Abstract

This chapter contains a detailed overview of the mechanisms, determinants and magnitude of foreign direct investment (FDI) in the developing economies, with particular emphasis on the interface with recent economic developments like worldwide recession and massive capital outflow from some of these countries.

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Notes

  1. 1.

    The types of institutions that are involved in foreign portfolio investment are mutual funds, hedge funds, pension funds, insurance companies, etc.

  2. 2.

    Also see Chuhan et al. (1996), Frankel and Rose (1996), Sarno and Taylor (1999) and Albuquerque (2003).

  3. 3.

    Some economists discard the scepticism regarding portfolio investment and suggest that in the long run, the volatility of growth due to FPI gets washed out and tends to be largely irrelevant; rather it is the average growth rate of the economy that is more important. For example, of all the big emerging markets of the nineteenth century, the United States relied mostly on portfolio flows while Argentina relied the most on foreign direct investment. But despite frequent financial crises and corporate bankruptcies, the United States grew faster.

  4. 4.

    Goldstein and Razin (2006) have developed a model that describes an information-based trade-off between direct investments and portfolio investments.

  5. 5.

    The declining real interest rates in developed economies and the improved investment environment in developing countries following liberalization and economic reforms, including the decision to privatize state enterprises, have been instrumental in a surge in FDI to developing countries (see, e.g. Calvo and Reinhart 1996, Fernández-Arias and Montiel 1996, Fernández-Arias 2000, and Albuquerque et al. 2003).

  6. 6.

    Interestingly, in case of China, ASEAN and other developing countries account for a substantial part of FDI. Hong Kong is the foremost single investor and the newly industrialized economies are the largest investors as a group. Thailand, the Philippines, Malaysia and Indonesia have substantially increased their presence in China since the early 1990s. Among the developed countries, Japan and the United States have been the most important investors in China. The other developed countries have made rather small amounts of investment in China, even though they have increased in recent years.

  7. 7.

    The few studies that focus on the determinants of FDI in Africa include Chaudhuri and Srivastava (1999), Morisset (2000), Bende-Nabende (2002), Asiedu (2006) and Naudé and Krugell (2007).

  8. 8.

    See OECD Report (2002).

  9. 9.

    See Blonigen (2005) and Artige and Nicolini (2006) for a detailed exposition on the studies of determinants of FDI based on partial equilibrium framework.

  10. 10.

    Earlier when local industries were heavily protected, FDI used to be an effective means to circumvent import barriers. But with liberalization of import regime of large number of developing countries, MNCs can choose between exporting and undertaking FDI. As a consequence, purely market-seeking FDI may decline (UNCTAD 1996). However, there is no conclusive evidence in support of this. It can be argued that the decline in market-seeking FDI may be limited to only manufacturing, which again may be counteracted by regional integration that increases market size and enhances economic growth (UNCTAD 2000).

  11. 11.

    Some of the important acquisitions by Chinese firms are that of IBM PC by Lenovo, France’s Thomson Electronics by TCL and United Kingdom’s MG Rover Group by Nanjing Automobile.

  12. 12.

    Some of the major acquisitions of overseas firms by Indian firms are of the Brazilian firm Petrobas by ONGC in 2006, Stokes Group of the United Kingdom by Mahindra and Mahindra in 2006, US firm Infocrossing by Wipro Ltd in 2007, Corus Steel of the United Kingdom by Tata Steel in 2007 and South African firm MTN by Bharti Airtel in 2009, to name only a few.

  13. 13.

    Tariff-jumping implies that countries with higher tariff tend to have higher return on capital, so that it becomes profitable for a foreign investor to invest in that country. In other words, there is a positive correlation between the tariff rate imposed in a country and the amount of FDI it attracts.

  14. 14.

    There is considerable literature on Chinese outward FDI. One can look at Cai (1999), Hong and Sun (2004), Child and Rodrigues (2005), etc.

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Authors and Affiliations

  1. Department of Economics, University of Calcutta, Kolkata, West Bengal, India

    Sarbajit Chaudhuri

  2. Department of Economics, Behala College, Kolkata, West Bengal, India

    Ujjaini Mukhopadhyay

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  1. Sarbajit Chaudhuri
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  2. Ujjaini Mukhopadhyay
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Chaudhuri, S., Mukhopadhyay, U. (2014). Role of FDI in Developing Countries: Basic Concepts and Facts. In: Foreign Direct Investment in Developing Countries. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1898-2_1

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