Exploring FDI atmospherics in corporate strategies
Foreign Direct Investment (FDI) is a driving force of globalization
and an important engine of economic growth. The relationship between
corporate strategies for the green world and host country aspiration is
receiving increased attention in the light of globalization and its
implications for sustained economic growth.
Historically, developed countries pioneered by transnational (TNC) or
multinational corporations (MNC) benefited immensely by FDI and
developing countries via public policy measures increasingly began to
seek and attract FDI due to its many advantages for economic
Foreign direct investment has played a critical and growing role in
the global economy assisted by accompanying improving absorptive
capacities in host countries. To a host country, FDI promises a source
of new resources and new technologies that could spur national economic
growth and development of various sectors.
Evidence of FDI influence on economic growth figures prominently both
in theoretical and empirical studies focusing on a large number of
developing nations among them cited in the paper are strong growth in
regional FDI inflows in South, East and S-E Asia, e.g., China, India,
Malaysia and Sri Lanka.
To a home country TNC or MNC, FDI offers the promise of new markets,
a mode-of-entry beyond exporting and less expensive export-led
production facilities. This current paper draws on reports, findings,
reviews and relies on the existing FDI statistical systems, reported by
UNCTAD World Investment Report 2010, World Investment Prospects Surveys
2009 and 2010, EIU, among others cited, to examine the various issues
related to FDI definitions, trends, perspectives, policies and
significant operations during the past two decades, decline during
global economic crisis (2007-2009), and prospects for 2010-2014. Of
significance is the trend of FDI in a low-carbon economy, and the
Strategies of Transnational Corporations (WIR 2010). Low-carbon FDI in
areas such as renewable, recycling and low-carbon technology
manufacturing is already large (some $90 billion in 2009), but its
potential is huge concludes UNCTAD’s 2010 World Investment Report.
Around 40 percent of low-carbon emission FDI projects by value during
2003-2009 were in developing countries.
Yet there is potential for much more “green” FDI to flow into
developing economies and the role of the private sector will be critical
in tackling climate change by expanding its presence in those countries.
Recipient countries will need to do more by adopting market-creating
policies that can foster demand for new low-carbon products and
The World Investment Report 2010 draws attention to investing in a
low-carbon economy. The report illustrates global and regional trends in
Foreign Direct Investment followed by recent policy developments. Global
FDI witnessed a modest, but uneven recovery in the first half of 2010.
This sparks some cautious optimism for FDI prospects in the short run
and for a full recovery in the future. Developing and transitional
economies attracted half of global FDI inflows, and invested one quarter
of global DFI outflows.
Overcoming barriers remains a key challenge to attract FDI for small,
vulnerable and weak economies. The chapter on leveraging foreign
investment for a low carbon economy describes characteristics and scope
of low-carbon foreign investment; its drivers and determinants;
strategies and policy options; and sums up with global partnership to
further low-carbon investment for sustainable development. (WIR 2010).
This paper draws on data from a number of international organizations
to explore the changing relationship between FDI and sustained growth,
especially for emerging economies and emphasizes the importance of
absorptive capacity and policies in the host country’s ability to
benefit fully from FDI and encourage MNC and TNC corporate strategies.
It is presented against the backdrop of the deepest global economic
slow down since the great depression of the 1930’s and the modest
recovery of 2010.
What began as a financial crisis in a handful of industrialized
economies continued to spill over into the global economy, engendering
massive contractions in consumer demand, rising unemployment, and
growing protectionist pressures worldwide.
A large number of developing countries have not been spared from its
fallout; many are now faced slumping demand for their export products
along with fluctuating commodity prices, significant reductions in
foreign direct investment and remittances, and a more general liquidity
The strong interdependence among the world’s economies make this a
truly global economic crisis, affecting a sharp decline in FDI and
economic growth slow down. As we slowly emerge from the global economic
slowdown, and as the economic balance of power gradually shifts towards
emerging economies led by the Bricks, this paper highlights the
importance of FDI to economic growth and development, as well as the
changing nature of the relationship between emerging economies and FDI
related to the potential of FDI in corporate strategies for the green
The annual UNCTAD World Investment Reports and a fund of literature,
both theoretical and empirical available, many cited in this paper
enable the analysis of FDI rise during two decades, recent fall and
policy implications of the global slowdown and crisis from late 2007
going into 2008-2009; and look at prospects for 2010-2014.
These findings are also in line with those of other sources, such as
GCR and WEF. EIU, the IFO Global Business Index and OCO Global
2008-2009, 12th Annual CEO Survey. Over the past twenty years, FDI
inflows have expanded substantially.
Specifically, global foreign direct investment flows fell moderately
in 2008 following a five-year period of uninterrupted growth, in large
part as a result of the global economic and financial crisis.
While developed economies were initially those most affected, the
decline has now spread to developing countries, with inward investment
in most countries falling in 2009 too. The decline poses challenges for
many developing countries, as FDI has become their largest source of
external financing. Greater involvement by TNCs (MNCs) not only lead to
greater productivity in manufacturing, in agriculture, rural development
essential to economic growth but also to the alleviation of poverty and
Although the 2008-09 major economic crisis began in the advanced
economics, it rapidly spilled over to the developing world through the
contagion mechanisms of reductions in trade, foreign direct investment,
remittances, and other types of financing. Although GDP growth rates in
emerging markets did not fall as much as they have in advanced
economies, the notion that the developing world would be only marginally
affected by the crisis, having decoupled from the business cycle of
industrialized economies, has not held true.
However, it is important to note that the crisis has not affected
developing countries in a homogenous way - some economies are showing a
higher resilience and even managing to enhance their competitiveness in
the midst of the global downturn.
According to IMF Update global economy is beginning to pull out of a
recession unprecedented in the post-World War II era, but stabilization
is uneven and the recovery is expected to be sluggish. Financial
conditions have improved more than expected, owing mainly to public
intervention, and recent data suggest that the rate of decline in
economic activity is moderating, although to varying degrees among
Cross border mergers and acquisitions (M&As) are the principal
drivers of this growth, as they are the main form of FDI in the
developed world and an increasingly important one in emerging markets.
Global flows of foreign direct investment have halved in the last two
years, and in the process emerging markets have edged ahead of developed
markets as the major destination. As higher-growth economies, emerging
markets have proven better than developed markets at attracting FDI
during the global downturn-with the notable exception of Eastern Europe,
which continues to suffer.
Surveys underline that, for developed-market companies, FDI tends to
pay off handsomely in terms of higher economic growth. Global FDI flows
are forecast to grow again this year, with emerging Asia in the
vanguard, but the volume is unlikely to match 2007’s US$2 tn level until
2012 or 2014 according to UNCTAD and EIU respectively.
FDI, globalization and economic growth
The boom in worldwide FDI flows constitutes a major element of
globalization and economic growth. Foreign direct investment is probably
one of the most significant factors leading to the globalization of the
international economy. FDI inflows to the developing countries increased
remarkably in the 1990s and now accounts for about 40 percent of global
FDI. The globalization of world markets has been accompanied by the
rapid growth of FDI by small and medium-sized firms accompanied by an
increase in entrepreneurial enterprises.
However, the dominance of MNCs/TNCs point to the complementarity of
trade and foreign direct investment in the context of sustainable
economic growth, as seen by:
* Multinational and Transnational companies, traditional exporters
and investors, send substantial exports to their foreign facilities;
* About 1/3 of world trade is intra-firm trade among MNCs and their
affiliates established under FDI;
* Many of the exports from parent MNC/TNC to subsidiary would not
occur if overseas investment did not exist. In these cases, factor
movements stimulate trade rather than substituting for it;
* The globalization of world markets has been accompanied by the
rapid growth of FDI by small and medium sized firms and entrepreneurial
enterprises in addition to traditional MNCs;
* Globalization has advanced FDI as a strategic foreign market entry
mode aiding growth
* Globalization of the world economy has raised the vision of firms
to realize the entire world as their markets market;
* Beyond export-led growth, the key to sustainable economic growth is
investment, which comes from: savings, retained earnings,
gifts/grants/foreign aid, investments (FDI)
* Trends are evident of TNC and MNC incorporate corporate strategies
for the Green World consistent with host country policies, backed by
Annual FDI flows increased fifteen-fold from about $55bn in 1980 to
$1.4 billion in 2000 and increased to over $2 trillion in 2007. FDI
soared not only in absolute terms but also in relative terms. Overall
FDI flows accounted for about 3 percent of worldwide exports in
1980-1985. By 2000, the FDI and export ratio exceeded 15 percent.
In other words, while exports remain the dominant form of corporate
internationalization strategies, globalization through FDI has gained
significantly in relative importance.
However, FDI inflows fell 37 percent from 2008 to 2009 to $1.114
trillion. However, this amount still represents the 5th highest amount
of cross border investment flows since data began to be recorded. It
accounts for a whopping 11 percent of global GDP output and over 80
In addition early signs from the beginning of 2010 suggest there will
be modest and uneven recovery in trillion by 2014 depending on data
provided by WTO and UNCTAD, EIU and author’s calculations.
The rapid expansion of FDI is enlarging the role of international
production in the world economy, making it “the main force in
international economic integration” says WIR2010.
The World Investment Report 2009, published by the UNCTAD (United
Nations Conference on Trade and Development), states there is a total of
889,416 multinational companies (MNCs) around the world: 82,053 parent
corporations and 807,363 affiliates.
In 2008, the 100 largest MNC’s sales combined amounted to nearly $8.5
They also increasingly shape trade patterns, accounting for about
two-thirds of all world trade. But both FDI and trade are concentrated
within regions and neighbouring regions, and within each region, trade
links are somewhat stronger than FDI links.
Structural shift in global FDI
The decline in global FDI flows in 2009 was accompanied by a distinct
shift in the pattern of FDI. Economic theory tells us that capital
should flow from capital-abundant rich countries to capital-scarce poor
In practice, that has not been the case as developed countries have
consistently attracted the bulk of global FDI flows.
High risk in many emerging markets, the benefits of advanced
institutions and infrastructure and a superior overall business
environment in developed countries have tended to outweigh the
attractions of greater market dynamism and lower costs in emerging
The share of emerging markets in global FDI has tended to rise during
recessions as slumps in M&A have hit the developed world
disproportionately. Despite the steadily increasing share in recent
years of emerging markets in cross-border M&A, this still remains mainly
a developed country phenomenon.In 2008 some 80 percent of cross-border
M&A sales were still in developed states. However, the influence of the
M&A factor has been reinforced by other developments which pushed the
share of emerging markets in global FDI inflows to a record level in
FDI flows to emerging markets have held up better because their
overall economic performance has been much better than in the developed
world which has experienced its worst recession since the Second World
Primarily this is due to the continued high growth of China and
India. However, even if China and India are taken out of the equation,
most emerging markets outperformed the developed world in 2009.
The notable exception is Eastern Europe which has suffered very badly
- its average output contracted by almost 6 percent in 2009.
Other factors are also apparent. Numerous studies have shown that
both “push” and “pull” factors determine FDI flows to emerging markets,
even during recessions. The trend of improving business environments in
many emerging markets in recent years has strengthened the “pull factor”
and has helped limit the recession-induced decline in FDI flows.
Globalization and increasing competitive pressure on companies have
increased the opportunity cost of not seizing opportunities in more
dynamic and lower-cost destinations.
The 2009 Economist Intelligence Unit global survey of 548 companies
provided evidence of a link between investing in emerging markets and
corporate financial success.
Among surveyed companies from developed countries that derive less
than 5 percent of their revenue from activities in emerging markets,
only 24 percent reported their financial performance as being better
than that of their peers.
By contrast, for developed country companies that derived more than 5
percent of their revenue from emerging markets, the share reporting
better performance than their peers was just under 40 percent.
Finally, the increased share of emerging markets in outward
investment is also increasing the share of emerging markets in inward
flows because a disproportionate share of outward investment by emerging
markets goes to other emerging markets. As a result of the various
factors that are expected to be at work, global FDI inflows as a
proportion of GDP are expected to decline from highs of about 3 percent
of global GDP to an average of 2.5 percent in 2010-14.
FDI inflows into emerging markets are projected to decline from
recent peaks of 4 percent of emerging markets’ GDP to an average of
about 3 percent of their GDP in 2010-2014 determination, FDI inflows are
dependent on a measure of the business environment, market size, real
GDP growth, unit labour costs, distance from markets, and the use of the
English language and natural resource endowments.
The model can be used to estimate the negative medium-term impact of
the effects of the 2009 crisis on FDI inflows.
Based on the model, global FDI inflows in 2010-14 will be some 25
percent lower compared with what they would have been if the average
business conditions and growth in 2004-08 had also pertained in 2010-14.
M&A’s have experienced a faster recovery, while Greenfield
investments have been more resilient during the crisis. FDI inflows
Global FDI witnessed a modest, but uneven, recovery in the first half of
2010. Developing and transition economies now absorb half of FDI.
Developing and transition economies attracted more Greenfield
investments than developed countries in 2007-2010. Although the majority
of cross-border M&A deals still take place in developed regions, the
relative share of such transactions in developing and transition
economies has been on the rise.
UNCTAD’s World Investment Prospects Survey 2010-2012 (WIPS) also
confirms that interest in developed countries as foreign investment
destinations compared to other regions had declined over the past few
years and is likely to continue to do so in the near future.
Global rankings of the largest FDI recipients confirm the emergence
of developing and transition economies: three developing and transition
economies ranked among the six largest foreign investment recipients in
the world in 2009, and China was the second most popular destination.
While the United States maintained its position as the largest host
country in 2009, a number of European countries saw their rankings
The determinants and drivers of FDI flows
The relationship between foreign direct investment (FDI) and economic
growth is a well-studied subject in the development economics
literature, both theoretically and empirically.
Recently, renewed interest in growth determinants and the
considerable research on externality-led growth, with the advent of
endogenous growth theories made it more plausible to include FDI as one
of the determinants of long run economic growth.
The interest in the subject has also grown out of the substantial
increase in FDI flow that started in the late 1990s, and led to a wave
of research regarding its determinants.
With the development of globalization, foreign direct investment is
increasingly being recognized as an important factor in the economic
development of countries.
Although FDI began a century ago, the biggest growth has occurred in
This growth resulted from several drivers and factors, particularly
the more receptive attitude of governments to investment flows, the
process of privatization and the growing interdependence of the world