An Economic Analysis Of Foreign Direct Investment

Published Date: 02 Nov 2017

During last twenty to twenty-five years, there has been a tremendous growth in global

Foreign Direct Investment (FDI). In 1980 the total stock of FDI equaled only 6.6

percent of world Gross Domestic Product (GDP), while in 2003 the share had increased to close to 23 percent (UNCTAD 2004). This dramatic development has

taken place simultaneously with a substantial growth in international trade. The

growth in international flows of goods and capital implies that geographically distant parts of the global economy are becoming increasingly interconnected as economic

activity is extended across boundaries. FDI is an important factor in the globalisation process as it intensifies the interaction between states, regions and firms. Growing international flows of portfolio and direct investment, international trade, information and migration are all parts of this process. The large increase in the volume of FDI

during the past two decades provides a strong incentive for research on this

phenomenon.

This dissertation investigates different aspects of FDI at the macro economic level

using aggregated data for FDI. The choice of research topics has been made in order

to allow for the possibility of finding results that can provide knowledge about the nature of FDI that may help policy makers of both home and host1 country to take appropriate decisions.

1 Henceforth, ‘host country’ refers to a country that receives an inflow of FDI while ‘home country’ refers

to a country that generates an outflow of FDI.

1

SECTION 1.1

THEORETICAL EXPOSITION OF FDI

Financial flows can be put into four categories:

1. Private Debt Flows: They are comprised of bonds, bank loans and other

credits issued or acquired by private sector enterprises in a country without any public guarantee.

2. Official Development Finance: It consists of Official Development Assistance (ODA) and other official flows –

i. Official Development Assistance: ODA consists of net disbursements of loans and grants made on concessional terms by official agencies of the

members of the Development Assistance Committee (DAC) and certain

Arab countries to promote economic development and welfare in recipient economies that are listed as developing by the DAC. Loans

with a grant element of more than 25 percent are included in ODA. ODA

also includes technical co-operation and assistance.

ii. Other Official Flows: These are transactions by the official sector whose main objective is other than development or whose grant element is less

than 25 percent such as official export credits, official sector equity and portfolio investment and debt re-organisation undertaken by the official

sector on non-concessional terms.