INTERNATIONAL ECONOMICS

International Economics

How would Foreign Direct Investment (FDI) cause an increase in Growth in Developing Countries (GDP)?

FDI flow has been primarily focused on developed nations. These nations get the majority of the flow of FDI. Developed nations dominate giving FDI as well as receiving. An obvious reason for this is that the more financially established a country is, the more likely it'll have money to invest abroad. The United States has been the biggest giver and receiver of FDI worldwide for the last several decades. Developed nations get approximately 80% of worldwide FDI. There is a strong positive relationship between inflows and outflows of FDI among developed nations (www.globalpolicy.org).

There have been numerous shifts in FDI throughout the 20th century. Causes of this vary by situation and time. Before FDI became such a dominant force in globalization, it was trade that was the dominant factor. "The primary mechanism of integration has shifted from trade to FDI. Of course, these trends in the growth of FDI, trade and production are not independent of one another. The common element is the transnational corporation (TNC)" (Global shift p.52). Wars, politics, technology and new markets opening have all been major factors in shifts. Rapid growth of FDI in the first half of the 20th century paled in comparison to the acceleration that occurred after World War II. "In fact during the 1960s, FDI grew at twice the rate of global gross product and 40% faster than world exports" (global shift p.52). FDI has been a direct factor in the spread of global prosperity and peace. It has replaced trade as the number one influence in the global community and given prosperity to the poor and underprivileged that would otherwise, never have been. FDI takes two forms: Greenfield investment and cross-boarder acquisitions. "Cross-boarder acquisitions involves firms trading ...