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IMF Working Paper Summaries (WP/95/1 - WP/95/61)
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Summary of WP/95/59: “Foreign Direct Investment in the World Economy”

Author(s):
International Monetary Fund
Published Date:
August 1995
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Foreign direct investment surged during the 1980s as firms from many nations expanded their international operations. This paper surveys a number of aspects of foreign direct investment and its role in the “globalized” world economy. The precise nature of foreign direct investment is examined from both microeconomic and macroeconomic perspectives. Historic patterns of foreign direct investment are explored, with emphasis on the large surge that took place following 1985. The (correct) proposition that foreign direct investment is not synonymous with international transfer of capital is analyzed from both a theoretical and empirical perspective.

Key characteristics of foreign direct investment and the multinational corporations that generate it are examined in detail. These include the determinants of foreign direct investment and the international expansion of firms as best as they are understood. Also analyzed are the relationships between foreign direct investment and capital formation, technology transfer, international trade, and the economic growth of both host (recipient) and home (investor) nations.

The paper concludes by surveying the policy issues that figure in current efforts to put international direct investment under the aegis of the multilateral trading rules. It is likely that in the near future some sort of “multilateral agreement on investment” will be negotiated. Issues of both substance and venue (that is, the question of whether the agreement will be negotiated within the World Trade Organization or some other negotiating body) are discussed.

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