Journal Issue

World Economy in Transition: Recent Trends in FDI for the Developing World

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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During the second half of the 1980s, the volume of global foreign direct investment (FDI) grew from approximately $47 billion in 1985 to $132 billion in 1989. Flows to developing countries also increased during this period; however, they grew at a much lower rate than the flows to developed countries. As a result, the developing countries’ share of global FDI flows fell from about 24 percent to 13 percent over the same period. Moreover, about two thirds of the flows to developing countries were concentrated in East Asia (primarily China, Malaysia, arid Thailand) and Latin America (mainly Brazil, Argentina, Mexico, and Colombia).

The trends that are portrayed in the data point to several underlying forces that are at work in the world economy:

  • International investment, in particular direct investment, has been growing more rapidly than world investment, implying an increase in the integration of the world economy through finance and ownership.

  • There are parallels between rapid growth in foreign investment now, and the rapid growth of international trade over the last several decades. The rapid growth of world trade was led first by trade among developed countries. Later, developing countries joined in as the structure of the world economy changed and many of the developing economies abandoned policies with an anti-trade bias. In a similar fashion, during the 1980s, the increase in international direct investment was led by investment among developed countries.

  • The decade of the 1980s saw a marked shift in the attitudes of developing countries toward foreign investment. Stimulated by changes in the international capital markets and in the determinants of competitiveness in international trade, many developing countries began actively seeking private sources of capital, particularly foreign investment, by redefining their development strategies, liberalizing their economies, and implementing a range of new policies.

Net FDI flows to developing countries

(In constant 1985 billions of US dollars)

Source: IMF, Balance of Payments Statistics, August 1991.

The issue now facing developing countries is whether they can increase their share of growing world FDI flows, and thus participate more fully in the internationalization of production that is now occurring. In order to do so, they will have to build on the policy improvements begun in the 1980s to facilitate an increased role for FDI in their economies. As in the case of trade reforms, this will be a long-term task involving detailed work and politically difficult decisions. The benefit from this effort, however, should be worth the costs involved.

Net FDI flows from Organization for Economic Cooperation and Development (OECD) investors, 1980-69

Source: OECD. March 1991.

Three major sources of FDI flows to developing countries

Source: OECD. March 1991.

FDI flows to developing countries: regional trends, 1980-89

Source: IMF, Balance of Payments Stalistics. August 1991

East Asia and the Pacific

The principal sources of direct investment flows, 1980-891

Source: OECD, March 1991

The principal destinations of FDI follows

Source: IMF, Balance of Payments Statstics. August 1991

Latin America and the Caribbean

The principal sources of direct investment flows, 1980-891

Source: OECD. March 1991.

1 Data include only FDI flows from OECD Development Assistance Commitee (DAC) countries.

2 1989 regional distribution for the United Kingdom estimated on the basis of 1988 percentage distribution.

The principal destinations of FDI flows

Source: IMF. Balance of Payments Statistics. August 1991

Note: All charts are based on data that exclude flows to offshore banking centers

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