When discussing foreign direct investment, it is important to distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to the amount of FDI undertaken over a given period (normally a year). The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. We also talk of outflows of FDI, meaning the flow of FDI out of a country.

HAS FDI BEEN GROWING OR DECLINING? WHY?

During the past 20 years there has been a marked increase in both the flow and stock of FDI in the world economy. The average yearly outflow of FDI increased from about $25 billion in 1975 to a record $644 billion in 1998. Not only did the flow of FDI accelerate during the 1980s and 1990s, but it also accelerated faster than the growth in world trade.

There are several reasons why FDI is growing more then the world trade and world output. Despite the general decline in trade barriers that we have witnessed for the past 30 years, there is still some fear among businesses of protectionist pressures. Some executives see FDI as a way of circumventing future trade barriers. Secondly, much of the recent increase in FDI is being driven by the dramatic political and economic policy changes that have been occurring in many of the world’s developing countries such as the aggressive promotion of industrial investment using fiscal and other incentives.

The globalization of the world economy is also having a positive impact on the volume of FDI. Firms such as Electrolux now see the whole world as their market, and they are undertaking FDI in an attempt to make sure they have a significant presence in every region of the world. It is important to note that many firms now want to have production facilities close to their customers.