Harvard Business School 9-795-031

January 4, 1995

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Note on Foreign Direct Investment

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Between 1985 and 1990 the global economy witnessed an unprecedented surge in flows of
foreign direct investment (FDI). According to U.N. estimates, world flows of FDI grew during this
period at annual growth rates of close to 27%, while world income grew at less than 7% per annum
and world trade at less than 9%.1 By the end of the decade, analysts estimated that roughly $3.6
trillion of business assets had come under the control of foreign owners.2

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In 1991, the surge subsided as quickly as it had begun, with global flows dropping roughly
25% from their 1990 level. The political and economic questions that surrounded FDI, however,
remained, highlighted even by the speed and intensity of the shift in capital flows. What, analysts
wondered, caused firms to contract and expand their purchase of foreign assets? How did patterns of
foreign investment relate to world trade and development levels? And what impact if any did
foreign owners have on the countries in which their assets were located?
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Definition and Accounting

Roughly defined, FDI is simply all capital transferred between a non-banking firm and its
new and established foreign affiliates. The investment itself can take any number of forms, ranging
from a hostile takeover, to a joint venture, or a new, or “greenfield,” operation. Conceptually, FDI is
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distinguished only by the control acquired by a foreign entity. Or as the International Monetary Fund
defines it: [FDI] is “an investment that is made to acquire a lasting interest in an enterprise operating
in an economy, other than that of the investor, the investor’s purpose being to have an effective voice
in the management of the enterprise.”

Precisely what constitutes an “effective voice,” though, is difficult to define. For reporting
purposes, most governmental agencies classify a foreign investment as “direct” when a single
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investor acquires more than 10% of a foreign firm. From that point on, the controlled firm is generally
considered a foreign affiliate or subsidiary of its overseas “parent.” Often, however, the statistical

1Edward M. Graham and Paul R. Krugman, “The Surge in Foreign Investment in the 1980s,” p.1. This note
draws heavily on the excellent summary and analysis of this paper, much of which is reproduced in the authors’
subsequent work, Foreign Direct Investment in the United States (Washington, D.C.: Institute for International
Economics, 1991.)
2ibid.
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Professor Debora L. Spar prepared this note with Research Associate Julia Kou as the basis for class discussion rather than
to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1995 by the President and Fellows of Harvard College. To order copies or request permission to
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 795-031 Note on Foreign Direct Investment

relationship between subsidiaries and parents belies their relative position. For instance, because the

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Bronfman (Seagram) family of Canada owns 22.9% of DuPont, DuPont is classified in statistics as the
U.S. subsidiary of a Canadian firm. But DuPont is widely considered a U.S. firm because foreign

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interests do not have managerial control over its operations.

Statistics on FDI can deceive in other ways as well, since the nature and intent of the
investment is rarely evident in the numbers themselves. To begin, not all investment capital is
captured in the measurement of FDI. In fact, under prevailing IMF guidelines, FDI consists only of

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the sum of 1) new equity purchased or acquired by parent companies in overseas firms they are
considered to control; 2) reinvestment of earnings by controlled firms; and 3) intracompany loans
from parent companies to controlled firms. Under these definitions, several increases in foreign
control simply do not count. If a foreign parent funds its acquisition by borrowing in the local
market, for instance, or if it increases its holding via a stock exchange with a local subsidiary, the
investment is not officially registered as FDI. Thus, the element of FDI that is presumably of greatest
interest—the increase in local assets under foreign control—is not easily discernable.

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Likewise, calculating the total sum of foreign-controlled assets—the stock of FDI—is no easy
task, since assets have customarily been computed on a historical cost basis.3 That is, a plant or mine
purchased in 1910 stays on the books at its original purchase price, regardless of the increase in its
current, nominal, value. Capital gains and price increases are both systematically ignored, leading to
a global understatement of FDI that varies significantly with the age of the investments. Countries
like the United States, whose firms ventured abroad at the start of the twentieth century, thus appear
to have fewer overseas assets than they actually do, whereas relative newcomers like Japan may seem
to have an unrealistically large global presence. In either case, moreover, the size of accumulated
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assets is again only a proxy for the overriding questions mentioned above: why do firms invest
abroad and how do they affect the countries in which they do business?

Motivations of Foreign Investment

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The debate on the causes of foreign investment began most publicly with Vladimir Ilyich
Lenin, who argued in 1916 that firms invested abroad to extend the monopoly rents and spheres of
influence that they enjoyed already in their home markets. Although Lenin was primarily concerned
with the effects of foreign investment (and particularly with the exploitation he saw as a result) he did
nevertheless identify the crucial capitalist motivation of FDI. In broadest terms, firms venture abroad
for the same reason they engage in most activities: to maximize expected returns.
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But how do firms determine the most lucrative overseas sites? And what leads them to
expect a higher return than that prevailing in their own domestic market? One obvious explanation is
that firms venture abroad in search of lower factor costs. They move to foreign markets, quite simply,
because they are cheaper. This explanation is particularly relevant with regard to basic inputs such as
natural resources. Whenever resources are scarce or expensive in the local market, firms will have an
incentive to acquire them abroad. Some of the earliest and most influential foreign investors, for
example, were the great state-owned trading companies of Great Britain and the Netherlands, who
established virtual colonies in Asia to harvest and produce the spices and teas that were prohibitively
expensive in western Europe. They were followed by prospectors in Africa who built great empires
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from their control over the continent’s diamonds, gold, and copper; and then by the emerging

3Recognizing these inconsistencies, the United States revised its valuation methods in 1991. In addition to the
customary historical cost data, the Bureau of Economic Analysis (BEA) has subsequently included in its
publications two other measures of FDI. The current cost method revalues investment by virtue of current costs
and general price indices. The market cost method revalues the owners’ equity portion using indices of stock
market prices.

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 Note on Foreign Direct Investment 795-031

multinational oil firms, which chased each other around the world in a race to acquire petroleum

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fields. Currently, resource-based investment still describes a substantial portion of total investment
flows, as resource-based companies continue to search for cheaper sources of supply and,

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increasingly, as manufacturing firms integrate backwards to assure a steady and secure supply of
their most critical raw material inputs.

The search for accessible supply and low cost is also evident with regard to labor. For firms
whose production relies heavily on unskilled or semi-skilled labor, investing in a low-wage overseas

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operation can be a powerful means of reducing factor costs. Industries like textiles and footwear, for
instance, have seen a decades-long shift from the northern industrial states to Latin America and East
Asia, where labor costs can be as much as 90% lower. The shift itself is a powerful cycle of trade and
foreign investment: lower wages give states a comparative advantage in the production of certain
labor-intensive products and thus an incentive to trade these goods on the international market. The
resulting competition then forces firms in higher-wage states to either leave the industry, find some
new means of differentiation, or move their own operations to the low-wage areas. In this cycle, FDI
is thus both a response to trade and a generator of it, since the firms that venture abroad almost

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always re-export their product to their original markets.

In other cases, the motive for foreign investment lies squarely in the foreign, or “host,”
market. Sometimes firms invest overseas, not to lower costs for their domestic market, but instead to
seek profits in new, often untapped, markets. The process fits squarely with Lenin’s early
description: as competition increases and profits decline in established markets, firms will need to
find new ventures if they are to maintain the returns to which they have grown accustomed.
Overseas markets provide an obvious target, especially if there are no local producers of the goods in
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question. IBM and Coca Cola for instance, became global giants largely by being the first to produce
and sell their products in a host of foreign markets. Being first, they could act almost as monopolists,
setting prices without fear of competitive pressures.

Moreover, even when local competitors are already established, foreign firms may have an
incentive to invest in the local market. In many cases, the incentive lies in a technological or
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managerial innovation which simply makes them more competitive than the local firms. IBM, for
instance, was for decades not only the first mover in foreign markets, but also technologically more
advanced than its competitors. Or, as has long been the case with Coca-Cola, the brand-name or the
very foreignness of a product may give the foreign investor an edge over local competitors.

But if foreign firms have this competitive edge, why would they invest directly instead of just
serving their overseas markets through exports and distributorships? Again, the answers are
numerous, and they vary by firm and industry. Sometimes, lower factor costs are an added incentive,
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especially when transportation costs are added to the equation. It makes little sense, for instance, for
AT&T to export telephone answering systems to Mexico from Louisiana if Mexican workers cost one-
tenth of their U.S. counterparts. In other cases, firms are wary of the arms-length transactions that
characterize overseas trade and prefer to control their would-be dealers or distributors directly. To
ensure this control they choose investment over trade, eliminating the risk of foreign intermediaries
and instead internalizing their operations. Finally, and perhaps most frequently, firms have also
turned to investment whenever tariff barriers prevented them from exporting their goods freely to
foreign markets. Indeed for many decades, tariff jumping was a primary inducement for foreign
direct investment. In countries such as Canada, Mexico, and Brazil, which explicitly chose
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development strategies based largely on import substitution, tariff levels were designed to keep
exports out and thus foster the development of local (albeit often foreign-owned) manufacturing.
Under these circumstances, outside firms had little choice but to invest directly. If they wanted to
enter these large and relatively prosperous markets, their only option was to jump the tariff wall,
setting up shop in the foreign market and becoming in effect a local or “national” enterprise. Thus,
throughout the post-war period, tariff-jumping investment was a common phenomenon in the
developing world, especially in countries with large populations and the high tariff levels that
customarily accompanied a development strategy based on import-substitution.

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 795-031 Note on Foreign Direct Investment

As global tariff levels have gradually declined, however, the need to jump has become less

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pronounced. Increasingly, developing countries have abandoned import substitution and moved
towards more liberal regimes of export promotion and open borders. Nevertheless, many firms

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continue to view direct investment as a way to hedge against the threat of future protectionism or
avoid the subtle non-tariff barriers that can continue to thwart the success of imports. Japanese
investment in the U.S. auto industry, for instance, is often seen as a reaction to the protectionist forces
that struck the industry in the early 1980s, while U.S. investment in Japanese retailing is described as
an attempt to get around domestic barriers in the Japanese market.

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A final motive—one imputed most frequently by Marxist analysts of foreign investment—is
simply the urge to dominate. Multinational firms enter foreign markets just because they are there.
In this view, the decision to invest is not the result of a careful cost-benefit analysis but rather a basic
response to a market opportunity. Taken to an extreme, of course, this explanation is nonsensical,
since multinational firms are clearly not in the business of throwing capital randomly at emerging
markets. A more moderate version, however, does seem to describe a not-uncommon phenomenon
of business. Often, firms do rush into new markets, lured as much by the novelty of the country as by

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a rational calculation of financial opportunity. After the collapse of the Berlin Wall, for instance,
Western firms scrambled to invest in the countries of the former Soviet bloc. Some of this investment
was clearly motivated by the unprecedented opportunities inherent in these newly-liberalized states.
But some, too, was motivated simply by the desire to be on the other side of the Wall and stand
among the pioneers of eastern Europe’s development. McDonald’s famous Moscow franchise, for
example, was never intended to generate particularly high returns. Instead, the Canadian-based
management wanted a Russian store to symbolize Russia’s opening to the West and McDonald’s
international scope.
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Putting the Moscow McDonald’s next to Mobil Oil or IBM reveals the wide range of reasons
that prompt firms to invest abroad. In practice, of course, the motivations are even more varied and
complex. They overlap and converge with one another, creating a whole web of reasoning that
managers themselves can not always entangle or discern. For those who look further to the effects of
their investment, the web becomes more complicated still.
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The Effects of FDI

In the neoclassical view of capitalism, the establishment of a foreign firm in a local economy
should affect little but the competitive structure of the market. Insofar as the foreign entrant is a new
entrant, it will simply expand the field of competitors and increase the level of supply. If the foreign
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firm has organizational or technological advantages over the local firms, it may also put downward
pressure on local prices. Eventually, it may even drive some local firms out of business. But the
identity of the firm in this analysis is irrelevant. Its effects on the market stem from its size and
competitive advantages, not from its foreignness.

Or so the theory goes. In practice, however, the expanding reach of multinational firms
seems to carry wider consequences. Foreign investment in many cases changes the economic and
political environment of host countries. When foreign firms bring capital, technology, and
managerial expertise with them, they bring simultaneously the very tools of economic and industrial
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development. Often, they will be the only sources of capital a developing country can secure, and the
only channel through which an isolated economy can begin to enter the international marketplace. It
was, for instance, the British East India Company that launched India’s industrialization and DeBeers
that transformed Botswana into one of Africa’s most prosperous economies. More recently, Western
firms such as Alcatel and General Electric have helped revitalize the crumbling infrastructure of
eastern Europe’s formerly-socialist states. Especially in countries that lack the basic institutions and
mechanisms of capitalism, foreign direct investment can be a powerful means of building the market

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 Note on Foreign Direct Investment 795-031

from the bottom up, gradually creating the jobs, skills, and technological base that drive an advanced

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industrial economy.

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Recognizing this potential many countries in recent years have warmly welcomed foreign
firms, wooing them with tax incentives, special export zones, and other enticements. Especially since
1991, when global investment funds dipped, the competition among developing countries to attract
potential investors has markedly increased, as countries from Lithuania to Tanzania race to secure the
technology, capital, and managerial skills that only foreign investment can bring. Even in

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industrialized countries such as the United States and Great Britain, regions are vying with one
another to attract the most promising investors, as evidenced in the competition among mid-western
and southern states to draw Japanese investment in the automobile industry.

Such enthusiasm is new. For decades, the recipients of FDI viewed foreign firms primarily
with suspicion, seeing their activities as an intrusion or even invasion. The criticisms against FDI
were manifold, and focussed on the ill-effects that resulted from the establishment of a business entity
that had no connection or loyalty to its new place of residence. Arguing against the neoclassical view,

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critics charged that foreign direct investment affected not only the structure of local markets but also
the very fabric of the political and economic community.

To begin with, the impact of foreign competitors on local markets is not economically neutral.
If foreign firms are more competitive they will drain profits from local firms, weakening the
indigenous base of the economy. Moreover, if the foreign firm subsequently repatriates its profits in
the form of dividends or salaries, it may actually act as a net exporter of capital from its host country.
This export need not be significant for an advanced industrial economy, but could prove devastating
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for an underdeveloped economy with limited hard currency reserves.

If the capital benefits of foreign direct investment are thus illusory, critics have charged, so
too are purported gains in technology and employment. Most multinationals, after all, do not transfer
their highest-technology research or their corporate headquarters to their overseas subsidiaries.
Instead, they tend to keep their core businesses at home, and establish manufacturing, or mining, or
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retail operations abroad. So they create jobs, but not necessarily the kind of highly-paid advanced
positions that host countries would obviously prefer. Moreover, in many instances, multinationals
bring older generation technologies with them, giving machinery and processes that were obsolete in
one market a new life in another. To foreign investors, this practice is simply a logical use of
resources and even a boost to the local economy, since older-generation technologies tend to be more
labor-intensive. To some recipient states, however, import of these older processes and plants denies
them the very technological edge that foreign investment was designed to bring.
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Going further still, many investors have long insisted that foreign investment disrupts the
political and cultural patterns of host states. Politically, it is easy to understand how the sheer
financial magnitude of a foreign investor could give it an undue influence over local authorities. At
the extreme, influence could even become control, as the very foundations of authority fall under the
sway of foreign-owned enterprises. Though rare, instances of such control are dramatic and well-
known. The first, of course, was the British East India Company, which came for spices and stayed to
rule the subcontinent. The oil companies operated similarly in the Middle East, where, until the
tables turned in the late 1960s, they supported the ruling families and virtually dictated policy.
Mining companies in Africa, banana companies in the Caribbean, and Japanese financial services
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have all also been accused of using their economic clout to shape policies in line with their own
demands. On a smaller scale, stories abound of foreign investors who have bought the favors of local
officials or helped to preserve the rule of a particular party or military clique.

Political concerns also surface whenever foreign investors stray too close to the security
interests of their host states. While the precise definition of these interests varies from state to state,
the fear is always the same: that foreign firms will subvert national security by gaining control over
key industrial or military assets. Even when the assets are immoveable and subject, potentially at

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 795-031 Note on Foreign Direct Investment

least, to expropriation, worries about foreign ownership remain. States fear that the loyalties of

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foreign-owned firms will always tie them back to their home base and that, in a crisis, the investors
may defect, dismantling the facilities they operate or refusing to supply the state with critical military

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or industrial components. Thus, many nations forbid foreign control in the defense sector and limit
foreign ownership of strategic natural resources such as petroleum. Others aim wider, preventing
foreign firms from “hollowing out” key industries. Even the United States moved in this direction in
the mid-1980s, screening foreign acquisitions in sensitive industries like computers and
semiconductors. Behind the move stood an inchoate but widespread belief that foreign owners might

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transfer core technologies and production to overseas locations, gradually weakening the industrial
infrastructure—and thus the military might—of the United States.

In the cultural domain, the purported effects of FDI are subtler. When foreign firms establish
themselves in new markets, they have the power to transform the local environment, often
dramatically. By creating job opportunities and importing technologies, they may disrupt established
patterns of work in the community, bringing more women into the work force, for instance, or
driving less sophisticated businesses out of operation. Paradoxically, even higher wages can be

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disruptive insofar as they change social relations that may have existed for decades, or even centuries.
New products can also have a serious impact, especially when introduced into relatively
unsophisticated economies. Agrarian economies are forever changed by tractors and chemical
fertilizers; rural communities transform themselves once motorcycles and cars arrive; and youth
around the world have been affected by the sudden availability of Levis, Bart Simpson, and
Madonna. Even Canada, one of the world’s most sophisticated consumer markets, periodically rebels
against the “cultural imperialism” many see as inherent in a reliance on goods produced by U.S.-
owned firms.
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To a large extent, such arguments can be dismissed as an inevitable reaction to globalization.
As the world’s economies draw closer, people may feel a nostalgia for the isolation of the past and a
need to preserve the remnants of their own distinctive cultures. They lash out at foreign investors,
not because of what they do so much as for what they represent. Nevertheless, there is still
something in the critique of FDI that rings true. Foreign firms are different in some respects from
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local ones. They are owned by different people; they were raised on different laws; and they may
have different loyalties, priorities, and operating styles. These distinctions are converging ever more
rapidly as globalization progresses, but they are still there.

The critique of foreign direct investment that erupted in the 1960s and 1970s, however, has all
but vanished in recent years, giving way to a new and virtually unanimous consensus on its merits.
Few states limit investment flows any longer, or even regulate them to any great degree. Foreign
investors are rarely screened, and expropriation hardly ever occurs. Even once-isolated nations such
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as China, Albania, Kazakhstan, and Cuba are rushing to attract foreign investors and make whatever
legal or commercial adjustments entice them to stay.

But beneath the embrace the questions still lurk. Is the surge of foreign investment an
undisputed good, either for firms or for states? How should managers and politicians decide which
investments are wise and which too risky to attempt? And what will be the long-term effects on the
international economy as firms increasingly do business beyond their own borders?
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 Note on Foreign Direct Investment 795-031

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Exhibit 1 The OECD Declaration and Decisions on International Investment and Multinational
Enterprises1

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National governments have found it difficult to regulate MNEs. Multilateral regulation may
be even more challenging, as demonstrated by the Organization for Economic Cooperation and
Development (OECD) efforts to establish rules for MNEs and international investment.

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In its 1976 Declaration and Decisions on International Investment and Multinational
Enterprises, the OECD established two sets of rules, one governing the practices of MNEs and the
other governing FDI.2 To govern MNEs, the OECD established a voluntary code of corporate
conduct that encourages MNEs to give their subsidiaries the autonomy to abide by national laws and
to cooperate with local business and labor. The code of conduct advises MNEs to permit labor
representation, contribute to technology transfer, and not obstruct competition or harm the
environment. To govern FDI, the OECD recommended that all member countries extend national

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treatment to foreign MNEs. The influence of both sets of rules has been limited primarily because
they rely on the good faith of MNEs and member nations.

For example, the code of conduct for MNEs has no quantitative means of measuring
effectiveness and commitment. Instead, it promotes good corporate citizenship among MNEs,
measured primarily by membership in national business federations that affiliate and consult with
the OECD through the Business and Industry Advisory Committee (BIAC).3 Individual firms have
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been reluctant to endorse the OECD’s rules because of the political and legal implications of explicit
commitment, especially in labor and environment disputes. Moreover, many MNEs reportedly feel
that stronger, obligatory rules would be too intrusive.4 The business community sees asymmetries in
policies as the major impediments to foreign investment, and the BIAC has been pressing the OECD
to enhance the International Investment and National Treatment portion of the Declaration. 5

The OECD rules promoting national treatment allow exceptions based on concerns for
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national security and public order, particularly in regard to the natural resource, energy, and service
sectors.6 Given these exceptions, nations can impose tax obligations and investment controls on
foreign controlled enterprises, restrict access to local bank credit and capital markets, and
discriminate in government procurement contracts.7 Concerned with an apparent trend towards
excessive restrictions, the OECD recommended a standstill on further exceptions in 1988. In 1991, the
OECD encouraged nations to make restrictive measures more transparent and to commit to
eliminating them in the future.8 At the same time, the OECD and the Committee on International
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1This summary is taken from U.S. Congress, Office of Technology Assessment, Multinationals and the National
Interest: Playing by Different Rules (Washington DC: Government Printing Office, 1993), pp. 70-71.
2Organization for Economic Cooperation and Development, Declaration on International Investment and
Multinational Enterprises, (Paris: OECD, 1976).
3The Business and Industry Advisory Committee to the OECD is based in Paris.
4Confidential business federation interviews.
5Business and Industry Advisory Committee, BIAC Statement on a Potential OECD Broader Investment Instrument,
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Paris, December 3, 1992.

6OECD, The OECD Declaration and Decisions on International Investment and Multinational Enterprises: 1991
Review, (Paris: OECD, 1992), pp. 26-32.
7OECD, National Treatment for Foreign-Controlled Enterprises, (Paris: OECD, 1985), pp. 20-22.
8OECD, The OECD Declaration and Decisions on International Investment and Multinational Enterprises: 1991 Review,
pp. 30-5; “National Treatment: Third Revised Decision of the Council,” December 1991, revision of the
Declaration by Governments of the OECD Member countries on International Investment and Multinational
Enterprises.

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 795-031 Note on Foreign Direct Investment

Investment and Multinational Enterprises (CIME), which monitors use of the decisions by national

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governments and MNEs, expressed concern over a number of trends and activities in both private
and government policies and practices, including sharp swings in investment flows, trade frictions,

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conflicting national requirements on MNCs, the marginal contributions of screwdriver assembly
plants, preferential treatment in the private sector, the increase in bilateral investment agreements,
and the use of reciprocity as a bargaining tool.9 The OECD fears these conditions undermine the
Declaration and Decisions and may impede future multilateral attempts to liberalize foreign
investment rules.

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In sum, the nonbinding nature of the OECD Declaration and Decisions and their
institutionalized deference to national laws and prerogatives leave them inherently weak. Member
countries often have different reactions to the effects of asymmetrical investment incentives, and
while some wish to strengthen the national treatment decisions, others prefer to include more rights
of exception.10 These different views indicate that real progress towards further liberalization or
enforcement of the Declaration and Decisions is unlikely.

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No
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9OECD, The OECD Declaration and Decisions on International Investment and Multinational Enterprises: 1991
Review, pp. 18-20.
10Confidential interviews.

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 Note on Foreign Direct Investment 795-031

Exhibit 2 Stock of Foreign-owned Assets in Selected Countries, 1975-1990 (in US$ billions)

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1975 1980 1985 1986 1987 1988 1989 1990

Germany 0.68 0.23 22.85 32.35 40.37 39.81 44.10 59.98

Japan1 0.23 0.29 4.74 6.51 9.02 10.42 9.16 9.85
United States 2.63 13.68 220.00 272.97 316.20 391.53 534.73 536.56

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Source: International Monetary Fund, Balance of Payments Statistics Yearbook, 1983 and 1993.
1Japan’s FDI stock data are recorded at historical cost, not market value.

Exhibit 3 Worldwide Distribution of FDI, by Recipient (1980-1990)

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1980 1985 1990

Total Inward FDI (US$ bil) $47 $51 $200

European Community 37% 31% 39%
Developing Countries 22 25 19
United States 16 25 24
Canada 10 9 7
Other Developed 10 6 6
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Other Europe 5 4 5

Source: International Monetary Fund, Balance of Payments Statistics Yearbook, various years; and U.S. Department of
Commerce, Foreign Direct Investment in the United States: An Update (June 1993), p. 13.
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Exhibit 4 Worldwide Distribution of FDI, by Source (1980-1990)

1980 1985 1990

Total Outward FDI (US$ bil) $46 $58 $237

United States 43% 37% 26%
European Community 39 40 44
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Other Europe 6 6 8
Canada 4 6 5
Japan 4 7 12
Others 5 5 6

Source: International Monetary Fund, Balance of Payments Statistics Yearbook, various years; and U.S. Department of
Commerce, Foreign Direct Investment in the United States: An Update (June 1993), p. 11.

Note: World outward and inward FDI are not equal because of differences between countries in FDI definition and data collection
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methodologies. FDI outflows are larger than FDI inflows because a larger proportion of outflows compared with inflows originate
from a small number of developed countries which have relatively better data collection systems.

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 795-031 Note on Foreign Direct Investment

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Exhibit 5 FDI Flows Into the Larger Industrial Countries (annual averages)

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1975-79 1980-84 1985-89 1990 1991 1992

Total inflows, $bn 18 34 96 156 116 90

% distribution

United States 33 53 51 29 21 2

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Larger EC countries 57 38 37 57 61 79
Belgium 6 3 3 6 8 12
France 10 7 6 8 13 24
Germany 7 2 2 2 6 8
Italy 3 3 3 4 2 3
Netherlands 4 3 4 7 5 6
Spain 4 5 5 9 9 9
United Kingdom 23 15 14 21 14 20

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Australia 6 6 5 4 4 6
Canada 2 -1 1 5 6 9
Japan 1 1 0.4 1 0 3
Sweden 0.3 1 1 1 5 0
Switzerland 0 1 2 3 3 1

Source: “Where the rich countries do their shopping,” The Economist, September 19, 1992, p. 17; and the International Monetary
Fund, Balance of Payments Statistics Yearbook 1993, Part 2, pp. 66-67.
op
Note: Totals may not add to 100% due to rounding.

Exhibit 6 FDI Flows From the Larger Industrial Countries (annual averages)
tC

1975-79 1980-84 1985-89 1990 1991 1992

Total outflows, $bn 34 40 126 214 170 153

% distribution

United States 47 24 19 15 17 23
Larger EC countries 40 53 48 50 52 59
No

Belgium 1 0.3 2 3 4 7
France 5 8 7 16 14 20
Germany 9 9 8 11 13 10
Italy 1 4 3 4 4 4
Netherlands 6 7 6 7 8 7
Spain 0.4 1 1 1 2 0
United Kingdom 18 24 21 8 9 10
Australia 1 2 3 1 1 0
Canada 4 7 4 0.2 4 4
Japan 6 11 17 22 18 11
Do

Sweden 2 2 4 7 4 0
Switzerland 0 1 4 3 4 3

Source: “Where the rich countries do their shopping,” The Economist, September 19, 1992, p. 17; and the International Monetary
Fund, Balance of Payments Statistics Yearbook 1993, Part 2, pp. 66-67.

Note: Totals may not add to 100% due to rounding.

10
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 Note on Foreign Direct Investment 795-031

Exhibit 7 Developing Countries and Foreign Direct Investment

t
os
rP
yo
op
tC
No
Do

11
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 795-031 Note on Foreign Direct Investment

Exhibit 8 Trends in Foreign Direct Investment

t
os
rP
yo
op
tC
No
Do

12
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 Note on Foreign Direct Investment 795-031

Exhibit 9 U.S. Employment by Foreign-owned Firms in Selected Industries, 1990 (in thousands of

t
employees, by country of parent firm)

os
Industries Canada France Germany Netherlands Switzerland Britain Japan

Food and kindred NA 12.5 2.9 17.4 NA 105.0 15.1

products
Chemicals and allied NA 22.8 94.4 41.5 60.4 129.2 23.7

rP
products
Primary and fabricated 32.2 35.3 21.8 10.5 8.2 39.5 61.8
metals
Machinery 41.3 34.5 59.9 NA 49.3 92.1 89.6
Of which:
Computer and office 0.7 NA 2.7 0.7 NA 10.3 25.2
equipment
Electric and electronic 35.2 19.4 39.0 NA NA 47.4 34.9

yo
equipment
Other manufacturing 90.2 76.0 70.8 NA NA 172.7 101.6

Total wholesale trade 20.7 43.4 65.6 16.2 14.9 59.9 152.9

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States,
Operations of U.S. Affiliates of Foreign Companies, Preliminary 1990 Estimates (Washington, DC: U.S. Government Printing
Office, August 1992), Table F-3.
op
Note: NA indicates data are not available.
tC

Exhibit 10 U.S. International Investment Positions Using Alternative BEA Methods of Valuation,
1983-1989 (US$ billions)

Valuation Method 1983 1984 1985 1986 1987 1988 1989

U.S. assets abroad

No

Historical cost 873 896 950 1,073 1,176 1,266 1,413

Current Cost 1,114 1,104 1,174 1,319 1,463 1,528 1,669
Market value 1,029 1,022 1,175 1,424 1,556 1,704 1,938

Foreign-owned assets in U.S.

Historical cost 784 898 1,067 1,347 1,554 1,797 2,076

Current cost 829 941 1,110 1,393 1,605 1,852 2,133
Market value 805 911 1,110 1,410 1,605 1,865 2,219
Do

International investment, net

Historical cost 89 (2) (117) (274) (378) (531) (664)

Current cost 285 164 64 (74) (142) (324) (464)
Market value 224 111 64 15 (49) (161) (281)

Source: J. Steven Landefeld and Ann M. Lawson, “Valuation of the U.S. Net International Investment Position,” Survey of Current
Business, May 1991, p. 43.

13
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Permissions@hbsp.harvard.edu or 617.783.7860