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Unformatted text preview: Lecture 9: Foreign direct investment We finished yesterday with a discussion of the Transnationality Index or TNI, which I was using as a proxy for the extent to which the economy is being globalized. One of the three components of the TNI is percentage of total assets held abroad, which includes foreign direct investment (ownership of foreign subsidiaries) and other kinds of assets, such as owning shares of stock in a foreign company you dont control (as in buying stock in Toyota). For the rest of today, I want to focus on assets held in other countries, and specifically on the most dramatic trends, both over time and across countries, of foreign direct investment in the era of globalization, using the tables on Reader pages 62 and 63 as our data source. The data cover the period 1960 to 1994 and so are not that recent, but they to illustrate many of the most important trends in FDI. 1. Growth of FDI. First of all, look at the phenomenal growth of FDI totals worldwide, from $ 67.7 billion in 1960 to $ 2.4 trillion in 1994. This is an increase by a factor of 35. Over this period, the worlds population almost doubled, but agricultural production grew by a factor of 2.5, so that food was on average cheaper and more plentiful at the end of this period than at the beginning. Over approximately the same time period, as population doubled, economic production in general about tripled, so there was on average 50 percent more wealth per person at the end of this period than at the beginning. More dramatically still, international trade multiplied by seven over this same time, so it was growing 3 times as fast as population. Meanwhile, the amount of international investment increased by a factor of 35. Thus, international trade was growing much faster than the underlying economy, and international investment was growing much faster than trade; one dramatic index of the spread of globalization. 2. Declining relative share of the US. Over the 1960-1994 period, US outward FDI increased by a factor of 19, from $ 31.9 billion to $ 610 billion. This rate of increase was about half that of world FDI flows, so that US outward FDI flows constituted a smaller percentage of the total at the end of that period than at the beginning (25 percent at the end as opposed to 47 percent at the beginning). The real anomaly here is the 1960 figure, with the US then responsible for about half the worlds total FDI flow. This was an artifact of World War II, which damaged, and in two cases almost completely destroyed, the industrial base of the other major economies,...
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- Spring '08