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 don’t 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 world’s 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 ½ 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
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 world’s 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,