international trade, albeit with a much greater fluctuation. Between 1970 and the mid- 1980s, annual global FDI flows (measured in terms of inflows) were equivalent to around 0.5 per cent of world GDP.  Since then, its growth accelerated relative to world GDP growth, until it went up to the equivalent of 1.5 per cent of world GDP in 1997. Then there was another acceleration in FDI flow, with the ratio reaching around 2.7 per cent of world GDP on average between 1998 and 2012, although with big fluctuations.  What makes FDI particularly important is the fact that it is not a simple financial flow. It can also directly affect the host (receiving) country’s productive capabilities. FDI affects the productive capabilities of the recipient country FDI is different from other forms of capital inflows in that it is not a pure financial investment. It being an investment with a view to influencing how a company is run, FDI by definition brings in new management practices. It frequently, although not always, also brings in new technologies. As a result, FDI affects the productive capabilities of the company that is receiving it, whether it is greenfield FDI, that is, a foreign company setting up a new subsidiary (like the Intel subsidiary established in Costa Rica in 1997) or it is brownfield FDI, that is, a foreign company taking over an existing company (like Daewoo, the Korean carmaker bought by GM in 2002). The impact of FDI is not confined to the enterprise receiving it. Especially when the gap in productive capabilities between the investing country and the recipient country is large, FDI might have particularly strong indirect influences on the productive capabilities of the rest of the economy. This might happen in a number of ways. To begin with, there would be ‘demonstration effects’, in which local
producers watch TNC subsidiaries and learn new practices and ideas. Then there is the influence through the supply chain. When they buy from local suppliers, TNC subsidiaries will demand higher standards in product quality and delivery management than do their local counterparts. Local suppliers will have to upgrade themselves if they want to keep the custom of TNC subsidiaries. Then there are effects from the employees of TNC subsidiaries leaving them to join other firms or even to set up their own enterprises. These workers can teach others how to use new technologies and how to manage the production process in a more efficient way. Collectively, these indirect positive effects of FDI are known as spill-over effects . The evidence for positive effects of FDI is rather weak Despite all these potentially positive (direct and indirect) effects of FDI, the evidence on whether FDI benefits the recipient economy is at best mixed.  One reason for this is that the benefits I have discussed above are theoretical. Many TNC subsidiaries might actually buy very little from local producers and import most of their inputs – they are said to exist as enclaves .
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