History of FDI

In the nineteenth century foreign investment was prominent, but it mostly took the form of lending by Britain to finance economic development in other countries.This was the case until the outbreak of World War I.In the interwar period, foreign investment declined, but direct investment rose to about one-quarter of the total.Another important development that took place between the world wars was that Britain lost its status as the major creditor, with the emergence of the United States as a major economic and financial power.In the period after World War II, FDI started to grow for two reasons.The first reason was technological: the improvement in transport and communications, which made it possible to exercise control from a distance.The second reason was the need of European countries and Japan for US capital to finance reconstruction following the destruction inflicted by the war.This was propelled by the US tax laws, which favored FDI.By the 1960s, these factors were weakening to the extent of giving rise to a reversal of the trend.Firstly, various host countries started to show resistance to US ownership and control of local industry, which led to a slowdown of outflows from the United States.Secondly, host countries started to recover, initiating FDI in the United States.As a result, the net outflow from the United States started to decline.The 1970s witnessed lower FDI flows, but the United Kingdom emerged as a major player in this game as a result of the North Sea oil surpluses and the abolition of foreign exchange controls in 1979.

The 1980s witnessed two major changes.The first was that the United States became a net debtor country and a major recipient of FDI, with a negative net international investment position.One of the reasons for this development was the low saving rate in the US economy,which made it impossible to finance the widening budget deficit by resorting to the domestic capital market, giving rise to the need for foreign capital that came primarily from Japan and Germany.The second reason was the restrictive trade policy adopted by the United States.The other development was the emergence of Japan as a major supplier of foreign direct investment to the United States and Europe.Motivated by the desire to reduce labour costs,Japanese direct investment also expanded in Southeast Asia.

The surge in FDI in the 1980s is attributed to the globalization of business and to the growing concern over the emergence of managed trade.Moreover, it is often argued that FDI benefits both multinational firms and the host country and this is why there has been tolerance towards FDI.A factor that accounts for the surge in FDI is the increase in FDI inflows to the United States as a result of the depreciation of the US dollar in the second half of the 1980s.The total flows of FDI from industrial countries more than quadrupled between 1984 and 1990.

In the period 1990-1992, FDI flows fell as growth in industrial countries slowed, but a strong rebound took place subsequently.This rebound is attributed to three reasons: (i)FDI was no longer confined to large firms, as an increasing number of smaller firms became multinational; (ii)the sectoral diversity of FDI broadened with the share of the service sector rising sharply; and (iii)the number of countries that were outward investors or hosts of FDI rose considerably.Moreover, the 1990s brought considerable improvements in the investment climate, triggered in part by the recognition of the benefits of FDI.The change in attitudes, in turn, led to a removal of direct obstacles to FDI and to an increase in the use of FDI incentives.Continued removal of domestic impediments through deregulation and privatization has also been widespread.

Another important feature of the 1990s was the decline in the importance of Japan as a source of FDI, which was due to the bursting of the Japanese bubble economy.The late 1990s were characterized by the rising popularity of cross-border mergers and acquisitions (M&As).Moreover, the trend towards the liberalization of regulatory regimes for FDI continued.Some changes have been introduced to (host)government policies on FDI, strengthening the trend towards the liberalization, protection and promotion of FDI.It seems that this trend will continue for a long time to come, which means that the growth of FDI will be robust in the foreseeable future.