Fdi in Zdeveloping and Developed Countries

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Introduction
Foreign direct investment (FDI) has grown dramatically as a major form of international capital transfer over the past decade. Between 1980 and 1990,world flows of FDI-defined as cross-border expenditures to acquire or expandcorporate control of productive assets-have approximately tripled. FDI has become a major form of net international borrowing for Japan and the United States (the world’s largest international lender and borrower, respectively). Direct investment has grown even more rapidly of late within Europe. To what extent is this sudden worldwide surge in FDI explained by traditional theories? These theories predict the scale and scope of multinational enterprises by looking to differences in competitive advantage, across firms or countries, that might lead to the extension of corporate control across borders. So, for example, better technology, management capability, and product design; stronger consumer allegiance; and greater complementarities in production or use of technology can allow a domestic firm to control foreign assets more productively than would a foreign firm and could therefore predicate direct investment. In many cases, these theories also explain why an enterprise’s alternatives to FDI-domestically based production or licensing of foreign-based production-are less efficient than direct control of foreign based operations (see, e.g., Caves 1982; Vernon 1966).Traditional theories are very useful for explaining basic long-term patterns of FDI. For example, they help understand the behavior of U.S. firms during the post-World War I1 period (the experience on which these theories were honed). At that time, advanced U.S. firms were superior in technology and well established in foreign markets. U.S. firms tended to move overseas to retain competitive access (or to preempt competitors’ access) to those markets and, in the process, met with relatively little competition. These theories also help us understand why the tide of U.S. FDI flows has slowly turned. The evolution of the United States from a home for domestically based multinationals to a host for foreign-based multinationals is probably the single most obvious sign of change in FDI today. This development basically coincides with the waning (and even disappearance) of U.S. firms’ former competitive advantages. It is obvious to today’s consumer that European-, Japanese, and Canadian-based firms have developed advantages that allow them to control certain assets in the United States more efficiently than would U.S.- based firms. In spite of their successes, however, the traditional theories leave many recent features of FDI unexplained. First, it is hard to believe that the tide of underlying competitive advantage followed closely (or at all) the behavior of total FDI flows over the last decade: very rapid increases from 1979 through 1981, strong declines from 1982 through 1985, and then increases of unprecedented size from 1986 through 1990. One would have expected changes in national competitive advantages to be reflected in more steady trends. Second,to the extent that any developments happen quickly, one might have expected that they would occur in a single industry at a time-say, the automobile producers of Japan-as shocks to competitive ability come to be reflected in world ownership patterns. Yet the surges of the past fifteen years take place across virtually all industries simultaneously. The recent FDI surges in U.S. inflows and Japanese outflows illustrate these two features. Japanese FDI overall, which historically was small, exploded across all industries in the latest surge, experiencing in the aggregate a sevenfold increase from 1985 to 1989. During this surge, both U.S. inflows and

Japanese outflows were particularly large and fast-growing in real estate and financial services. In these industries, however, there was little evidence of meaningful change in competitive advantage. Particularly puzzling is the case...
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