Where will you place your bets today?
Where the World Invested in
2024
UNCTAD, World Investment Report 2025
Where the World Invested in 2024
UNCTAD, World Investment Report 2025
Is FDI losing Momentum?
Profits of MNCs
[Link]
What Is FDI?
• Foreign direct investment (FDI) occurs when a firm invests directly in new
facilities to produce and/or market in a foreign country
• the firm becomes a multinational enterprise
• Multinational enterprises (MNEs) are incorporated or unincorporated
enterprises comprising parent enterprises and their foreign affiliates.
• A parent enterprise is defined as an enterprise that controls assets of other
entities in countries other than its home country, usually by owning a certain
equity capital stake.
• An equity capital stake of 10 per cent or more of the ordinary shares or voting
power for an incorporated enterprise, or its equivalent for an unincorporated
enterprise, is normally considered as the threshold for the control of asset
• FDI can be in the form of
• greenfield investments - the establishment of a wholly new operation in a
foreign country
• acquisitions or mergers with existing firms in the foreign country
UNCTAD, World Investment Report
Definition
• Foreign direct investment (FDI) is defined as an investment involving a
long-term relationship and reflecting a lasting interest and control by a
resident entity in one economy (foreign direct investor or parent
enterprise) in an enterprise resident in an economy other than that of the
foreign direct investor (FDI enterprise or affiliate enterprise or foreign
affiliate)
• FDI implies that the investor exerts a significant degree of influence on
the management of the enterprise resident in the other economy.
• A foreign affiliate is an incorporated or unincorporated enterprise in
which an investor, who is a resident in another economy, owns a stake
that permits a lasting interest in the management of that enterprise (an
equity stake of 10% for an incorporated enterprise, or its equivalent for
an unincorporated enterprise)
Types of Foreign Affiliates
• Subsidiary: an incorporated enterprise in the host country in which another
entity directly owns more than a half of the shareholder’s voting power,
and has the right to appoint or remove a majority of the members of the
administrative, management or supervisory body.
• Associate: an incorporated enterprise in the host country in which an
investor owns a total of at least 10%, but not more than half, of the
shareholders’ voting power.
• Branch: a wholly or jointly owned unincorporated enterprise in the host
country which can be a permanent establishment or office of the foreign
investor or an unincorporated partnership or joint venture between the
foreign direct investor and one or more third parties
Eg. Foreign bank branches in India
Components of FDI
FDI has three components: equity capital, reinvested earnings and intra-
company loans.
• Equity capital is the foreign direct investor’s purchase of shares of an
enterprise in a country other than its own.
• Reinvested earnings comprise the direct investor’s share (in proportion
to direct equity participation) of earnings not distributed as dividends by
affiliates, or earnings not remitted to the direct investor. Such retained
profits by affiliates are reinvested.
• Intra-company loans or intra-company debt transactions refer to short-
or long-term borrowing and lending of funds between direct investors
(parent enterprises) and affiliate enterprises. (UNCTAD, World
Investment Report)
FDI Data: Some Pointers
• FDI data compiled in the WIR are on a net basis- net acquisition of
assets in the case of outward FDI (net outflows) and net incurrence of
liabilities in case of inward FDI (net inflows).
• Thus decreases of net acquisitions of assets in the case of outward FDI
or decreases of net incurrence in liabilities in the case of inward FDI are
recorded as negative FDI.
Non-equity Forms of Investment
• Foreign direct investors may also obtain an effective voice in the
management of another business entity through means other than
acquiring an equity stake.
• These are non-equity forms of investment, and they include,
subcontracting, management contracts, turnkey arrangements,
franchising, licensing and product-sharing.
• They are covered as ‘Royalties & Licensing Fees’ or ‘Charges for the use
of Intellectual Property’ (such as patents, trademarks, copyrights,
industrial processes and designs including trade secrets, franchises,
copyrights on books and manuscripts, computer software,
cinematographic works, and sound recordings)
Global foreign direct
investment (FDI) fell
by 11% to $1.5 trillion
in 2024, marking the
second straight year of
decline.
[Link]
report-2024
Global FDI Trends
• FDI to developed economies fell by 22%.
• Europe was hit hardest, with inflows down 58% in 2024. FDI fell in
more than half of EU countries, with sharp declines in Germany (-
89%), Spain (-39%), Italy (-24%) and France (-20%).
• North America saw a 23% rise, driven by a wave of semiconductor
megaprojects in the United States, where FDI rose 20%.
Africa saw a record
75% rise in FDI, driven
by a mega infrastructure
project in Egypt.
Excluding that, flows
still grew 12%,
supported by investment
reforms and improved
facilitation across the
continent.
Asia remained the top
recipient region, despite a
3% overall decline and a
29% drop in flows to China.
South-East Asia stood out,
with ASEAN countries up
10%, reaching a record $225
billion in FDI. India saw
strong momentum in
greenfield investment, even
as total inflows dipped
slightly.
The Middle East continued to
see strong inflows, especially
in the Gulf, thanks to
diversification efforts and
investment in non-oil sectors.
Latin America and the
Caribbean saw a 12%
drop in FDI.
New greenfield
projects in Argentina,
Brazil and Mexico
signalled renewed
investor interest and
growing momentum
in productive sectors.
[Link]
FDI Inflows
FDI Inflows, Top 20 Host
Economies ($ Bn)
FDI Outflows, Top 20
Home Economies ($Bn)
FDI Vs FPI/FII (Foreign
Portfolio
Investments/Foreign
Institutional Investment)
Which is better for the country?
Remittance Inflows
• $125 billion was sent by Indians living in different parts
of the world to their families in India in 2023, making it
the highest remittance receiving country in the world.
• Total remittance flow to low and middle-income countries
amounted to $669 billion in 2023.
• Average growth in low- and middle-income countries was
3.8%, remittance inflow grew 7.2% in South Asia.
• The total remittance inflow to South Asia was about $189
billion, of which India's share was almost 66%.
• The US, UK, and Singapore are the most significant
contributors to the remittance inflow in India (36% of
India's total remittance inflow).
• Gulf Cooperation Council (GCC) countries are the second
most prominent contributors to India's remittance inflow,
with the UAE alone contributing 18% to the total inflow.
The UAE is the second-largest contributing country to
India’s remittances after the US.
Surging Remittances in India
The number of Indian
international migrants has
grown from 6.6 million in
1990 to 18.5 million in
2024.
Proportion in global
migrants increasing from
4.3% to 6% during this
period.
Half of all the Indian
migrants worldwide are
located in the GCC
countries.
What Are The Patterns Of FDI?
• The growth of FDI is a result of
1. a fear of protectionism
• want to circumvent trade barriers
2. political and economic changes
• deregulation, privatization, fewer restrictions on FDI
3. new bilateral investment treaties
• designed to facilitate investment
4. the globalization of the world economy
• many companies now view the world as their market
• need to be closer to their customers
What Are The Patterns Of FDI?
• Gross fixed capital formation - the total amount of capital invested in
factories, stores, office buildings, and the like
• the greater the capital investment in an economy, the more favorable its
future prospects are likely to be
• So, FDI is an important source of capital investment and a determinant
of the future growth rate of an economy
Why Do Firms Choose
Acquisition Versus Greenfield
Investments?
• Firms prefer to acquire existing assets because
• Mergers and acquisitions are quicker to execute than greenfield investments
• It is easier and perhaps less risky for a firm to acquire desired assets than
build them from the ground up
• Firms believe that they can increase the efficiency of an acquired unit by
transferring capital, technology, or management skills
Why Choose FDI?
Question: Why does FDI occur instead of exporting or licensing?
1. Exporting - producing goods at home and then shipping them
to the receiving country for sale
• Exports can be limited by transportation costs and trade barriers
• FDI may be a response to actual or threatened trade barriers
such as import tariffs or quotas
Why Choose FDI?
2. Licensing - granting a foreign entity the right to produce and sell the
firm’s product in return for a royalty fee on every unit that the
foreign entity sells.
- A licensing agreement is an arrangement whereby a licensor grants
the rights to intangible property to another entity (licensee) for a
specified period and in return the licensor receives a royalty fee
from the licensee. Intangible property includes patents, inventions,
formulas, processes, designs, copyrights and trademarks/brands.
• Internalization theory (aka market imperfections theory) -
compared to FDI licensing is less attractive
• firm could give away valuable technological know-how to a
potential foreign competitor
• does not give a firm the control over manufacturing, marketing,
and strategy in the foreign country
• the firm’s competitive advantage may be based on its
management, marketing, and manufacturing capabilities
What Is The Pattern Of FDI?
• Question: Why do firms in the same industry undertake FDI at about the
same time and the same locations?
• Knickerbocker - FDI flows are a reflection of strategic rivalry between
firms in the global marketplace.
• multipoint competition -when two or more enterprises encounter each other
in different regional markets, national markets, or industries.
• Eg. global automobile companies like GM, Ford, Volkswagen, Toyota
encountering each other in emerging markets like China & India.
What Is The Pattern Of FDI?
• Question: But, why is it profitable for firms to undertake FDI rather than
continuing to export from home base, or licensing a foreign firm?
• Dunning’s eclectic paradigm - it is important to consider.
• location-specific advantages - that arise from using resource endowments
or assets that are tied to a particular location and that a firm finds valuable
to combine with its own unique assets.
• externalities - knowledge spillovers that occur when companies in the same
industry locate in the same area.
What Are The Theoretical
Approaches To FDI?
• The radical view - the MNE is an instrument of imperialist domination
and a tool for exploiting host countries to the exclusive benefit of their
capitalist-imperialist home countries
• in retreat almost everywhere
• The free market view - international production should be distributed
among countries according to the theory of comparative advantage
• embraced by advanced and developing nations including the United States
and Britain, but no country has adopted it in its purest form
What Are The Theoretical
Approaches To FDI?
• Pragmatic nationalism - FDI has both benefits (inflows of capital,
technology, skills and jobs) and costs (repatriation of profits to the home
country and a negative balance of payments effect)
• FDI should be allowed only if the benefits outweigh the costs
• Recently, there has been a strong shift toward the free market stance
creating
• a surge in FDI worldwide
• an increase in the volume of FDI in countries with newly liberalized regimes
How Does FDI Benefit The Host
Country?
• There are four main benefits of inward FDI for a host country
1. Resource transfer effects - FDI brings capital, technology, and
management resources
2. Employment effects - FDI can bring jobs
How Does FDI Benefit The Host
Country?
3. Balance of payments effects - FDI is a capital inflow, impacting the
capital account positively. If the MNE exports from the host country
it has a positive impact on the host country’s current account. Eg.
Export of Apple Iphones from China
4. Effects on competition and economic growth - greenfield
investments increase the level of competition in a market, driving
down prices and improving the welfare of consumers
• can lead to increased productivity growth, product and process
innovation, and greater economic growth
What Are The Costs Of FDI To The
Host Country?
• Inward FDI has three main costs:
1. Adverse effects of FDI on competition within the host nation
• subsidiaries of foreign MNEs may have greater economic power
than indigenous competitors because they may be part of a larger
international organization.
2. Adverse effects on the balance of payments
• when a foreign subsidiary imports a substantial number of its inputs
from abroad, there is a debit on the current account of the host country’s
balance of payments.
• Repatriation of profits by MNE.
3. Perceived loss of national sovereignty and autonomy
• decisions that affect the host country will be made by a foreign parent
that has no real commitment to the host country, and over which the
host country’s government has no real control.
How Does FDI Benefit The Home
Country?
• The benefits of FDI for the home country include
1. The effect on the country’s balance of payments from the inward
flow of foreign earnings. Also exports from home country may
increase to the host country where FDI is undertaken will have a
positive effect on the home country’s BoP.
2. The employment effects that arise from outward FDI
3. The gains from learning valuable skills from foreign markets that
can subsequently be transferred back to the home country
What Are The Costs Of FDI To The
Home Country?
1. The home-country’s balance of payments can suffer
• from the initial capital outflow required to finance the FDI
• if the purpose of the FDI is to serve the home market from a low cost
labor location. Imports into the home market from the cheaper location
depress the current account
• if the FDI is a substitute for direct exports from home country
2. Employment may also be negatively affected if the FDI is a substitute
for domestic production
• But, international trade theory suggests that home-country
concerns about the negative economic effects of offshore
production (FDI undertaken to serve the home market) may not
be valid
• may stimulate economic growth and employment in the home
country by freeing resources to specialize in activities where the
home country has a comparative advantage