The Management of Foreign Direct Investment: A Preliminary Assessment

FDI has become one of the most important sources of capital in the 1980s. Estimates hold total FDI flows in 1990 at around $225 billion. FDI is concentrated within a ‘triad’ consisting of the USA, Western Europe and Japan. In these countries, it is partly driven by an accelerating pace of technological innovations which shorten the life-span of capital stock. About 15 per cent of FDI goes into the developing countries and, although their share in total FDI flows has been falling, it has come to account for three-quarters of all long-term capital inflows to LDCs from private sources. One reason for the growing concentration of FDI in developed countries has to do with the creation or preparation of integrated markets: the European Economic Area (EEA) in and around the EC, NAFTA with the USA as its core and increasingly also within the Association of South East Asian Nations countries. The EC’s drive towards a higher degree of integration reduced transaction costs and provided new incentives to invest for both European and non-European investors. This translates into disincentives for production in ‘outsider’-type-countries whose relatively lower labour costs may be offset by the expected profitability of doing business within the area of integration (Katseli 1992). Even in the absence of such regional blocs, the comparative advantage of low labour costs clearly carries only so far.