Not so long ago, foreign direct investment (i.e., foreign ownership of businesses as opposed to investment in securities) was widely viewed in developing countries as a form of neo-colonialism. Big American, European, and Japanese companies would come bearing promises of jobs and riches. Once there, they would bribe the local autocrats to keep their distance, then strip the country of its mineral wealth, old-growth forests, etc. -- or maybe just entrench plantation agriculture that displaced small farmers, wrecked environmentally sensitive watersheds, and made the economy more vulnerable to the vicissitudes of global commodity markets.
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Today FDI is, more often than not, touted as the Holy Grail of growth, a vital source of capital, technology, training, and managerial know-how. Moreover, unlike investments in the form of bank loans or stock/bond purchases, the foreign owners can't cut and run in times of crisis.
If forced to pick sides, I'll go with the sunnier interpretation of FDI. The global economy is now utterly dependent on cross-border production, much of which would not be practical without massive cross-ownership of firms and factories. But, in truth, neither caricature is (or was) quite true. Allow me to muddy the waters with a few facts and some educated speculation.
The United Nations Conference on Trade and Development (UNCTAD) estimates that global FDI totaled $1.24 trillion in 2010, and probably increased by about $200-300 billion in 2011 -- which is still well short of the $1.9 trillion peak in 2007. Of the total, a bit more than half ended up in developing and emerging-market economies. But that's a new phenomenon: 2010 was the first year in which less than half went to rich countries. All told, $12.5 trillion of the total $19.1 trillion foreign-owned stock of capital in 2010 still consisted of assets in developed economies.
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The EU and the U.S. were still the biggest recipients, attracting $305 billion and $228 billion, respectively. But, as you'd expect, the real action has been in emerging-market countries, with China ($175 billion, up from $72 billion in 2005), Brazil ($48 billion, up from $15 billion), Russia ($41 billion, up from $13 billion), and India ($24 billion, up from $8 billion) leading the pack.
The most inauspicious -- if not unexpected -- FDI numbers are for truly poor countries. All of sub-Saharan Africa received just $38 billion. And the 48 "least developed" (in UNCTAD-speak) pulled in a mere $26 billion. That's down substantially from what had been an upward trend, which is especially troubling since just a handful of mineral-rich countries (Angola, Democratic Republic of Congo, Sudan, and Zambia) got half the total.
The bulk (about 70 percent) originates in developed countries. No surprise there: The EU, U.S. and Japan are home to the headquarters of most of the great multinational corporations, which do most of the FDI. The other 30 percent isn't so easy to explain, though.
The emerging-market countries all generate big outflows of FDI, in large part because they are deeply enmeshed in the multinational production chains that add value to products in three or four countries before selling them in a fifth. But there are more specific incentives. Russians, for example, invested an astonishing $51 billion abroad in 2010 -- much of it, one would guess, to protect earnings generated by extractive industries and organized crime against political risk. Brazil, Chile, and Mexico, for their part, are headquarters to companies with strong ambitions to become multinational powerhouses, as well as home to very rich families with strong incentives to diversify their holdings in countries and currencies. Then there are a handful of "entrepot" economies and regional financial centers -- think Hong Kong, Singapore, the Cayman and British Virgin Islands -- that register inflows and outflows of hundreds of billions in FDI for hard-to-explain reasons (which, in some cases, may be just the point).
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