Definition and Types of Foreign Direct Investment

FDI can be classified into two broad categories: inorganic and organic. Inorganic FDI involves the acquisition of a company in the target country, while organic FDI refers to the expansion of an existing business’s operations in that country (Financial Times, n.d.). FDI is distinct from foreign portfolio investment, which is a passive investment in securities such as public stocks and bonds without direct control over the invested assets (Wikipedia, n.d.). FDI typically involves participation in management, joint ventures, technology transfer, and expertise sharing, and is characterized by a lasting management interest of at least 10% of voting stock in the enterprise (International Monetary Fund, 2009).

Historical Development of FDI Theories

The historical development of Foreign Direct Investment (FDI) theories can be traced back to the early 20th century, with the works of Eli Heckscher (1919) and Bertil Ohlin (1933) providing a foundation for understanding international investments. These scholars employed neoclassical economics and macroeconomic theory to explain the differences in production costs between countries, leading to specialization and trade. However, their theories were limited by assumptions of perfect competition and no labor movement across borders.

A significant breakthrough in FDI theories came with Stephen Hymer’s work in 1960, which focused on the motivations behind large foreign investments made by corporations. Hymer’s theory went beyond the existing frameworks by emphasizing the difference between portfolio investment and direct investment, with the latter involving control over the invested assets. This firm-specific approach to international investment provided a more comprehensive understanding of FDI and its motivations.

Since then, FDI theories have continued to evolve, incorporating various factors such as technology transfer, environmental sustainability, and the role of multinational corporations. These developments have led to a more nuanced understanding of FDI, its benefits and challenges, and its implications for both developed and developing economies (Dunning, 1988; UNCTAD, 2020).

Factors Influencing FDI Decisions

Various factors influence Foreign Direct Investment (FDI) decisions, including economic, political, and institutional aspects. Economic factors encompass market size, growth prospects, and labor costs, which determine the potential profitability of an investment. For instance, larger markets with higher growth rates and lower labor costs are more attractive for FDI (Dunning, 1993). Political factors, such as political stability, government policies, and regulations, also play a crucial role in FDI decisions. Stable political environments with favorable policies and regulations tend to attract more FDI (Jensen, 2003). Institutional factors, including the quality of governance, legal framework, and property rights protection, are essential for investors as they reduce transaction costs and risks associated with investments (North, 1990). Furthermore, cultural and geographical proximity, as well as technological and infrastructural development, can influence FDI decisions (Grg & Greenaway, 2004). In summary, a combination of economic, political, and institutional factors, along with cultural, geographical, and technological aspects, shape the attractiveness of a country for FDI.


  • Dunning, J. H. (1993). Multinational Enterprises and the Global Economy. Addison-Wesley.
  • Jensen, N. M. (2003). Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment. International Organization, 57(3), 587-616.
  • North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press.
  • Grg, H., & Greenaway, D. (2004). Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment? The World Bank Research Observer, 19(2), 171-197.

FDI and Economic Growth: Benefits and Challenges

Foreign Direct Investment (FDI) plays a crucial role in stimulating economic growth, particularly in developing and emerging economies. One of the primary benefits of FDI is the influx of capital, which can be utilized to develop infrastructure, create employment opportunities, and enhance productivity. Additionally, FDI facilitates the transfer of technology and expertise, leading to improved competitiveness and innovation in the host country (UNCTAD, 2018). Moreover, FDI can contribute to the diversification of the economy, reducing dependence on a single sector or industry (World Bank, 2020).

However, FDI also presents several challenges. In some cases, FDI may lead to an overdependence on foreign capital, making the host economy vulnerable to external shocks and fluctuations in global markets (IMF, 2017). Furthermore, the benefits of FDI may not be evenly distributed, potentially exacerbating income inequality and social tensions (OECD, 2019). Additionally, FDI can result in environmental degradation if multinational corporations prioritize short-term profits over long-term sustainability (UNCTAD, 2018). Thus, while FDI can significantly contribute to economic growth, it is essential for policymakers to carefully consider the potential benefits and challenges to ensure sustainable and inclusive development.


  • UNCTAD. (2018). World Investment Report 2018: Investment and New Industrial Policies. United Nations Conference on Trade and Development.
  • World Bank. (2020). Global Economic Prospects, June 2020. World Bank Group.
    IMF. (2017). World Economic Outlook, April 2017: Gaining Momentum? International Monetary Fund.
  • OECD. (2019). FDI Qualities Indicators: Measuring the Sustainable Development Impacts of Multinationals. Organisation for Economic Co-operation and Development.

Role of Multinational Corporations in FDI

Multinational corporations (MNCs) play a crucial role in Foreign Direct Investment (FDI) as they are the primary agents driving the flow of capital, technology, and expertise across borders. MNCs engage in FDI by establishing subsidiaries, joint ventures, or strategic partnerships in foreign countries, thereby contributing to the host country’s economic growth and development. Through FDI, MNCs can access new markets, exploit comparative advantages, and diversify their operations, while host countries benefit from increased capital inflows, job creation, and technology transfer. Furthermore, MNCs often bring advanced management practices and innovation capabilities, fostering competitiveness and productivity in the host economy. However, the presence of MNCs can also pose challenges, such as crowding out local firms, exacerbating income inequality, and causing environmental degradation. Therefore, striking a balance between the benefits and challenges of FDI requires effective policies and regulations at both national and international levels (Dunning, 1993; UNCTAD, 2020).

FDI Policies and Regulations: National and International Perspectives

National and international perspectives on policies and regulations related to Foreign Direct Investment (FDI) vary significantly, reflecting the diverse economic and political contexts in which they are formulated. At the national level, countries adopt FDI policies to attract investment, promote economic growth, and enhance technological capabilities. These policies may include tax incentives, streamlined regulatory processes, and the establishment of special economic zones. However, some countries may also impose restrictions on FDI to protect domestic industries, maintain national security, or preserve cultural heritage.

At the international level, FDI policies and regulations are shaped by multilateral agreements, such as the World Trade Organization (WTO) agreements, bilateral investment treaties (BITs), and regional trade agreements (RTAs). These agreements aim to promote a stable and transparent investment environment by establishing rules on the treatment of foreign investors, dispute resolution mechanisms, and provisions on investment protection. Nevertheless, the effectiveness of these international frameworks in promoting FDI remains a subject of debate, as they must balance the interests of both host and home countries while addressing concerns related to environmental sustainability, labor rights, and corporate social responsibility (UNCTAD, 2018; OECD, 2015).

FDI in Developing and Emerging Economies

Foreign Direct Investment (FDI) plays a crucial role in the economic growth of developing and emerging economies. It serves as a significant source of capital inflows, which can be utilized to finance infrastructure projects, enhance productivity, and stimulate innovation. FDI also contributes to the creation of employment opportunities, thereby reducing poverty and improving living standards in these economies (UNCTAD, 2018). Moreover, FDI facilitates the transfer of technology, managerial expertise, and best practices from developed countries to developing and emerging economies, fostering their industrial development and global competitiveness (OECD, 2002). Additionally, FDI can lead to increased trade integration, as multinational corporations often establish global supply chains that involve the host countries (World Bank, 2020). However, it is essential for these economies to implement sound policies and regulatory frameworks to maximize the benefits of FDI while minimizing potential negative impacts, such as environmental degradation and social inequality (IMF, 2019).


  • UNCTAD. (2018). World Investment Report 2018: Investment and New Industrial Policies. United Nations Conference on Trade and Development.
  • OECD. (2002). Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs. Organisation for Economic Co-operation and Development.
  • World Bank. (2020). Global Investment Competitiveness Report 2019/2020: Rebuilding Investor Confidence in Times of Uncertainty. World Bank Group.
  • IMF. (2019). World Economic Outlook, October 2019: Global Manufacturing Downturn, Rising Trade Barriers. International Monetary Fund.

FDI in Developed Economies

Foreign Direct Investment (FDI) plays a significant role in the economic growth and development of developed economies. In these countries, FDI contributes to the expansion of domestic industries, enhancement of technological capabilities, and creation of employment opportunities. It also fosters competition and innovation, leading to improved productivity and efficiency in the host economy (Dunning, 2001). Moreover, FDI facilitates the transfer of knowledge, managerial expertise, and advanced technologies from multinational corporations to local firms, thereby promoting technological spillovers and boosting the overall competitiveness of the host country (Borensztein et al., 1998). Additionally, FDI can help developed economies diversify their economic base and reduce their reliance on specific sectors, thus enhancing their resilience to external shocks (UNCTAD, 2018). However, it is crucial for policymakers in developed economies to implement appropriate regulatory frameworks and investment promotion strategies to maximize the potential benefits of FDI while minimizing potential adverse effects, such as crowding out domestic investment or exacerbating income inequality (OECD, 2008).


  • Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115-135.
  • Dunning, J. H. (2001). The eclectic (OLI) paradigm of international production: Past, present and future. International Journal of the Economics of Business, 8(2), 173-190.
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  • UNCTAD. (2018). World Investment Report 2018: Investment and New Industrial Policies. Geneva: United Nations Conference on Trade and Development.

Sectoral Distribution of FDI: Industries and Services

The sectoral distribution of Foreign Direct Investment (FDI) varies across industries and services, reflecting the diverse nature of global investment patterns. In recent years, the services sector has attracted a significant share of FDI, accounting for approximately 63% of global FDI inflows in 2019 (UNCTAD, 2020). Within the services sector, finance, insurance, and business services have been the primary recipients of FDI, followed by telecommunications, transportation, and utilities. In contrast, the manufacturing sector has experienced a decline in its share of FDI, representing around 33% of global inflows in 2019 (UNCTAD, 2020). Key industries within this sector include automotive, chemicals, pharmaceuticals, and electronics. The remaining FDI inflows are directed towards the primary sector, which includes agriculture, mining, and natural resources, accounting for approximately 4% of global FDI in 2019 (UNCTAD, 2020). It is important to note that these figures may vary across countries and regions, influenced by factors such as economic development, market size, and government policies.


  • UNCTAD. (2020). World Investment Report 2020. United Nations Conference on Trade and Development.

FDI and Technology Transfer

Foreign Direct Investment (FDI) plays a crucial role in facilitating technology transfer between countries, particularly from developed to developing economies. This process occurs through various channels, including the establishment of multinational corporations (MNCs) in host countries, joint ventures, and strategic alliances. MNCs often possess advanced technologies, management practices, and technical know-how, which can be transferred to their subsidiaries or local partners in the host country (Dunning, 1993). This transfer of technology can lead to increased productivity, innovation, and competitiveness in the host economy, ultimately contributing to economic growth and development (Borensztein et al., 1998).

Moreover, FDI can stimulate technology spillovers to domestic firms in the host country through demonstration effects, competition, and labor mobility. Demonstration effects occur when local firms observe and imitate the technologies and practices of foreign firms, while competition forces domestic firms to improve their efficiency and adopt new technologies to remain competitive (Blomstrm & Kokko, 1998). Additionally, labor mobility between foreign and local firms can facilitate the diffusion of knowledge and skills, further enhancing technology transfer (Fosfuri et al., 2001).


  • Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115-135.
  • Blomstrm, M., & Kokko, A. (1998). Multinational corporations and spillovers. Journal of Economic Surveys, 12(3), 247-277.
  • Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham: Addison-Wesley.
  • Fosfuri, A., Motta, M., & Rnde, T. (2001). Foreign direct investment and spillovers through workers’ mobility. Journal of International Economics, 53(1), 205-222.

FDI and Environmental Sustainability

The relationship between Foreign Direct Investment (FDI) and environmental sustainability is complex and multifaceted. On one hand, FDI can contribute to economic growth and development, which may lead to improved environmental management and increased resources for environmental protection. For instance, FDI in clean technologies and renewable energy can promote sustainable development and reduce greenhouse gas emissions (UNCTAD, 2010). Moreover, multinational corporations (MNCs) involved in FDI often possess advanced technologies and management practices, which can be transferred to host countries, potentially improving their environmental performance (OECD, 2002).

On the other hand, FDI can also have negative environmental impacts, particularly in developing and emerging economies where environmental regulations may be weak or poorly enforced. In such cases, FDI may lead to increased pollution, natural resource depletion, and other environmental problems (Grg & Strobl, 2001). Furthermore, the “pollution haven hypothesis” suggests that MNCs may relocate their polluting activities to countries with lax environmental regulations, exacerbating environmental degradation in these locations (Dean, Lovely, & Wang, 2009). Thus, the relationship between FDI and environmental sustainability depends on various factors, including the nature of the investment, the regulatory environment, and the capacity of host countries to manage and mitigate potential environmental risks.


  • Dean, J. M., Lovely, M. E., & Wang, H. (2009). Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China. Journal of Development Economics, 90(1), 1-13.
  • Grg, H., & Strobl, E. (2001). Multinational companies and productivity spillovers: A meta-analysis. The Economic Journal, 111(475), F723-F739.
  • OECD. (2002). Foreign Direct Investment and the Environment: Lessons from the Mining Sector. Paris: OECD Publishing.
  • UNCTAD. (2010). World Investment Report 2010: Investing in a Low-Carbon Economy. New York and Geneva: United Nations.

Future Trends and Implications of FDI

The future trends and implications of Foreign Direct Investment (FDI) are expected to be shaped by several factors, including the ongoing digital transformation, the rise of emerging economies, and the increasing importance of environmental sustainability. The digital revolution is likely to lead to a surge in FDI in technology-intensive sectors, as multinational corporations (MNCs) seek to capitalize on new opportunities and gain access to cutting-edge innovations (UNCTAD, 2018). Additionally, the growing economic clout of emerging economies, such as China and India, is expected to result in a shift in FDI patterns, with these countries becoming both major recipients and sources of FDI (World Bank, 2020). Furthermore, the global emphasis on environmental sustainability is likely to influence FDI decisions, as MNCs increasingly prioritize investments in green technologies and environmentally friendly practices (OECD, 2019). These trends suggest that FDI will continue to play a crucial role in shaping the global economy, with potential implications for economic growth, technology transfer, and environmental sustainability.


  • UNCTAD. (2018). World Investment Report 2018: Investment and New Industrial Policies. United Nations Conference on Trade and Development.
  • World Bank. (2020). Global Economic Prospects, June 2020. World Bank Group.
  • OECD. (2019). FDI Qualities Indicators: Measuring the Sustainable Development Impacts of Investment. Organisation for Economic Co-operation and Development.
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