Report on FDI Flow Pattern

FDI Flow Pattern across the World: Regional and Country

Level Study

2
FDI Flow Pattern Study: Report

Contents
Introduction................................................................................................................ 3
Regions of the World.................................................................................................. 3
Asia............................................................................................................................ 4
Africa.......................................................................................................................... 5
South America............................................................................................................ 6
Transition Economies.................................................................................................. 7
Developed Countries.................................................................................................. 7
Key Take Away and Learning...................................................................................... 8
Conclusion.................................................................................................................. 9
References................................................................................................................ 10

3
FDI Flow Pattern Study: Report

Introduction
There are various aspects that play an important role in the development of economy.
Foreign Direct Investment (FDI) play a very important and fundamental role with the
increase in globalization. There are various factors that can influence the flow of FDI
from and into the economy. The report has been prepared to analyze the FDI flow
pattern in different regions of the word. Further discussion with respect to countries in
these regions has been discussed. This discussion has been supported by different
theories and models of FDI.

Regions of the World

The economic and other factors in different regions of the world have huge variations.
The FDI flow into different regions have been shown below

The above chart clearly shows that the Asian region has been attracting highest FDI
inflows while the FDI in Africa has remained stagnant. The position of Europe and North
America has improved and remain strong
The various factors that have an impact on FDI flow include wage rate, tax & trade
barriers, transport & infrastructure, economic growth, political stability and currency
exchange rate. The trend in FDI in the regions shown in the above figure can be
analyzed with respect to these factors. These factors are favorable for Asia, Europe and

4
FDI Flow Pattern Study: Report

North America. Asian region has resources and growth potential on the other hand the
European and American is favorable because of the transport & infrastructure and
stability. The FDI flow pattern specifically for each region has been discussed below.

Asia
The Asian region is the largest recipient of FDI in the world. Almost all the countries
have shown growth in FDI inflow in this region. An increase in wage rate and production
cost has resulted in fall in FDI inflow in manufacturing in China but FDI in services has
increased. The rise in equity investment has contributed the most in case of Hong Kong.
The political environment in low income countries like Myanmar and Bhutan have been
favoring investment thus bringing in investment from infrastructure sector. The
liberalization policies in India and labour intensive industries in Bangladesh have been
the main factors that have boosted FDI inflow in these countries. Like China equity
investment in India has been boosted and various players across the globe have
contributed to it (Lessmann, 2013). The Indian economy has not been dependent on
one particular region considering the inflows from different regions
One of the theories that can be seen to be applicable in this region is Aliber Theorem
according to which the countries having strong currency tend to take advantage of the
purchasing power in weak currency countries. Most of the countries that have been
discussed above, except China has weak currency and are hub for the strong currency
countries. It is evident from the fact that huge investments have been made by Europe
and USA in this region.
Another model that is relevant for Asian region is Product Life Cycle Model. As per this
model the product in domestic market has matured and thus these new and developing
markets can be good source of revenue for such products (Nayak & Choudhury, 2014).

5
FDI Flow Pattern Study: Report

Source: www.Investmentu.com
Further analysis highlights that in Asia most benefits of FDI have gone to the service
sector while the manufacturing sector has almost remained stagnant. Particularly in
China, as mentioned above, downturn in FDI has been seen in manufacturing. The
manufacturing industries have invested well in India. In India the electronic industry has
been the main industry which attracted FDI. The OLI theory supports the above
changing scenario as location advantage of labor and resources has shifted to India
considering the increase in wage rate in China (Dunning, 2015). The investment in India
by Singapore has been the result of political ideology of free market wherein
comparative advantage is the basis of investment.

6
FDI Flow Pattern Study: Report

The institutionalization theory can further elaborate the increasing FDI inflow to Asia
wherein enterprises are focusing of different aspects such as market seeking, resource
seeking, efficiency seeking and strategic asset seeking. These factors are suitable with
respect to different countries. For Example, in case of India market and resource might
be the primary factor while in case of Bhutan and Myanmar strategic asset seeking
factor might be more prevalent (Vohra and Sehgal, 2011). FDI in Vietnam has been
driven by electronic sector enterprises. Samsung has announced expansion plans
further strengthening its existence in Vietnam. This expansion of Samsung is supported
by Uppsala Model

7
FDI Flow Pattern Study: Report

Source: http://economists-pick-research.hktdc.com/
Considering FDI outflow from Asia, China has been the major contributor. China has
invested majorly in developed nations and Africa. In developed nations the FDI has
been done through M&A while in Africa acquisition and Greenfield investment has been
done (Raff, Ryan and Sthler, 2009). The investment in Africa is as per the Hymer
theory wherein China has ensured full control over the investment that is made.

Africa
FDI flows in Africa are driven by several factors. There is huge variation in the flow of
FDI in different regions. The North African region (Egypt) has received huge FDI while
the FDI inflow in West Africa and South African region reduced. The FDI in Egypt has
been driven by the expansion of Affiliates in the financial industry. The companies like
CIB Bank and Citadel Capital have invested enormously while the pharmaceutical
player Pfizer has also invested in Egypt. The factors that are driving investment from
different industries are different. The investment in Egyptian region can be explained by
Knickerbocker - multipoint competition theory (Mijiyawa, 2015). There are various

8
FDI Flow Pattern Study: Report

players in the market and the investment the banking enterprises highlights that
imitation may be there (imelyt, Tvaronaviien and Kalainskait, 2014). The same
theory can be applied for FDI inflow in Ghana and Ivory Coast wherein companies like
Cmoi from France entered the market. Another reason for investment in Cocoa market
was high commodity price.
On the other hand the entry of pharmaceutical company can be supported by OLI
theory wherein firms do not wish to give away the advantage of internalization (control)
over the assets which could result in diminishing the value if licensing was done. The
investment in some of the countries like Morocco and Sudan has been done by oil
companies due to presence of oil reserves in the region. The availability of resources for
textile industry has been the primary factor for FDI in central African countries like
Kenya. This enables the companies to export goods to Europe in cost effective manner
(Rajput et al., 2012).
The investment in South Africa declined decline prices and high operating cost
(electricity) and decline in oil prices. Political instability that prevailed in most of the
Eastern African countries did not favor the development of FDI in the sub region.
Northern Africa is geographically the closest African sub-region to Europe, and given
that Northern Africa is highly endowed in natural resources, one can expect that the
sub-region will continue to attract a significant amount of FDI. Based on OLI theory and
strategic asset seeking institutional theory this FDI inflow to Northern Africa can be
understood. China has invested majorly in Africa (imelyt, Tvaronaviien and
Kalainskait, 2014). In Africa acquisition and Greenfield investment has been done.
The investment in Africa is as per the Hymer theory wherein China has ensured full
control over the investment that is made.
The outflows from the countries in Africa are largely intra-Africa only. Only few big
companies operating in Oil sector have made investment outside the region. The main
reason for low level of FDI outflow is the low currency value.

9
FDI Flow Pattern Study: Report

South America
The situation in South America has not changed much however the individual
performance of the countries has undergone significant change. The FDI inflow in Brazil
and Columbia reduced significantly which was compensated by growth in Mexico and
Argentina. Automobile is one industry that has witnessed FDI inflow across all the
countries in South America. The main reason for this was the demand of automobile in
USA. This is based on the efficiency seeking institutional theory wherein the efficiency in
manufacturing automobile in South American countries is higher. Overall the fall in FDI
is because of the fall in commodity prices in the region (imelyt, Tvaronaviien and
Kalainskait, 2014).

Source: Ministry of External Relations, Department of Trade and Investment Promotion

The growth in FDI in pharmaceutical sector in Brazil has been witnessed while the main
reason for fall in FDI in the South American region has been due to falling prices in oil
and gas industry. The FDI inflow in pharmaceutical is the result of enactment of law that
created new opportunities for investors. Considering OLI theory the law enabled the

10
FDI Flow Pattern Study: Report

pharmaceutical enterprise to have the control over their assets. The major source of FDI
in the Panama region is reinvestment and intra company loans while these factors
resulted in deteriorated FDI in other countries in the region.
Considering FDI outflow, it can be said that reverse investment in Brazil is not favored
and investors preferred to move out of the South American market. Overall the
attractiveness of South American region has not been conducive for FDI This aspect is
in contrast to the market potential and availability of resources.

Transition Economies
The FDI inflow in transition economies has been on reducing trend. The factors affecting
FDI inflow are low commodity prices, weakening domestic market and geopolitical
tension. The FDI inflows in Russia were reinvestment and thus new FDI inflows was
almost nil (Stepanok, 2015). The fall in FDI inflow is due to no reinvestment and decline
in intra company loans. In the other resources based economies the fall in FDI is
attributed to economic crisis in the region. Ukraine received FDI inflows due to
privatization of the G network. This benefit is explained by the OLI theory wherein the
location and ownership is in favor of investors (imelyt, Tvaronaviien and
Kalainskait, 2014).
It is important to note here that the fall in FDI in the transition economies is due to losing
of its attractiveness of low cost high skilled labor and growing market to China and
South Asian countries. In the past decade the investment that was made in the
manufacturing sector was due to low cost high skilled labor and access to growing
market (Rajput et al., 2012). These factors have now become favorable to South Asian
countries and thus the shift in FDI flows can be seen.
The FDI outflow has also reduced primarily due to currency depreciation. However the
certain level of outflow that has been witnessed is due to the M&A that have taken place
in Europe from this region (Raff, Ryan and Sthler, 2009).

11
FDI Flow Pattern Study: Report

Developed Countries
The region that has been considered under this category comprise of North America,
Europe and Australia. The FDI inflow to Europe increased by significant amount after
being on the negative side for the last three years. However this inflow in the region is
mainly attributed to increase in FDI flow to Ireland and Switzerland. While the FDI flows
in countries like France, Germany and UK was significant, apart from these almost all
other countries did not receive FDI inflows.
Merger and Acquisitions have been the major factors that have influenced the FDI flow.
For example Medtronic Covidien inversion megadeal in Ireland, merger of the cement
manufacturer Lafarge with its Swiss rival Holcim and M&A in pharmaceuticals and real
estate industry in UK have played a key role in FDI inflow. Another factor that
contributed to the FDI inflow is in relation to intra company loans. Both Germany and
Ireland benefitted from this. However this benefit was offset by limited contribution from
M&A in Germany.

Source:
http://webarchive.nationalarchives.gov.uk/

12
FDI Flow Pattern Study: Report

Considering North American region, USA has been attracting huge FDI inflows. A large
portion of FDI inflows to USA were attributed to large corporate inversions, such as the
Medtronic-Covidien and Mylan-Abbott deals. Apart from this M&A in manufacturing and
pharmaceutical sectors have contributed to the FDI inflow in USA. FDI flows in Canada
fell on account of disinvestment in energy and mining sectors. Similar factors accounted
for reduction in FDI in Australia (Rajput et al., 2012)
The above discussion is supported by the Uppsala Model. According to this model firms
gradually intensify their activities in foreign market. One way to increase your presence
in the market is acquire more market share. M&A leads to increased market share. Thus
the enterprises consolidated their position in the market based on M&A and
reinvestment. Intra Company loans have also contributed to the growth in FDI
(Stepanok, 2015).
Among the developed regions, outflow from Europe has been the highest. Almost every
country in this region invested in other regions. The major focus has been on
pharmaceutical industry. The other favorable sectors were Finance and Insurance. The
slowing of the domestic banking sector has been one of the reasons for outflow from
Canada.

Developing Economies
Based on the analysis that has been conducted an insight into developing economies
(except developed economies) has been made. The above discussion shows that
although the developing economies have high growth prospects, the Asian countries
have been performing fairly well in comparison to other developing regions. The FDI
inflow in these regions have been shown below

13
FDI Flow Pattern Study: Report

As shown above, the South Asian region has been showing tremendous growth. Similar
growth has been there in Sub Sahara region as well. The reasons for this growth have
already been discussed above. The other regions have shown negative growth primarily
because of political instability. The above trend and the factors that have been
discussed earlier shows that Asian region, countries of South Asia, will continue to
generate FDI.
Further there are various ways in which FDI can be generated. It has been viewed that
the growing regions attract more Greenfield investment while in the regions in limited
growth M&A and reinvestment have been the major source of FDI. The example of India
and other South Asian countries like Myanmar have been attracting Greenfield
investment while M&A and reinvestment has been prevalent in Central & South Africa,
Latin America and transition economies.
This shows that the South Asian region has huge potential. Apart from this the
aberrations in growth in other developing regions can be sustained if the political turmoil
can be controlled and brought to rest. The developing economies have huge potential

14
FDI Flow Pattern Study: Report

and growth opportunities. Apart from this it has been observed that the connectivity of
the countries with the world is an important factor. The land locked countries in East
Asia and Central Africa have been lagging behind in comparison to South Asia and
North African countries.

Key Take Away and Learning

The above discussion on different regions and particular countries in these regions
show that factors that have an impact on FDI flow pattern can vary a lot. Secondly with
the passage of time the flow pattern undergoes changing owing to the dynamic
environment. Based on the above discussion key take away and learning have been
discussed below. This discussion is driven by the theoretical models in relation to FDI
(Sooklall and Hoolash, 2016).
Hymer Theory: The Hymer Theory states that the stronger country tends to dominate
the weaker country due to monopoly. This kind of FDI flow can be seen in Africa where
China has invested in a big way (Moosa, 2016).
Uppsala Model: This highlights that FDI inflow is due to expansion of activities by
enterprises in the region. The investment made by Samsung in Vietnam and developed
countries can be explained based on this model.
Knickerbocker - multipoint competition: This model states that the players in the same
industry enter the market so that the competitive advantage is not there with their
competitor. The example of Egypt supports this model (Moosa, 2016)
Aliber Theorem: The shift from countries with strong currency to countries with weak
currency. The shift of FDI from China to India and neighboring region is one such
example. Similar is the region for outflow of FDI from China, Singapore and other
regions (Moosa, 2016).
OLI Theory: this theory is based on three factors i.e. ownership, location and
institutionalization. Almost all the FDI patterns can be explained based on this model.
Various examples have been discussed above that support the OLI theory. Most of the
outflows in different regions is because of diminishing demand and commodity prices.

15
FDI Flow Pattern Study: Report

For example the outflows or fall in FDI in Canada, Africa, transition economies, Australia
etc. have been due to falling oil prices and thus these regions became less favorable for
such investments (imelyt, Tvaronaviien and Kalainskait, 2014). This resulted in
outflows from these regions.
Institutionalization: there are four goals as per this theory i.e. market seeking, resource
seeking, efficiency seeking and strategic asset seeking. IT can be seen that the
investors goals revolve around these aspects and thus FDI flow pattern can also be
explained by this theory.

Conclusion
The complete discussion on the various regions and countries highlights the areas that
are favorable for investments. The theoretical models have been quite helpful in
understanding the inclination and reasons for favoring certain regions. Based on the
above discussion the reasons and factors favoring investment in a region have been
mentioned in the above discussion.
The above discussion also shows that there are several theories in relation to FDI.
However it may be the case that in certain cases the FDI flow is explained on the basis
of different theories at the same time. This shows that different theories may stress on
certain pattern of FDI flow.
Overall the study has been quite useful in understanding the aspects mentioned above
and the theories of FDI. Based on the above discussion it can be said that Asian
countries have several advantages over other regions of the world that lead to positive
prospects for FDI. The African region also has its strengths but the lack of stability in the
region has been the main factor for the low FDI inflows. The developed regions of the
world have been ensuring that the opportunities are created for the FDI inflows however
the way the FDI has been generated (M&A) is not a very healthy sign and does not
ensure that future FDI inflows will be there. One of the major factors that have impacted
FDI is oil prices. Disinvestment can be seen in every region in the oil industry.

16
FDI Flow Pattern Study: Report

References
Dunning, J.H., (2015). The Eclectic Paradigm of International Production: A
Restatement and Some Possible Extensions. In The Eclectic Paradigm (pp. 50-84).
Palgrave Macmillan UK.
Lessmann, C., (2013). Foreign direct investment and regional inequality: A panel data
analysis. China Economic Review, 24, pp.129-149.
Mijiyawa, A.G., (2015). What Drives Foreign Direct Investment in Africa? An Empirical
Investigation with Panel Data. African Development Review, 27(4), pp.392-402.
Moosa, I., (2016). Foreign direct investment: theory, evidence and practice. Springer.
Nayak, D. and Choudhury, R.N., (2014). A selective review of foreign direct investment
theories. Asia-Pacific Research and Training Network on Trade, Working Paper, (143).
Raff, H., Ryan, M. and Sthler, F., (2009). The choice of market entry mode: Greenfield
investment,

M&A

and

joint

venture. International

Review

of

Economics

&

Finance, 18(1), pp.3-10.

Rajput, D.N., Garg, M.R., Jain, M.A. And Rajput, M.A., (2012). Trends and Patterns of
Flow

of

FDI

in

Developed

Countries

and

Developing

Countries:

Comparison. International Journal Of Social Science & Interdisciplinary Research Vol. 1

Issue 9, September 2012, ISSN 2277 3630, p.7.
imelyt, A., Tvaronaviien, M. and Kalainskait, K., (2014). Review of approaches
towards FDI: driving forces and plausible consequences.
Sooklall, M.F. and Hoolash, B.K.A., (2016). Analysing the Theories Explaining the
Pattern of FDI in China and Assessing the Impact of Such FDI Upon the Chinese
Economy. Available at SSRN.
Stepanok,

I., (2015).

Cross

border Mergers

and

Greenfield

Investment. Review of International Economics, 23(1), pp.111-136.

Foreign

Direct

17
FDI Flow Pattern Study: Report

Vohra, P.S. and Sehgal, P., (2011). An Inclusive Study Of Foreign Investment In The
Indian Economy. Asia Pacific Journal of Research in Business Management, 2(6).