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Unit 27: FDI : Types and Issues

In spite of their successes, however, the traditional theories leave many recent features of FDI Notes
unexplained. First, it is hard to believe that the tide of underlying competitive advantage followed
closely (or at all) the behavior of total FDI flows over the last decade : very rapid increases from 1979
through 1981, strong declines from 1982 through 1985, and then increases of unprecedented size
from 1986 through 1990. One would have expected changes in national competitive advantages to be
reflected in more steady trends. Second, to the extent that any developments happen quickly, one
might have expected that they would occur in a single industry at a time—say, the automobile
producers of Japan—as shocks to competitive ability come to be reflected in world ownership patterns.
Yet the surges of the past fifteen years take place across virtually all industries simultaneously.
The recent FDI surges in U.S. inflows and Japanese outflows illustrate these two features. Japanese
FDI overall, which historically was small, exploded across all industries in the latest surge, experiencing
in the aggregate a seven-fold increase from 1985 to 1989. During this surge, both U.S. inflows and
Japanese outflows were particularly large and fast-growing in real estate and financial services. In
these industries, however, there was little evidence of meaningful change in competitive advantage.
Particularly puzzling is the case of Japanese banks, which during the latest surge went on a much-
publicized binge in acquiring foreign affiliates. Many of the involved banks were actually noted for
their apparently inefficient operations and low profitability in comparison with U.S. and European
companies. These facts suggest that existing theories do a good job of explaining neither the timing
or magnitude of surges nor their broad cross-industry composition.
27.1 Types of FDI

FDI flows into an economy through many mediums, and the type of flow determines its multiplier
effects on an economy. This chapter discusses the categorisation of FDI into five broad types, viz.
export-oriented investment, market-development investment, government-initiated investment,
acquisition investment and greenfield investment, and the motivation for such investments in an
economy.
Export-oriented Investment

Export-oriented investment is described by Reuber as the type of investment that reflects a wide
range of considerations such as the desire to develop secondary and more diversified sources of
supply by way of obtaining lower-cost products to be used either as inputs or for sale elsewhere.
Firms serving established markets at home or internationally frequently seek new sources of inputs,
including raw materials, components and parts, as well as finished products. This reflects a wide
range of considerations, such as the desire to develop secondary and more diversified sources of
supply and the possibility of obtaining lower-cost products. Examples of this type of investment are
found in the raw materials sector. Generally, such foreign investors are mainly interested in extracting
products from the host country and selling them abroad through established market channels. In
making such investments, firms sometimes also create a supporting infrastructure such as housing,
hospitals and schools. This investment focuses on the needs of a particular market which is largely or
entirely outside the host country.
The World Investment Report advocates that this type of investment is made with the intention of the
investor to improve its competitive position at home or internationally by taking advantage of the
lower cost of production that host countries offer, where lower cost is indicated by some of the
following, amongst others : incentives from the host country, abundance of skilled and semi-skilled
labour with concurrent relatively lower wages, and political and monetary stability. With this type of
investment, investors attach little significance to host countries' markets. The major factors with regard
to the determination of the location of the investments are cost, as explained above, and the reliability
of production.
This investment is geared towards the production of component parts. After production, the
components are normally exported to a central location or to a country other than the host country
for assembly into finished goods, confirming the fact that this investment is made with the object of
taking advantage of the lower-cost environment in a host country.

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