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Unit 27: FDI : Types and Issues

In some respects, foreign investment in the United States and U.S. investment abroad should operate Notes
as substitutes, so that both U.S. and foreign firms would be expected to invest in the United States
when the U.S. economic growth rate was strong relative to other advanced economies and both U.S.
and foreign firms would be expected to invest elsewhere when the relative rate of U.S. economic
growth was weak. Instead U.S. investment abroad is strong when foreign investment in the United
States is strong and U.S. investment abroad is weak when foreign investment in the United States is
weak. The two trends likely reflect the impact the US. economy has on the global economy and
particularly on Western Europe, where much of the U.S. overseas investment and acquisition activity is
concentrated. As a result, when the rate of economic growth in the United States is strong, foreign firms
are drawn to invest in U.S. businesses. In addition, the stronger rate of economic growth in the United
States enhances the profit position of U.S. firms which encourages them to increase their investments
both at home and abroad as U.S. economic activity also boosts economic performance in Western Europe
and among other developed economies that have become increasingly linked with the U.S. economy.

Number of Deals $Billions
1300 $350

$300
1200
$250
1100
$200
Value ($bil.)
1000
$150
900
$100
No. of deals
800
$50
700 $0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Figure 3 : Foreign Acquisitions of U.S. Companies
Source : Mergers and Acquisitions

Who benefits from foreign investment?

Self -Assessment
1. Choose the correct options:
(i) Foreign direct investment:
I. Increases the domestic country's stock of capital and therefore can increase productivity
II. Can bring new technologies to poorer countries
III. Causes some of the income earned from the investment to exit the country that received
the investment
(a) II and III only (b) I only
(c) II only (d) I, II, and III
(e) I and III only

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