Foreign direct investment in developing countries

This paper documents the trends in private capital flows to developing countries since 1982 by focusing on the flows and geographical distribution of foreign direct investment (FDI), and provides a comprehensive explanation of the underlying factors. Private capital flows, as defined in this paper, have two major components: FDI and private borrowing. We argue that the sustained FDI flows can be accounted for by four major causes: the paradigmatic shift in development thinking, the domestic urgency for economic growth in developing countries, the globalization of production and services, and the changing international environment. We also maintain that the major underlying causes of the uneven geographical distribution of FDI flows have to be sought in the changing nature of FDI supply, varying economic conditions, and different investment environments in developing countries. The combined effect of an overall decline in private capital flows to developing countries, the uneven distribution of FDI flows, and chronic trade imbalances has been a shortage of foreign exchange in many developing countries. This shortage, along with other contributing factors, has in turn led to domestic economic decline. -from Authors