Patterns of foreign direct investment flows and economic development: a cross country analysis

Abstract

Globalisation can be summarised as opening-up of markets, leading to transfer of capital, technology and people. However, another important dimension of globalisation is multilateralism. It would be obvious that the former cannot be effective without later. One of the major objectives is of international economic reforms was to encourage multilateralism. The economic basis of multilateralism lies in allocative efficiency. This implies that economies are able to import from most efficient sources and are able to export to the best destinations. In an analogous manner, it can be said about Foreign Direct Investment (FDI) that multilateralism implies importing capital from a variety of sources as may be most efficient. Rather than restricting to a bilateral basis. Similarly, the obverse of this phenomenon would be to export capital where it can be most efficiently utilised, by combining capital with other resources optimally. Second, these capital transfers should work as two way relationship, which implies that the process of globalisation should have gains for both the home country and the host country. Therefore, we propose to study FDI flows both from the point of view of inward FDI where the host country is the recipient country, as well as, outward FDI where the home country is the source country. If globalisation is a progression in the international economic relations, it implies that capital flows are substituting trade flows. The assumption behind such a progression is that there is a decision to switch from relative inefficient trade to more efficient alternative of international relocation of production or FDI.