FDI Distribution among Developing Countries

This section deals with FDI inflows distribution in developing economies, which reveals a relatively high degree of concentration within regions and countries.

a- Concentration among regions

According to Table 3.4, East Asian and Latin American regions attract most FDI inflows. In 1995, about 72% of net FDI inflows were directed towards those regions, leaving a minority share for sub-Saharan Africa, the Middle East and North Africa.

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Table 3.4: Net FDI Inflows by US$ Billion, and Annual Average Growth by Percentage in Developing Countries, by Region, 2007–2010

Country FDI inflows Average

growth

Year 2007 2008 2009 2010 -

World 2,100 1,744 1,185 1,244 -

Developing Countries 585 658 511 574 12.3

Africa 63 73 60 55 20.4

Latin America and the Caribbean 164 207 141 159 32.1

West Asia 78 92 66 58 19.6

South, East and South East Asia 259 284 241 300 69.3

South East Europe and CIS 91 121 72 68 0.55

Source: UNCTAD World Investment Report 2011

This large share may be attributed to several factors: (i) The rapid economic growth during 1991-1995, reaching 8% growth in real GDP per capita (compared with only 2.6% in aggregate GDP per capita of all developing countries);¹¹ (ii) The agreement reached by the Asia-Pacific Economic Co-operation Forum’s Ministerial meeting (11-12 November 1994), aimed at achieving open trade and investment in Asia Pacific no later than 2010, which has been responsible for improving the investment climate within the region; and (iii) The large and growing domestic market, and the inclusion of countries enjoying location-specific advantage which enabled the region to trigger sustainable and diversified types of FDI (UNCTAD, 1995).

Latin America and the Caribbean is the second largest FDI recipient region accounting for 23% of FDI inflows to developing countries, during 1993-95 (World Bank, 1996a).¹² This relatively large share of FDI could be attributed to: (i) an improved macroeconomic environment, revealed by real per capita GDP growth (1.1% compared with 1.2% in high-income countries during 1991-95), and the fall in the foreign debt service from around US$ 38.6 billion in 1985 to US$ 27.5 billion in 1994 (World Bank, 1996a); (ii) increasing waves of privatisation, which have raised

11 Excluding Eastern Europe and the former Soviet Union in the first three years of the 1990s.

12 Latin America and the Caribbean region tops developing countries if China is excluded from East Asia.

almost US$ 17 billion in foreign exchange between 1988 and 1993 compared with just US$ 5 billion in East Asia (World Bank, 1995a), and (iii) investment restrictions relaxation, particularly in natural resources and infrastructure industries.¹³

b- Concentration among Countries

As among regions, FDI concentration also applies at country level. During 1989-1995, about 75% of FDI flows to developing countries were confined to only ten countries (Todaro, 1996). In 1991, the top ten countries accounted for around 66.7%

as shown in Table 3.5.

Table 3.5: Major Destinations of FDI to Developing Countries, 1991

Recipient country US$ million Percentage

Mexico 4,762 13.3

China 4,366 12.2

Brazil 1,600 4.5

Malaysia 3,455 9.6

Argentina 2,439 6.8

Thailand 2,014 5.6

Indonesia 1,482 4.1

Korea, Republic of 1,116 3.1

Venezuela 1,914 5.3

Turkey 810 2.2

Top ten countries 23,958 66.7

Others 11,937 33.3

Developing countries 35,895 100

Source: IMF Balance of Payments Yearbook and World Bank (World Bank, 1993: 29) Note: FDI based on net inflows, balance of payments basis.

13 For example, Argentina in 1992 allowed FDI in the privatisation of the State Gas Company and

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However, this apparent concentration is less acute when scaling FDI by recipient GDP or Gross Domestic Income (GDI). GDI/GDP in the top recipient countries were somewhat closer to the average of all developing countries (1.1% and 4.5%

respectively). Exceptions were Argentina, Malaysia and Venezuela, with high FDI-GDI ratios, and Malaysia with a high FDI-GDP ratio (World Bank, 1993) as outlined in Table 3.6.

Table 3.6: FDI Ratios in Major Recipient Developing Countries, 1991

Recipient country Share of recipient GDP (%)

Share of recipient GDI (%)

Mexico 1.7 7.4

China 1.2 3.3

Brazil 0.4 2.0

Malaysia 7.4 20.5

Argentina 1.9 15.1

Thailand 2.2 5.6

Indonesia 1.3 3.6

Korea, Republic of 0.4 1.0

Venezuela 3.6 19.2

Turkey 0.8 3.9

Developing countries 1.1 4.5

Source: IMF Balance of Payments Yearbook and World Bank estimates (World Bank, 1993) Note: FDI based on net inflows, balance of payments basis.

Concerning FDI distribution within East Asia and the Pacific region, China is the major recipient country, accounting for around 74% of inflows to the region during 1993-95. In fact, it represents a unique example as it is one of the fastest growing economies in the world. During 1991-1995, China achieved an outstanding growth performance, recording an average annual GDP growth rate of 12%. FDI inflows increased by nearly tenfold from just US$ 4.4 billion to US$ 37.5 billion throughout

the same period (UNCTAD, 1996). This concentration is still prevalent, even after excluding China, as Malaysia and Indonesia account together for about 70% of total FDI inflows to the region (Table 3.6). Malaysia’s share of FDI inflows tripled from 1990 to 1995, ranking second after China. FDI in Indonesia has also experienced a fourfold increase during the same period.¹⁴

In addition, FDI distribution within Latin America and the Caribbean region reflects high spatial concentration. Between 1988 and 1994, Argentina and Mexico accounted together for about 60-70% of total inflows to the region (UNCTAD, 1995). At the beginning of the 1990s, Argentina’s share more than tripled from US$ 2.4 billion to US$ 6 billion between 1991-1993, thus representing the largest FDI recipient in the region (and the second largest among developing countries). Its share constituted, on average, about 39% of total investment directed to the region (World Bank, 1994/95).

Concerning Mexico, its share rose from about 32% of FDI inflows to the region in 1988 to 40% in 1994. FDI inflows more than doubled between 1989 and 1994 (World Bank, 1994/95, 1996a).¹⁵ In 1995, inflows fell, however, by about 50% to about US$

4.1 billion. This decline could be explained by the uncertainty following the peso-crises, which began in November 1994 and exerted a negative impact on the country’s economic growth and stability (Table 3.7).

Table 3.7: FDI Flows in Latin America and the Caribbean, 1990-1995

Country 1990 1991 1992 1993 1994 1995 Annual growth

rate

Mexico 2.6 4.8 4.9 4.9 8.0 4.1 3.9

Argentina 1.8 2.4 4.2 6.3 1.2 4.0 2.6

Brazil 0.9 0.9 1.6 0.8 2.2 - 1.5

Chile 0.6 0.6 0.7 0.9 1.8 - 1.1

Colombia 0.5 0.6 0.8 0.9 1.5 - 0.7

14 Its share increased from around US$ 0.4 billion in 1987 to US$ 2.3 billion in 1990, then it nearly tripled reaching US$ 5.8 billion in 1995.

15 It increased from US$ 3 billion to nearly US$ 5 billion between 1988/90-1993 and hit a record of

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Country 1990 1991 1992 1993 1994 1995 Annual growth

rate

Venezuela 0.4 1.9 0.7 0.4 0.9 - 0.7

Peru 0.04 -0.007 0.1 0.3 2.7 - 0.5

Others 0.97 1.1 1.2 1.5 2.0 - -

Total 7.8 12.3 14.2 16 20.3 - 12.1

Source: UNCTAD, Division on transactional corporations and investment, based on ECLAC/UNCTAD 1995b; and UNCTAD-DTCI, FDI database (UNCTAD, 1995: 71)

According to the previous review, the FDI geographical distribution has revealed a high degree of concentration, both at the region and country level, thereby highlighting the need for most economies for substantial FDI inflows, particularly to support and strengthen their economic reform schemes currently adopted.

In this context, it becomes essential to examine the factors that influence foreign investors’ locational decisions, and hence recipient countries. The following section sheds light on this issue by reviewing the results of some empirical studies, relating to factors determining FDI locational decisions.