Foreign Direct Investments (FDI) involve direct investments in productive assets by a corporation incorporated in a foreign country. FDIs are correlated with international trade since the additional production capacity brought to bear is often used to increase exports (or imports). A corporation investing in a foreign country is more likely to be involved in trade than a national corporation investing in the domestic economy. FDIs can accumulate in a variety of economic sectors, such as manufacturing, commercial, and distribution activities. If FDIs are made in the commercial sector (e.g. retail), the outcome is likely to be a growth in imports. If they are made in resources or manufacturing, then exports are more likely to increase.
FDIs tend to be cyclical, particularly since they involve financial transactions and the risk of over-accumulation they entail. The above graph depicts four general cycles of boom and bust since 1990.
- The first relates to the 1993-2000 period, when globalization became a dominant strategy, particularly between developed countries.
- The second cycle relates to the 2004-2007 period, which saw a growing share of FDIs going to developing economies. When the global economy is slowing down, often after a phase of over-accumulation of investments (and the resulting overcapacity), FDIs are substantially cut back. This is well reflected in the recessionary cycles of 2001-2003 and 2008-2010.
- The third cycle of 2014-2017 reflects mainly the surge of Chinese investments, many of which took place in developing economies such as Central Asia and Africa.
- The fourth cycle from 2018 onward reflects trade restrictions between the United States and China, associated with a decline in FDI in developing economies. Further, the Covid-19 pandemic resulted in a steep decline in FDI, particularly in developing economies, as trade and financial transactions were curtailed.
While FDIs used to dominantly take place in developed economies, after a surge involving developing economies, they are now more balanced. They remain a reflection of available economic opportunities in a variety of economic sectors.