Putting it to Work in Developing Countries - Nathan Associates

4. FDI DRIVERS AND
FUTURE DIRECTIONS
Macroeconomic forces, global production
chains, technology advances, and host-country
conditions broadly determine the size and location
of foreign direct investment throughout the
world. The result is a constantly shifting set of
sectoral and industry destinations for FDI. But
within these shifts, two fundamental trends have
emerged. First, service sector activities now
attract a majority of FDI inflows, globally and
in developing countries. Second, developing
countries as a group are increasing their share of
worldwide FDI stock in all sectors, but not in
all industries within sectors. These sector and
industry trends, combined with other factors
especially relevant to developing economies—
the end of the Multifibre Arrangement, the
dominance of China, the need to upgrade infrastructure
systems, and increasing South-South
investment links—will shape future FDI inflows
in developing countries.
PROFILE OF FDI BY SECTOR
Worldwide FDI patterns have shifted markedly
over the past 15 years. Comparing the 1990 and
2004 composition of inward FDI stock in developing
and developed countries, at the sectoral
and then the industry level, is revealing. 1
DOMINANT ROLE OF SERVICES
Perhaps contrary to expectation—given popular
images of China’s vast FDI-fueled manufacturing
industry—the services sector now accounts
for the largest share of inward FDI stock in
developing countries. The sector consists of conventional
services, such as power, water, and
other public utilities; telecommunications;
finance and insurance; and retail and wholesale
distribution. It also includes the new services of
business support and other activities enabled by
telecommunications and IT.
In developing countries, FDI in services
increased substantially in the second half of the
1990s, growing at a much faster rate than FDI
in manufacturing or natural resources. Services
now represent nearly 60 percent of total inward
FDI stock, up from 47 percent 15 years ago.
Manufacturing represents roughly 30 percent, a
decrease of nearly 15 points. Inward FDI stock
in natural resources has also grown slightly in
absolute and relative terms, but its share of 8
percent is still the smallest of the three sectors
(Table 4-1). This evolving sectoral composition
roughly parallels what has happened in the
developed world in the same period, where concentration
of FDI in services is a bit higher
39