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Table 1: FDI Flows to Emerging Market Economies 1990-2003
Countries Annual Average
1990-1996 1997-2002
1996 1997 1998 1999 2000 2001 2002 2003
All Countries 62.0 156.8 114.4 141.7 153.6 164.0 158.0 172.1 151.3 160.9
Africa 2.5 10.9 3.6 7.8 6.4 9.3 7.7 22.3 11.8 10.1
Asia 31.7 56.3 53.4 56.8 59.7 61.2 54.2 47.1 58.7 59.0
Middle East & Turkey 3.5 7.5 4.8 5.5 6.5 5.5 7.9 10.8 8.8 11.5
Western Hemisphere 18.2 58.7 40.3 56.1 60.1 64.1 64.7 66.9 40.4 45.6
Countries in transition 6.1 23.4 12.3 15.5 20.9 23.9 23.4 25.1 31.5 34.7
Source: IMF, World Economic Outlook, September 2003; IMF Database
Even though foreign investors have different options, such as exporting,
licensing, joint ventures or FDI, if deciding to expand their activities abroad, many
of them may choose FDI due to the OLI (OWNERSHIP LOCATION
INTERNALIZATION) paradigm (Dunning, 1993). The Ownership advantage
occurs when the transfer of technology and management know-how permits the
company to compete in the local market. The Location advantages occur when a
country can provide location-specific resources, such as good infrastructure or lowcost
inputs. Finally, the Internalization advantage is realized, if it is cheaper to
invest than to export to a particular country.
The inflow countries governments are interested in FDI, foremost, in order of
fostering employment, but also, as a source of financing the state account, as
capital inflows are going to improve their foreign balances.
B. The Determinants and the Impact of FDI
The most important effect of FDI on the growth of a country is to bring much
needed capital and employment, in order to overcome the pervasive investmentsaving
gap of a developing economy, which doesn’t invest much in new business,
obstructing so also employment. Additionally, the inflow of FDI brings to the host
country efficient technology and new management techniques. The main problem
of assessing the impact of FDI on economic growth, is its association with other
growth-driven factors. On the one hand, FDI stimulates economic growth
(Bernstein et al., 1998), while, on the other hand, high growth rate attracts FDI
(Barrel and Pain, 1996). Therefore, FDI and economic growth are mostly
interrelated. For example, Ericsson and Irandoust (2001) examined the causal
relationship between FDI and economic growth for four European countries of
Denmark, Finland, Norway, and Sweden. The results are controversial: the
existence of causality was shown for Sweden and Denmark, being bi-directional
for Sweden and unidirectional for Denmark; no causality link was detected for
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