Fdi Flows and Domestic Investment: Overview

The name “Foreign Direct Investment” usually brings to mind a significant contribution of FDI to domestic investment. However, there has been a lot of skepticism concerning the contribution of inward FDI to domestic investment. As noted by Froot (1993), FDI (the purchase by a domestic resident of a controlling stake in a foreign company) actually requires neither capital flows nor investment in capacity. Conceptually, FDI is an extension of corporate control over international boundaries: "When Japanese-owned Bridgestone takes control over the US firm Firestone, capital need not flow into the US. The equity purchase can be largely financed by US domestic lenders. Any borrowing by Bridgestone from foreign -based third parties also does not qualify as FDI (although it would count as an inflow of portfolio capital into the US). And, of course, in such acquisition there is no investment expenditure; merely an international transfer in the title of corporate assets." Does this example captures the essence of FDI? The answer we provide here , based on a new theory, and recent empirical evidence is that FDI flows play an important role in the process of skimming high productivity investment projects and contributes significantly to domestic investment in both the quantity and the quality dimensions.