Figure 1.3

Percentage Share of Total FDI Stock, 1980 - 1996

Source: Data are taken from the United Nations, World Investment Report, 1997 (New York: United Nations, 1997).

began to invest across national borders. The motivation for much of this foreign direct investment by non-US firms was the desire to disperse production activities to optimal locations and to build a direct presence in major foreign markets. Thus, during the 1970s and 80s, European and Japanese firms began to shift labor-intensive manufacturing operations from their home markets to developing nations where labor costs were lower. In addition, many Japanese firms have invested in North America and Europe--often as a hedge against unfavorable currency movements and the possible imposition of trade barriers. For example, Toyota, the Japanese automobile company, rapidly increased its investment in automobile production facilities in the United States and Britain during the late 1980s and early 1990s. Toyota executives believed that an increasingly strong Japanese yen would price Japanese automobile exports out of foreign markets; therefore, production in the most important foreign markets, as opposed to exports from Japan, made sense. Toyota also undertook these investments to head off growing political pressures in the United States and Europe to restrict Japanese automobile exports into those markets.

One consequence of these developments is illustrated in Figure 1.3, which shows how the stock of foreign direct investment by the world's six most important national sources--the United States, Britain, Japan, Germany, France, and the Netherlands--changed between 1980 and 1996. (The stock of foreign direct investment refers to the total cumulative value of foreign investments.) Figure 1.3 also shows the stock accounted for by firms from other developed nations and from developing economies. As can be seen, the share of the total stock accounted for by US firms declined substantially from around 44 percent in 1980 to 25 percent in 1996. Meanwhile, the shares accounted for by Japan, France, other developed nations, and the world's developing nations increased markedly. The rise in the share for developing nations reflects a small but growing trend for firms from these countries, such as South Korea, to invest outside their borders. In 1996 firms based in developing nations accounted for 8.9 percent of the stock of foreign direct investment, up from only 1.2 percent in 1980.

Figure 1.4 illustrates another important trend--the increasing tendency for cross-border investments to be directed at developing rather than rich industrialized nations. Figure 1.4 details recent changes in the annual inflows of foreign direct investment (the flow of foreign direct investment refers to amounts invested across

Figure 1.4

FDI Inflows, 1985 - 1997 (in US$ billions)

Source: United Nations, World Development Report, 1998: Trends and Determinants.

national borders each year). What stands out in Figure 1.4 is the increase in the share of foreign direct investment inflows accounted for by developing countries during the 1990s, and the commensurate decline in the share of inflows directed at developed nations. In 1997, foreign direct investment inflows into developing nations hit a record $149 billion, or 37 percent of the total, up from just $42 billion in 1991, or 26 percent of the total. Among developing nations, China has received the greatest volume of inward FDI in recent years. China took a record $45 billion out of the investment that went to developing nations in 1997. Other developing nations receiving a large amount of FDI in 1997 were Indonesia, Malaysia, the Philippines, Thailand, and Mexico. At the other end of the spectrum, the smallest 100 recipient countries accounted for just 1 percent of all FDI inflows.24 Foreign investment into developing nations is focused on a relatively small group of countries experiencing rapid industrialization and economic growth. Businesses investing in these nations are positioning themselves to be active participants in those areas of the world that are expected to grow most rapidly over the next quarter of a century.

The Changing Nature of the Multinational Enterprise

A multinational enterprise is any business that has productive activities in two or more countries. Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise: (1) the rise of non-US multinationals, particularly Japanese multinationals, and (2) the growth of mini-multinationals.

Non-US Multinationals

In the 1960s, global business activity was dominated by large US multinational corporations. With US firms accounting for about two-thirds of foreign direct investment during the 1960s, one would expect most multinationals to be US enterprises. According to the data presented in Table 1.3, in 1973, 48.5 percent of the world's 260 largest multinationals were US firms. The second-largest source country was Great Britain, with 18.8 percent of the largest multinationals. Japan accounted for only 3.5 percent of the world's largest multinationals at the time. The large number of US