The mode of international capital flows in the developing economies has radically changed over the years.
During the seventies, debt (especially, bank lending) constituted the large part of capital flow to the developing world. With the wave of liberalisation and economic reforms, the situation is changed in most countries 1970 onwards the surge in capital flows of the developing countries is largely in terms of foreign investment rather than borrowings. Under the foreign investment the proportion of FDI has been rising continuously.
World over the share of FDI to gross fixed capital formation (the FDI/GFCF ratio) has increased from 3.6 per cent in 1985-1999 (annual average) to 5.6 percent in 1997. In the developing countries this ratio has increased from 3.4 per cent to 8.4 during the same period of comparison.
Likewise, the FDI/GDP ratio has increased from 4.6 per cent to 10.6 per cent for the world over. In the case of developing economies this ratio is evolved out at 4.3% and 15.6% respectively for the same period of comparison.
The significance of FDI (as an engine of growth can be seen as it characteristically brings forth to a developing country five E’s:
5. Expatriation of profits.
6. In the Global economy at large, the flow of FDI has increased almost 70 folds from USD 12.5 billion in 1973 to USD 844 billion in 1999.
7. In 1998, the USA inflow of FDI amounts to 193 billion-dollars.
8. China receives USD 45 billion of FDI.
9. The lion’s shares of FDI flows have been mostly claimed by East Asian and Pacific countries as well as Latin America.
10. Sub-Sahara Africa, North Africa and Middle East claimed the lowest share.