COMCEC Trade Outlook 2019
49
FDIs contribute to international competitiveness of the domestic firms through transfer of the
know-how and technology.
Attracting foreign direct investment (FDI) is considered a vital instrument for diversifying the
exports. Many empirical studies have examined the impact of FDI inflows on export
diversification and reached positive results. Focusing on the Low Income Countries, Jayawera
(2009) found that the cumulative effect after four years of a US$1bn increase in FDI is estimated
to be the creation of 83.5 new export lines for the host countries. Iwamoto and Nabeshima
(2012) have tested the impact on 175 countries. They found out that, FDI inflows have positive
impact on export diversification of the developing countries, but no significant effect on
developed countries. The reason according to the studies is that the Multinational Corporations
(MNCs) are more diversified and developing
countries are affected by the spill-over effects of the
FDI brought by the MNCs. Another study by Hailu
(2010), examined the impact of FDI inflows on Sub
Saharan Africa countries. The study found out that a
1 percent increase in FDI in the previous year brings
about 0.043 percent increase in exports of the following period.
Another obstacle faced by most of the Member States is the concentration of the export oriented
FDIs on traditional sectors. Harding and Javorcik (2011) underlined that, if the FDI exports are
only products that the host country already exports intensively, the efficiency-seeking FDI could
move towards more specialized rather than more diversified exports. Thus, FDI does not
contribute too much to export diversification. For example according to UNCTAD (2011), which
investigated the sectorial distribution of the FDIs in LDCs, many large projects are in the form of
greenfield and expansion projects prospecting for reserves of base metals and oil. The study also
cited the lack of political stability and unavailability of skilled workers as main reasons for low
performance of investment in the manufacturing sector in Africa.
FDI inflows is also considered as the largest source of external finance for developing and least
developed countries where insufficient finance constitutes a bottleneck for development.
According to UNCTAD 30 39 per cent of incoming finance in developing countries and less than
25 per cent of incoming finance in LDCs is fromFDI. Global foreign direct investment (FDI) flows
which hovered around 1.3 to 1.4 in the aftermath of global crisis, increased to around 1.9 trillion
USD in 2015-2016 period. However global FDI fell by 23.4 percent to 1.4 trillion USD in 2017.
However, global foreign direct investment (FDI) flows slid by 13% in 2018, to US$1.3 trillion
from $1.5 trillion the previous year – the third consecutive annual decline, according to
UNCTAD’ 1.The contraction was largely precipitated by United
States multinational enterprises (MNEs) repatriating earnings from abroad, making use of tax
reforms introduced by the country in 2017, designed for that purpose. Hardest hit by the
earnings repatriation were developed countries, where flows fell by a quarter to $557 billion -
levels last seen in 2004.
Figure 57 illustrates the global FDI inflows and shares of developing and developed countries
versus OIC countries. The figure reveals that the developed countries continue to get the largest
recipient of FDI with a share of 54 per cent in global FDI inflows while the share of developing
30 World Investment Report,2018
3
“FDI Inflows are inadequate
for export diversification
in many OIC Countries”