The Geography of International Investment

Much foreign direct investment is between high-income countries, but investment in some developing and transition regions, while still modest, grew rapidly in the 1990s. Adjusting for market size, much investment stays close to home; adjusting for...

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Bibliographic Details
Main Authors:	Shatz, Howard J., Venables, Anthony J.
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	BORDER MERGERS CAPITAL EXPENDITURES CLASSICAL TRADE THEORY COMMODITY TRADE COMPETITIVE POSITION CONSTANT RETURNS TO SCALE COST SAVINGS DEVELOPED COUNTRIES DIFFERENTIATED PRODUCTS ECONOMIC ACTIVITY ECONOMIC ANALYSIS ECONOMIC EXCHANGE ECONOMIC GEOGRAPHY ECONOMIC INTEGRATION ECONOMIC SIZE ECONOMIES OF SCALE ELASTICITY ELECTRONICS INDUSTRY EMPIRICAL STUDIES EQUILIBRIUM EXPENDITURES EXPORTERS EXPORTS EXTERNALITIES FACTOR ENDOWMENTS FACTOR PRICE FACTORS OF PRODUCTION FDI FINAL GOODS FIXED COSTS FOREIGN AFFILIATES FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN MARKET FOREIGN MARKETS FREE TRADE FREE TRADE AREA FREE TRADE IN GOODS GDP GROSS OUTPUT HOST COUNTRIES HOST COUNTRY HOST ECONOMIES IMPORTS INCOME INCOME COUNTRIES INCREASING RETURNS INCREASING RETURNS TO SCALE INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INDUSTRIALIZATION INPUT PRICES INTERMEDIATE GOODS INTERNATIONAL INVESTMENT INTERNATIONAL PRODUCTION INVESTMENT ACTIVITY INVESTMENT DECISIONS INVESTMENT FLOWS KNOWLEDGE SPILLOVERS LEGAL FRAMEWORK LOCAL FIRMS LOCAL MARKET LOCAL MARKETS LOCAL PRODUCTION LOW TRADE LOW TRADE BARRIERS MARGINAL COST MARGINAL COSTS MARKET ACCESS MARKET ENTRY MARKET SIZE MARKET STRUCTURE MERGERS MULTINATIONAL CORPORATIONS MULTINATIONAL FIRMS PATTERN OF TRADE PRICE DIFFERENCES PRODUCERS PRODUCTION ACTIVITIES PRODUCTION COSTS PRODUCTION NETWORKS PRODUCTION PROCESS QUANTITATIVE RESTRICTIONS RETAINED EARNINGS SAVINGS SCALE ECONOMIES TAX RATES TAX SYSTEMS TIME SERIES TRADE BARRIERS TRADE CREATING TRADE DATA TRADE FLOWS TRADE OPENNESS TRADE THEORY TRADE VOLUMES TRANSITION COUNTRIES TRANSITION ECONOMIES TRANSPORT COSTS TRANSPORT EQUIPMENT VARIABLE COSTS WAGES
Online Access:	http://documents.worldbank.org/curated/en/2000/05/693310/geography-international-investment http://hdl.handle.net/10986/18843

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Summary:	Much foreign direct investment is between high-income countries, but investment in some developing and transition regions, while still modest, grew rapidly in the 1990s. Adjusting for market size, much investment stays close to home; adjusting for distance, much heads toward the countries with the biggest markets. Foreign direct investment is more geographically concentrated than either exports, or production. Thus, U.S. affiliate production in Europe, is 7 times US exports to Europe; that ratio drops to 4 for all industrial countries, and to 1.6 for developing countries. Multinational activity in high-income countries is overwhelmingly horizontal, involving production for sale to the host country market. In developing countries, a greater proportion of multinational activity is "vertical", involving manufacturing at intermediate stages of production. Thus, only four percent of US affiliate production in the European Union (EU) is sold back to the United States, whereas for developing countries, the figure is eighteen percent, rising to forty percent for Mexico. Similarly, less than ten percent of Japan's affiliate production in the EU is sold back to Japan, compared with more than twenty percent in developing countries. In models of horizontal activity, the decision to go multinational, is a tradeoff between the additional fixed costs involved in setting up a new plant, and the savings in variable costs (transport costs, and tariffs) on exports. In models of vertical activity, direct investment is motivated by differences in factor prices) and discourage it (by making trade between headquarters , and an affiliate more expensive). The major outward investors carry out much horizontal investment in large markets. For US investors, this means Europe, especially the United Kingdom; for Japan and Europe, it means the United States. Most EU investments, however, stay within the EU. The major outward investors carry out much of their vertical investment closer to home: the United States, in Mexico; the EU, in Central and Eastern Europe; Japan, in Asia.

The Geography of International Investment

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