This slide shows where FDI sits within the universe of financial flows into and out of Developing Asia (1999) and demonstrates why we chose to focus on just direct investment as we looked ahead to the region’s economic future. First, let’s break down the numbers:

We chose to focus on FDI because it is usually more strategic and long term in nature, typically involving transnational corporations or small and medium-sized companies setting up overseas operations. Whereas portfolio investments and loans are far more volatile, FDI reflects the global investment community’s appreciation of the region over the long haul. Also, unlike loans, stocks, or foreign aid, FDI involves actual ownership, meaning it is a far less liquid form of investment suggesting cross-border economic integration.

Here we look more closely at the relative importance of public sector foreign aid (ODA, or Official Developmental Aid from the Organization of Economic Cooperation and Development, or OECD) versus FDI for emerging markets.

During the Cold War, ODA substantially outpaced FDI as a source of external financing for developing economies. Even as late as 1990, ODA flows were roughly double that of FDI. In that economic paradigm, IFIs like the World Bank and bilateral donor agencies like USAID were major players in deciding which developing economies would receive the most attention.

This paradigm was turned on its head quite rapidly over the course of the 1990s, suggesting a very different, or new rule set regarding external financing of emerging markets. By the end of the decade, FDI was routinely outpacing ODA by a five-fold margin, effectively pushing the IFIs and bilateral agencies to the margins of the developing world—or to the truly undeveloped economies. Meanwhile, transnational corporations (TNCs) became the great arbiters of the designation "emerging," for TNC-fueled direct investment now represents the largest component of external resource flows to developing countries. According to the United Nations, the world’s average annual FDI outflow for the late 1990s (1995-99) was four times as large than a decade earlier (1985-89).* Simply put, FDI is now one of the most powerful variables of the global economy.

In this slide we explain why we chose to focus on FDI stock (i.e., the accumulated total) versus annual flow.

The chart above compares the net flow of portfolio investments, loans, and FDI into Developing Asia over the 1990s. Looking at stock investment and loans, it is not hard to spot the Asian Flu of the late 1990s, as both lines suffered significant—and in the case of loans, severe—net outflows following its onset.

But looking at the annual flow of FDI, it is not at all apparent that any financial crisis occurred in the region in the 1990s. So while Developing Asia experienced some genuine volatility in both stocks and loans, FDI flows expanded smoothly across most of the decade. This means that at the end of the 1990s, an enormous accumulation of FDI had been achieved by Developing Asia. Unlike loans that have to be paid off at some point, or stock market flows that reverse at a moment’s notice, FDI represents a long term stake—something to be protected by the foreign firm that has put its money on the line.

We chose to focus on FDI stock because we think the accumulation of such direct investment in Asia’s economic future represents that region’s genuine integration into the global economy—a process so huge and unprecedented that it generates new rules for globalization as a whole. Simply put, by accepting long term foreign investments, Asia puts itself on a pathway of accommodating its particular economic rule set to that of the larger international economic community, represented here by Europe and the U.S.

Now let’s look at the distribution of global FDI stocks by source (outward) and target (inward) regions.

Looking first at the inward stock, we get a sense of where TNCs like to invest, or which countries do the best job of attracting outside investors. What the world is really saying to your country when it invests directly in your economy is this: "We like your future market and we want to be a more permanent part of your success." In short, it is a seal of approval or a sign of long term confidence in a country’s internal rule set.

As the numbers above make clear, four regions of the world attract the vast majority of FDI (just over 90 percent):

• Europe (39%)
• North America (25%)
• South/East/Southeast Asia (17%)
• South America (10%).

Who are the great sources of that FDI? Here we look at outward stock totals and see that only three regions register in the double digits:

• Europe (53%)
• North America (28%)
• South/East/Southest Asia (15%).

What this charts makes abundantly clear is this: if Asia has to turn to the former Soviet bloc and the Middle East for energy, it has to turn to Europe and North America for the financial resources to make it happen.