Having completed our cursory tour of the FDI landscape, let’s turn our attention to the unfolding of the Here and Now, which we define as the inevitable expansion of the current Triad of global FDI holdings (i.e., United States, European Union, Japan) into a downstream expression which we dub the future Quad (namely, the Triad + Developing Asia).

The concept of the Triad comes from UNCTAD’s 1999 World Investment Report, which described the concentration of global FDI stock in the U.S., Western Europe, and Japan as constituting a special, longstanding stronghold in the global financial community.*

* See UNCTAD, World Investment Report 1999: Foreign Direct Investment and the Challenge of Development (New York: United Nations, 1999), p. 22.

In this and subsequent calculations, we will include the European Union’s intra-EU investments because, for the foreseeable future, the EU remains an entity far closer to a multinational economic union than a federated state like the United States. This approach also (frankly) allows us to use UNCTAD’s FDI data without having to constantly estimate the intra-EU share.

Proceeding in this manner, we estimate the global FDI stock at $5.7 trillion as of October 2000. If the Triad holds four-fifths of that total, they control an aggregate pool of $4.6 trillion. Using the relative shares established by Snapshot A (EU = 55%, U.S. = 35%, Japan = 10%), we thereby estimate each leg’s holdings as follows:

It is interesting to note that the Triad’s members each have their own little financial sphere of influence with regard to FDI. UNCTAD’s World Investment Report 1999 (p. 22) identified those countries in which the Triad "dominates," meaning those economies in which one of the Triad’s members accounts for "at least 30 percent of total FDI inflows during a three-year period."

Not surprisingly, much like security-based spheres of influence, these financial variants are based on geographic proximity and/or past colonial relationships (with one notable exception noted below).

The United States’ financial sphere of influence is centered almost exclusively on Latin America:

The EU’s sphere of influence is clearly bifurcated between regional neighbors and former colonies:

Japan’s sphere of influence is solely concentrated in Southeast Asia, meaning both neighbors and, in several instances, former WWII-era occupied territories:

In essence, just as the containment triad represented a political reach extending beyond its immediate membership, its financial counterpart represents an economic whole that’s larger than the sum of its immediate parts.

Now we turn to Developing Asia and what it brings to the table in terms of FDI outward stock.

Developing Asia’s current pool of FDI outward stock is roughly equivalent to that of Japan, or $400 billion. Using the latest UNCTAD data, we estimate that roughly nine-tenths of that total has been invested within the region itself, leaving only a tenth for distribution to the outside world. Of that 10 percent, the large majority goes to the Triad, and only a tiny fraction to emerging markets outside of Asia.

In effect, Developing Asia pretty much looks out for itself in terms of direct investment, and does not stray very far from home. That tendency, in combination with the substantial FDI provided by Japan, means that Developing Asia has limited—up to now—its reliance on Western investors to roughly one-third of its total FDI requirements. As developing regions go, this has been a relatively closed system in terms of Western influence.

As a theme for the Foreign Direct Investment event, we proposed the emergence of a Quad by 2010, meaning:

• European Union (with any new members unlikely to alter its aggregate FDI total in any significant manner)
• North American Free Trade Area (United States, Mexico, Canada)
• Japan
• Developing Asia.

This expansion could be viewed as the next great step in a sort of post-containment strategy designed to:

• Bring Asia into the now-Western dominated community of developed economies
• By doing so, effectively rule out great power warfare in Asia in the same way it has been ruled out among the Triad members.

Such a Quad would be a formidable concentration of economic might, encompassing (as it does today) roughly 85 percent of the global GDP and 90 percent of the global FDI stock.* The individual shares of the Quad’s total FDI pool would be as follows:

• European Union, 55 percent (including its intra-union FDI)
• NAFTA, 30 percent (including its intra-area FDI)
• Japan, roughly 7 to 8 percent
• Developing Asia, roughly 7 to 8 percent (including its intra-regional FDI).

In many ways, the Quad must emerge in practice, if not in form, for Developing Asia to attract the out-of-region FDI it needs over the coming generation.

Having presented the notions of the Triad and Quad, we can now explain our somewhat cryptic, pseudo-mathematical decision event "formula":

• 3 refers to the Triad of the United States, the European Union and Japan, or what we like to call the financial embodiment of the Cold War strategy of containment, as well as the three main pillars of Globalization II.
• + x(Asia) refers to our proximate thesis that Developing Asia must turn increasingly to these three main sources of foreign direct investment over the coming years if their ambitious plans for economic development and energy consumption are to be realized.
• = Triad²? refers to our ultimate thesis that eventually Developing Asia will combine with the current FDI Triad to form a recognized Quad.

In terms of global financial architecture, this process is arguably the most important dynamic the world will witness over the coming generation. Naturally, new rule sets (e.g., politically codified expressions of consensus economic tenets) will be required for this process to unfold, but new rule sets will also be a downstream effect.

Where security fits in this argument is a complex question. Clearly, security relations between the legs of the Triad are very strong, forming the deep trust that allows these FDI bonds to form. Currently, many political-military analysts and decision makers in the United States are predicting that Asia will be the focus of interstate conflict in the coming decades. For this Quad to come into being, improved security relations within Developing Asia, and among all four legs of the quartet, is a minimum requirement. If the Quad is achieved in any real fashion, it will reduce the potential for great power war both within Asia and between Asia and the outside world to a considerable degree.

In effect, we argue that the primary strategic goal of the West should be to foster the security and economic integration of Developing Asia to the extent that it effectively joins a developed North that is committed to the long-term integration of free markets and democratic societies.

Having laid our vision for the progressive unfolding of the Here and Now, we now explore the dialectic tension between the amount of money the world has available for foreign direct investment and that share of The Pie that actually makes its way to the countries most in need—the so-called emerging markets. In this section, we asked our participants to Do the Math in a two-fold sense:

• Tell us how how much money the world will likely make available for cross-regional FDI flows over the coming decade
• Help us understand how much of that global pool would end up in Developing Asia, which in effect allows us to plot the strengthening and weakening of existing financial relationships both within Asia and between Asia and the outside world.

Before we took any votes on the subject, we presented participants with the following information regarding the explosive growth of global FDI outward stock over the past 20 years:

• In 1980, the global FDI outward stock was approximately half a trillion dollars. This amount represented 5 percent of the global gross domestic product of approximately $10 trillion.
• Over the 1980s, FDI flows averaged $120 billion a year, increasing the global FDI outward stock in 1990 to roughly $1.7 trillion, or 9 percent of the global GDP of $19 trillion.
• Over the 1990s, FDI flows averaged $400 billion a year, bringing the global FDI outward stock total in October 2000 to approximately $5.7 trillion. This amount represents 18 percent of the current global GDP of roughly $31-32 trillion.

In sum, global FDI outward stock has essentially tripled in both of the last two decades, or a ten-fold increase in all from 1980 to 2000. The FDI stock’s percentage share of the global GDP has basically doubled in both of the last two decades, or a 2 to 3 fold increase in total from 1980 to 2000. Annual flows of FDI has increased 10-fold from 1980 to 2000.

The total picture presented by this data suggests that FDI has become a profoundly important variable in the functioning of the global economy, both as an absolute amount and when measured against the world’s economic growth. For example, global outward FDI flows averaged 5 percent of gross fixed capital formation at the Cold War’s end, but rose to roughly 12 percent by 1998.

What we proposed for the next ten years was that the twin patterns (i.e., rough tripling in absolute stock and rough doubling of percentage share of global GDP every decade) would extend themselves one more time. If this were to occur, the global FDI outward stock in 2010 would be approximately $15 trillion, or 36 to 38 percent of expected global GDP. The annual average flow of FDI required to achieve this growth is approximately $900 billion. For comparison’s sake, the 1999 FDI flow was $800 billion, and in 2000 it was $1.1 trillion. The Economist predicts a drop to roughly $800 billion in 2001 (24 February 2001, p. 80).

This slide lays out our four-step process for Doing the Math on the likely growth of FDI inward stock for Developing Asia by 2010:

1. Our participants voted on the global total of FDI outward stock for the year 2010. Noting that the current global total was just under $6 trillion, we gave the participants a range of 5 to 15 trillion US dollars (constant), instructing them to pick a whole number.
2. Having then determined the Quad’s share of the global total (using the previously established estimate of 90 percent), our participants voted on the percentage share of the Quad’s total that would remain within the quartet, i.e., invested in one another.
3. Having established how much of the global total would be kept within the Quad, our participants next voted on the likely distribution of the Quad’s pool among its four members.
4. Finally, we determined the likely inward stock of Developing Asia’s FDI for the year 2010 by adding up the estimated FDI stock totals flowing from:

• United States to Developing Asia
• European Union to Developing Asia
• Japan to Developing Asia
• Developing Asia to itself.

The point of this effort was not to come up with the most accurate forecast of FDI flows, but to force the participants to confront their own expectations about the future functioning of the global economy and their assumptions regarding the ability of the West to pull Asia into a closer, more integrated financial relationship.

We begin the process with the first vote on global FDI outward stock in 2010.

Our participants voted for a global FDI stock of $11 trillion, or a rough doubling of the current (October 2000) global stock. Considering the decline of global equity markets since the decision event last fall, this prediction may strike some as still unduly ambitious, despite the resistance of our participants to embrace the notion of another tripling of the stock amount.

Let’s put this vote in some perspective. First off, global FDI annual flows could drop to roughly $500 to 550 billion and still reach the $11 trillion mark, meaning annual flows could average roughly half of 2000’s record flow of $1.1 trillion. So, in many ways, this vote represented a certain pessimism about the future, despite the prediction of a doubling effect.

Secondly, a 2010 FDI stock total of $11 trillion would represent just over a quarter of the predicted global GDP of $41 to 42 trillion—far from a doubling of today’s percentage share of 18 percent.

Finally, as a point of comparison,we note that the Economist Intelligence Unit (EIU) has just published a report (February 2001), entitled World Investment Prospects, which they claim is the first detailed global forecast of FDI flows. In this report, the EIU predicts a global FDI outward stock total of $10 trillion by the year 2005. This would equate to an average annual flow of $900 billion, or a flow roughly 60 percent heavier than what our group of participants predicted.

If the Quad, as we predict, holds 90 percent of the global FDI stock in 2010, then its combined total would be just under $10 trillion. The totals for each leg of the Quad would be as follows:

• NAFTA, 30 percent or $3.0 trillion
• EU, 55 percent or $5.5 trillion
• Japan, 7.5 percent or $750 billion
• Developing Asia, 7.5 percent or $750 billion.

Having voted on the size of the global FDI "pie" for the year 2010, we next asked our participants to determine the likely share of the Quad’s total FDI outward stock that would remain within the quartet. In effect, we asked them to think ahead to how much the Quad members would choose to concentrate their FDI in one another vice the rest of the world.

In preparation for this vote, we informed participants that the Triad members currently keep approximately two-thirds of their pooled FDI outward stock within the Triad itself (i.e., invested in one another and, in the case of the EU, within the Union itself).

We also reminded participants that, on average, Developing Asia states invest upwards of 90 percent of their outward FDI flows in one another.

In this vote, we asked participants to make a number of simultaneous decisions:

• How the current distribution within the Triad’s three legs would change with the addition of Developing Asia
• How much Developing Asia might redirect its FDI outward toward other Quad members versus how much it would likely keep for itself
• How much remaining FDI each member of the Quad would employ outside the quartet, or to the rest of the world (e.g., Latin America, former Soviet bloc, Southwest Asia, Africa).
• Accounting for Mexico and Canada in NAFTA’s total.

In this second vote, our participants voted to keep roughly 80 percent of the Quad’s predicted 2010 FDI stock pool of $10 trillion within the quartet, or approximately $8 trillion. This represents a higher percentage of concentration than that currently seen within the Triad, but that only makes sense given the tremendous economic opportunity represented by Developing Asia over the coming decade, and the fact that Developing Asia adds roughly 4 billion people to the mix.

After deciding how much of the Quad’s FDI total will remain within the quartet, we asked the participants to decide how the pool would likely be distributed among the four legs over the next decade. In effect, we asked them to think ahead to how much the Quad members would choose to concentrate their FDI in Developing Asia vice the other legs—and the rest of the world.

In preparation for the third vote, we informed participants of the current breakdown in FDI stock percentages for each leg of the Triad:

• The strongest bond obviously exists between Europe and the United States, as both direct over 90 percent of their in-Triad FDI total to one another.
• In contrast, neither the EU nor the United States seems able to achieve much direct investment in Japan, which, by all descriptions, throws up a lot of formal and informal barriers to inward FDI flows.
• Japan’s outward FDI is the most evenly distributed within the Triad, with approximately two- thirds going to the U.S. and one-third to the European Union.

In many ways, it is fair to describe the Triad as an incredibly strong dyad with a third leg that clings to both.

Finally, we reminded our participants that Developing Asia currently directs only a small fraction of its FDI outward flows to developed economies.

The one thing we did not provide the participants were current estimates of each Triad members FDI flows to Developing Asia, preferring to let them "guesstimate" those flows on their own.

This last vote was the most complex of the three, but in many ways, all we were asking the participants to do was to tell us which dyad relationships within the proposed Quad would grow stronger in terms of FDI flows over the next decade and which would grow weaker.

Rather than present percentages here, we delineate which dyad relationships grow stronger (measured against today’s estimated percentage shares) over time and which grow weaker.

For NAFTA, the participants voted for stronger dyads with all three Quad partners, meaning less FDI available for the rest of the world. The same basic judgment was offered for the European Union.

In Japan’s case, the group voted for a stronger FDI relationship with only the EU, envisioning a smaller percentage of Japan’s FDI flowing into North America (presumably because it is hard to imagine us investing any less in Japan given how little we do today) and Developing Asia. As a result, a greater share of Japanese funds would be made available for the world outside the Quad (e.g., former Soviet bloc, Mideast, Latin America).

As for Developing Asia, the group basically predicted an opening up of the region’s heretofore "closed" FDI loop, meaning far higher percentage flows to all other Quad legs, as well as to the world outside.

We believe we can draw three basic conclusions from this vote:

• Even a strong reorientation of Western investment toward Developing Asia is unlikely to weaken the already formidable trans-Atlantic FDI bond.
• A strong reorientation of U.S. investment toward Developing Asia may weaken some of our financial connectivity with Japan, in large part because they do not yet allow us into their economy in a meaningful way.
• A strong reorientation of Western investment toward Developing Asia is likely to free up Asia FDI for redirection to other parts of the world.

In sum, when the West invests in Asia it helps to integrate that region into the global economy on two levels: by tying the West closer to Asia and by tying Asia closer to the rest of the world.

Having completed our three "drill down" votes, we are now able to calculate our workshop’s estimate for the likely available inward stock of FDI in Developing Asia in the 2010 timeframe. This calculation is not presented as a "scientific forecast"—something better obtained from an industry group or The Economist Intelligence Unit—but rather as a bias-revealing vote by a cohort of experts covering the issue from political, economic and security angles.

A second point to remember about this calculation is the timing of the vote in relation to market trends. As of mid-October 2000, the market decline was already in full swing, although the full extent of the bear market was not yet in view. Accordingly, it is fair to say that this group vote was not taken by those still caught up in the so-called high-tech bubble of 1998-2000, nor by those unduly depressed by the markets’ rapid decline in the first half of 2001. Nonetheless, this entire voting scheme must be viewed as nothing more than the collective opinion of some smart people one morning in the fall of 2000.

Using our "drill down" voting process, we finally arrive at the following estimated figures for inward FDI stock available to Developing Asia in the year 2010.

Not surprisingly, our participants predicted that Developing Asia itself would provide the largest share of FDI, or between 35 to 40 percent of the total amount of $1.45 trillion. NAFTA would provide the second largest amount at just over a third of a trillion, then the EU with just over a quarter. Japan and the rest of the world would combine to provide approximately $300 billion, or one-fifth.

How do we interpret this combined estimated total of $1.45 trillion FDI inward stock for Developing Asia in 2010?

First, we note that Developing Asia typically accounts for roughly half of the FDI flows into Emerging Markets. So if we double $1.45 trillion to get a $2.9 trillion total for all Emerging Markets, that would represent a 26 percent share of the global total ($11T) the group voted for previously. Such a percentage would be in line with historical averages. According to UNCTAD, Emerging Markets have typically garnered one-quarter of global FDI flows over the years.

Second, we will cite the particular vote of Dr. Gary Hufbauer of the Institute of International Economics, who recently completed a major study on world capital markets.* Hufbauer’s 2010 estimate for all Emerging Markets was $2.9 trillion, or 24 percent of his global FDI stock vote of $12 trillion.

In sum, we believe the participants’ votes are defensible both in terms of fitting within historical ranges and corresponding reasonably well to mainstream economic forecasts. Again, compared to the Economist Intelligence Unit, our group was fairly conservative, but we only expected that since we brought together a fairly wide range of expertise to discuss both future potential and future problems.

By any fair estimate, our vote was somewhat rigged. After all, our starting premise for the workshop was Developing Asia’s need to attract more FDI from the West over the coming years to accomplish its ambitious growth targets. So it’s no surprise that our voting process indicated that experts expect more Western investment in Asia in the future.

The question we were really searching to answer here was: How much might the West’s relative financial influence in Developing Asia increase? In effect, if Asia can continue to self-finance to a large degree through intra-Asian FDI, state-based financing, internal savings, and trade surpluses, then the West’s ability to draw Asia toward a single global rule set is limited.

What do we then draw from this session?

• Right now we estimate that the West has cumulatively provided just under a quarter of Developing Asia’s inward FDI stock, compared to the two-thirds that Asian themselves (Japan included) have supplied.
• Based on this voting process, we believe Developing Asia is transitioning to a new reality in which extra-regional providers will come to dominate the FDI market.
• Over the next decade or so, we foresee the West’s position in Developing Asia’s inward FDI stock roughly doubling from its current percentage share.
• While it would be naïve to equate a rough doubling of percentage share with a doubling of financial "influence," it does seem fair to say that the West’s economic influence in Asia will rise dramatically over the coming years as a result of further financial integration brought on by a combination of globalization and Developing Asia’s extraordinary need for foreign investment.

Of course, what cannot be extrapolated from this simple exercise is the answer to the eternal question about the chicken and the egg, which we paraphrase here: Does the West’s rising economic influence lead to the emergence of new rule sets in Asia or must new rule sets arise in Asia for the West’s economic influence to grow?

Where does this vote leave us following the great decline in equity markets in early 2001 and the resulting slowdown in the global economy? How much stock (pun intended) can we place in this sort of projection?

Again, we like to emphasize how modest our group’s projection actually turns out to be when compared to recent history.

Developing Asia ended the 20th Century with an inward FDI stock total of about three-quarters of a trillion dollars. To achieve a 2010 stock total of $1.45 trillion, the region would need to attract around $70 billion a year (counting both intra- and inter-regional flows). $70 billion equates to roughly the average inward flow of the mid-1990s, or substantially less than what poured in during the heyday of the high-tech bubble in stock markets at the very turn of the century.

During this voting process, we took time out at several occasions to ask participants to brainstorm reasons why they might be wrong in their collective guesstimate of $11 trillion in global FDI stock for 2010. This slide presents ten of the best arguments we heard about why there won’t be a larger FDI flow into Developing Asia over this decade.

The arguments can be grouped into four general camps:

• The 1990s were extraordinary, and past performance does not guarantee future results.
• There is a natural ceiling on FDI: at some point more mature market venues appear and investors will prefer them for their increased efficiency and ease
• The global economy is due for some breakdowns, crises, snafus.
• Developing Asia is simply ill-equipped to absorb all this investment without destabilizing outcomes.

Here we present the flip side arguments, or why there very well could be a bigger FDI flow into Developing Asia than we’re envisioning.

The arguments can likewise be grouped into four general camps:

• The global fundamentals are in good shape; this is just a necessary pause in the action.
• Transnational corporations are the big drivers here, and they see a big market they want to be part of (think about a middle class of perhaps a billion people!).
• If there is a natural ceiling on FDI, Asia is a long way away from it, given the immaturity of their financial markets.
• Asia is opening up and working on new rules, so the long term looks very solid.

By presenting these alternative analyses, we give you a sense of the range of opinions that came together in three, very particular votes. In short, we had a full complement of both bulls and bears.