Money Begets Money

What attracts foreign direct investment?

Q1.

Does money follow laws of fluid dynamics?

Money doesn't seem to flow from high to low. This seems particularly true when looking at foreign direct investment (FDI) movements across globe.

World Map of FDI Inflows in 2016 (USD Millions)

FDI Inflows by Country Groups in 2016

The map and the chart above clearly show that richer countries attract more FDI than developing countries.

Advanced economies account for 59% of the global FDI inflows.

The FDI inflows to developing countries has indeed decreased, compared to 2015.

It's more challenging for developing countries to attract FDI inflows.

Q2.

Money attracts more money?

So what happens to the FDI of a poor country when it becomes rich? Let's take a look at Mexico.

FDI of Mexico (1982-2016)

GDP of Mexico (1982-2016)

Mexico's FDI has grown significantly over the last two decades when its economy took a sharp increase in GDP.

The correlation between GDP and FDI inflows for Mexico during the time was 92%.

In 2013 when public energy enterprise was privatized, the FDI took a big jump.

Lack of investment opportunities is a greater obstacle for developing countries to grow.

Correlation is high between GDP and FDI.

Q3.

Where did the money go?

Click on the following link to see which sectors in the Mexican economy received the most investment from outside the country in 2012.

Mexico's FDI Broken Down by Sector (2012)

The above graphic provides a snapshot of what sectors received the most FDI in Mexico in 2012. There are a couple observations to be gleaned from this graphic:

The notable absence of investments in energy due to the fact that energy markets were closed to foreign investors. In 2013, they opened up, however, detailed data for that year has not yet been made available.

Manufacturing served as the largest sector receiving FDI, aided in large part by the trade deal known as the North American Free Trade Agreement (NAFTA), which makes Mexico an attractive and safe destination for investors.

FDI was also high in construction and mining industries, suggesting a fairly strong labor force.

FDI in middle-income nations may be aided by trade agreements and a strong labor force.

FDI predominantly flows to high-income nations; however, this trend is changing as middle-income nations open up their markets to private capital.

Sources for DATA: IMF DataMapper

Sources for D3:

Prepared by Conor Sanchez

DaYoung Sim

Dawei Wang