The spatial clustering of foreign direct investment (FDI) is clearly visible in the location of multinationals investing in the United States, the European Union, China, and other regions.
As mentioned earlier, a key change in the world economy has been in the structures of international production of goods and services, as multinational enterprises (MNEs) engage in varieties of foreign direct investment (FDI) with managerial influence over foreign-based productive enterprises. Drawing on both the work of earlier theory in international business and new developments in trade theory, economists have incorporated MNEs and FDI into the theory and practice of international economics. At the same time, issues such as outsourcing and offshoring have attracted public attention and increased political interest in this area. This has occurred both in high-income countries, where outsourcing has moved to white-collar as well as blue-collar occupation categories, and in developing countries,where newincome-generating possibilities have emerged outside of manufacturing. When deciding to become a MNE, a firm chooses the mode that maximizes its profits, typically considering such options as exporting and licensing a local firm (outsourcing/offshoring) as alternatives. Consequently, models usually revolve around the trade-offs between foreign direct investment andat least one alternative. In these models, the location of production differs between FDI and exporting, and whether transactions occur within the firm differs between FDI and licensing. Like trade, much foreign direct investment occurs between similar, developed countries and is often two-way, but foreign direct investment has grownevenmore rapidly than trade. A large share of world trade (about 30 percent) occurs within firms and is known as intrafirm trade. Multinational enterprises tend to arise in industries with large research and development expenditures relative to sales, significant product differentiation, and substantial intangible assets such as intellectual property and brand value. FDI is mostly horizontal with MNEs creating local production facilities in each country and selling within each country or region rather than vertical, in which MNEs allocate production processes across countries and ship the products back home. Our coverage of international production begins with issues of theory, from long-standing pursuits such as location theory to emerging issues of importance such as FDI under monopolistic competition and oligopoly. These more formal considerations are again supplemented with a set of entries on basic concepts, from foreign direct investment and multinational enterprises themselves to intangible assets and technology licensing. Coverage of policy instruments includes entries on domestic content requirements, foreign equity restrictions, and trade-related investmentmeasuresmore broadly. We also cover specific analytic tools such as market size and exchange rates as they relate to FDI. Finally, the book addresses several special issues related to FDI, such as foreign direct investment and export performance and foreign direct investment and labor markets.