Foreign Direct Investment (FDI)

Theory history

Before Stephen Hymer's seminal 1960 work, no theory dealt specifically with FDI. Hymer took the issue of control as his axis, distinguished mere portfolio investment from direct investment, and argued that FDI is not necessarily a movement of funds from the home to the host country: it can be financed through host-country loans, or through equity payments for patents, technology and machinery. His framework influenced the later OLI theory of Dunning and Pitelis and the resource-based and evolutionary theories of the 1990s.

Types and distinctions

From the investor perspective, FDI divides into horizontal FDI (a multinational duplicating its home-country industry chain in the destination country to produce similar goods), vertical FDI (backward, to exploit natural resources, or forward, to acquire distribution outlets), and conglomerate FDI, a combination of the two. Platform FDI is investment from a source country into a destination country for the purpose of exporting to a third country. From the destination-country perspective, it divides into import-substituting, export-increasing and government-initiated FDI. It may be undertaken by incorporating a wholly owned subsidiary, acquiring shares in an associated enterprise, merger or acquisition of an unrelated enterprise, or an equity joint venture. The 'stock of FDI' is the cumulative net (outward minus inward) volume for a period.

Capital scale and employment

The cumulative FDI position in the United States was $5.86 trillion on a historical-cost basis at end-2025, up $266.0 billion from 2024. By country of foreign parent the largest positions were Japan ($776.3bn), the Netherlands ($751.8bn), Canada ($747.3bn) and the UK ($738.3bn), with manufacturing accounting for 42.8% ($2.51 trillion). White House data reported in 2011 found 5.7 million workers employed at US facilities highly dependent on foreign direct investors, about 13% of the American manufacturing workforce, with average pay around $70,000, over 30% above the average across the entire US workforce. This is an example of host-economy integration, and should be examined alongside critical accounts rather than presented as an unqualified benefit.

A dependency-theory reading

Dependency theory holds that raw materials, labour, capital and surplus value flow from a poor periphery to a wealthy industrial core, enriching the latter at the expense of the former, and that world production and trade are organised asymmetrically to extract surplus from dependent nations. Marxist dependency theory, notably that of Ruy Mauro Marini, located the root of underdevelopment not in industrial backwardness as such but in how Latin America was incorporated into the world market through colonisation. This view supplies an anti-imperialist reading of FDI to set against mainstream productivity and employment claims.

Example: Vietnam and trade rerouting

After the 2018-19 tariffs, US imports from China declined sharply while imports from Vietnam tripled by 2025. Chinese FDI into Vietnam climbed markedly after the tariffs, breaking with its pre-tariff trend, and the number of Chinese-owned firms more than doubled between 2018 and 2023, rising from 9% to 15% of all foreign-owned firms in Vietnam. According to analysis by the US Federal Reserve, the share of Vietnam's exports to the US attributable to Chinese FDI firms rose from 11% in 2018-19 to 25% in 2020-2023, while the share of domestic firms fell from 33% to 23%. Not only Chinese firms but also non-Chinese firms previously operating in China shifted production to Vietnam in response to the tariffs. The Fed concludes that the effectiveness of US tariff policy aimed at reducing dependence on China may be attenuated when production is relocated across borders through FDI while supply-chain linkages to China remain intact; Vietnamese imports from China did indeed rise disproportionately during Vietnam's export boom.

The scale of rerouting, however, depends heavily on measurement. Firm-level measures, which better capture tariff evasion, are far smaller than product-level measures: in 2021, 16.5% of Vietnamese exports to the US were product-level rerouting versus only 1.7% at the firm level (about $15.9bn versus $1.6bn). Chinese-owned firms in Vietnam drove the growth in firm-level rerouting, their number rising 314% from 2018 to 2021. An average tariff increase of 12.48% raised product-level rerouting by 5.9 percentage points and firm-level rerouting by 0.22 points. Project-level data show that South Korea had long been the largest source of FDI into Vietnam, but after the tariffs China (including Hong Kong) emerged as the largest source of manufacturing FDI from 2018 onward in the sectors most exposed to US tariffs.

Vietnam's FDI inflows in 2025 exceeded $38.4 billion in newly registered capital, up 0.5% year on year, with disbursed FDI estimated at $27.6 billion, a 9% increase and the highest in five years; manufacturing and processing took 56.5% ($9.8bn) of newly registered capital. Singapore was the largest new-project investor ($4.8bn, 27.9%), followed by China ($3.6bn, 21.0%), Hong Kong, Japan and Sweden. In the same year Vietnam's total trade exceeded $930 billion with a surplus of about $20 billion, but the domestic sector ran a $29.4 billion trade deficit while the foreign-invested sector posted a surplus of nearly $49.5 billion. Foreign-invested enterprises accounted for 77.3% of total exports, shipping $367.1 billion (up 26.1% year on year), while domestic enterprises exported $108 billion (22.7%, down 6.1%). This illustrates a structure in which the external balance depends on foreign capital.

Example: China

FDI in China largely began in the late 1970s with Deng Xiaoping's reform and opening-up policies. In 2003 China became the largest recipient of FDI, topping the United States, and it adopted a Foreign Investment Law in 2020. From 1992 until at least 2023 the United States and China were the top two FDI destinations. China's FDI dropped to a 30-year low in 2024, attributed to anti-espionage crackdowns and rising sanctions in industries such as semiconductors. A 2010 meta-analysis found that foreign investment robustly increases local productivity growth in developing and transition countries, a contested claim to present alongside critical and dependency-theory accounts that emphasise surplus extraction. FDI flows are cyclical and policy-sensitive: UNCTAD's World Investment Report 2024 recorded that global FDI flows declined in 2023 amid investor uncertainty, economic fracturing, tighter financial conditions and depressed M&A and project finance.