The relationship between foreign direct investment (FDI) and international trade is central to globalisation. Both transactions play different economic roles but often complement each other.
Research from the OECD suggests that, until the mid-1980s, increased international trade led to higher levels of direct investment between countries. After this, however, the roles appeared to reverse, with data suggesting that FDI trends were heavily impacting trade.
For instance, inward FDI is widely considered to boost a country’s exports due to the transfer of technology and new products for export to international markets. In addition, FDI can provide its destination market with intangible resources that trade cannot, such as technological knowledge, skills and training.
Research also suggests that foreign investment is likely to increase imports into a destination country in the short term. For example, when a company establishes an overseas manufacturing facility, it may ship machinery and equipment when setting up the plant.
Both international trade and FDI face increasing criticism as a result of growing protectionism globally. In theory, inward FDI has the potential to harm a country’s export levels if the project involves the transfer of low-level technologies, solely targets the domestic market or hampers the growth of local exporting companies. Despite this, most experts agree that FDI and international trade align positively.
The world’s biggest trade and FDI players
As part of Investment Monitor’s analysis, we examined 54 locations that received 20 or more goods-based FDI projects in 2021. We then calculated the trade balance – the value of a country’s exports in goods in 2021 subtracted from its imports. In addition, we worked out an FDI balance for each country – the number of goods-based outbound FDI projects for a country minus the number of goods-based inbound FDI projects that overseas companies established in that country.
A trade surplus – when a country’s exports exceed its imports – indicates high demand for a country’s goods globally, which should create more jobs and stimulate economic growth.
With a trade balance of $677.9bn in 2021, China has the largest trade surplus in the world. The US is by far the leading importer of Chinese goods despite significant tensions between the two countries, followed by Hong Kong and Japan. Germany had the second-largest surplus of the countries analysed at $208.1bn, driven by exports of motor vehicles, machinery and chemical products.
At almost $200bn, Russia had the third-largest trade surplus in 2021, largely due to exports of mineral fuels. Following Russia’s invasion of Ukraine in early 2022, trade will be dramatically impacted given the raft of import and export sanctions implemented worldwide.
A trade deficit – when a country imports more than it exports – can have a negative effect, with a lower demand for goods making local currencies less valuable internationally. However, trade deficits are not inherently bad. The world’s largest economy – the US – also has the largest trade deficit globally. This can be attributed to a gap between domestic savings and total investment in the economy. The UK and India – the world’s fifth and sixth-largest economies, respectively, in 2021 – also operate in trade deficits.
Some of the largest FDI players globally operate in trade surpluses and deficits. Five of the top ten overall FDI destination countries in 2021 make the top ten trade deficit table (the US, UK, France, India and Spain).
Meanwhile, four of the world’s top FDI destinations are in the top trade surplus ranking – Germany, the United Arab Emirates (UAE), Australia and China. In addition, several of the top trade surplus countries are countries with high GDP per capita, such as Ireland, Norway and Qatar.
The countries with an FDI surplus (a nation that invests in more goods-focused FDI projects overseas than foreign companies create within their country) tend to be developed, service-based economies. Nine of the top ten countries by FDI surplus are developed nations, with China the only developing country.
The fact that service-based FDI has been excluded from our analysis in order to more accurately compare trade and FDI in goods is also likely to reduce the number of inward FDI projects attributed to service-based economies such as the US, Japan and Switzerland. In turn, this could increase the FDI surplus for these countries.
A country in an FDI deficit attracts more inbound goods-focused FDI projects than outbound. Similarly to trade, the FDI deficit is not necessarily negative with high inbound FDI often seen as a sign of economic strength.
In comparison to the FDI surplus top ten, the countries with the largest FDI deficits are generally more cost-effective locations. Apart from Spain, which ranks ninth, all the countries in the top ten by FDI deficit are developing nations. As goods-based investments are more likely to be manufacturing orientated, companies are more focused on investing in lower cost locations. Investors creating these projects are generally more cost sensitive as these operations tend to require more manpower than service-based activities.
How do the top FDI locations trade and invest globally?
In the chart below, we plotted the trade and FDI balances of the world’s top destination countries for goods-focused FDI. This then split the countries into four categories depending on whether they were net exporters, net importers, net outbound foreign investors or net inbound foreign investors.
Generally, the larger economies are further from the point of origin while the smaller economies tend to cluster around the centre of the chart.
Globally, by far the quadrant with the fewest countries is the top left – countries that are net importers and net outbound foreign investors (the countries that import more goods than they export and have more outbound than inbound goods-based FDI).
The most extreme example of this is the US, which operates in the largest trade deficit of all countries analysed and has the highest FDI surplus. The US imported $1.2trn more goods globally than it exported in 2021 and invested in 900 more goods-based FDI projects than its inbound investment levels. However, this does not mean that the US has a poor record for inward investment. Overall, the US was the leading destination for inbound goods-based FDI as well as the top outbound investing country.
US companies are known for innovation and are a key target for many foreign investment promotion agencies. The country also was the second-largest recipient of total goods and services greenfield FDI in 2021, just behind Germany. Even so, the US does underperform when it comes to inward investment given the size of its economy. This is illustrated by its low rank in Investment Monitor's Inward FDI Performance Index.
Another country that falls into this category is Japan, which historically punches below its weight when it comes to inbound FDI. The world’s third-largest economy is a major source country for FDI and is considered a leader in innovation and advanced technology but struggles to attract inward investment for a variety of reasons, including excessive red tape and an insular business environment.
On the other extreme of the trade balance is China, which is a net exporter and net outbound foreign investor. The country exported goods worth $677.9bn more than it imported in 2021 and Chinese companies established 99 more FDI projects overseas than foreign businesses created in China. China’s FDI surplus can also be attributed to Chinese companies favouring foreign mergers and acquisitions deals when it comes to investing abroad rather than greenfield FDI. Also, countries are weary of China’s investment intentions with many country governments tightening FDI regulations to ensure domestic security.
In addition, several highly innovative and developed countries fall within this category, including two other Asia-Pacific nations (Singapore and South Korea), as well as five European locations (Sweden, Switzerland, the Netherlands, Germany and Italy) and one country within the Americas (Canada).
Qatar is the one Middle East and North African country in this quadrant. Its trade surplus is set to increase further in 2022 driven by a surge in demand for its liquefied national gas exports from European countries looking to cut ties with their traditional supplier Russia. Qatar also experienced an increase in outbound FDI in 2021 largely due to multinational telecommunications company Ooredoo's fibre network infrastructure investments in Oman.
The net importer, net inbound FDI category was the most popular among the countries analysed, with 18 countries falling into this quadrant. India was the most extreme example, importing $175.6bn more goods than it exported in 2021 and receiving 163 more inbound than outbound FDI projects.
This category was particularly popular among European countries with 12 in this quadrant, including France, Turkey, Poland and Spain. In addition, four Americas countries (Costa Rica, Mexico, Dominican Republic and Colombia) were net importers and net inbound foreign investors.
The most extreme of the net exporter, net inbound FDI countries was Russia. Russia exported goods worth almost $200bn more than it imported in 2021, largely oil and gas, and attracted 50 more inbound FDI projects than outbound. As previously mentioned, trade will be heavily impacted by Russia’s invasion of Ukraine and inbound and outbound FDI are expected to drop dramatically in 2022.
Ireland, which had the fourth-largest trade surplus of the countries analysed, also slotted into this category. The country’s main exports were in pharmaceuticals and medical goods, which are also key sectors for inward investment. The country’s low corporate tax rate, business-friendly environment and lack of formal FDI regulations, coupled with relatively low domestic demand, make Ireland a powerhouse for exports and inbound FDI.
The net exporter, net inbound FDI quadrant was the most popular among Asia-Pacific countries, with six nations falling into this category, as well as South Africa, the only sub-Saharan African nation included in our analysis.
Of the 54 countries analysed, more than 70% operate in an FDI deficit, meaning they receive more goods-focused FDI projects than they invest in.
How do the top FDI players trade and invest regionally?
The way the top FDI players invest and trade can also vary when they operate within their source region.
When focusing on trade and investment in the Asia-Pacific region, five of the richer Asian countries fall into the net exporter and net outbound investor category (China, Japan, Singapore, South Korea and Australia). Two of these countries also move quadrants compared with the global analysis, with Japan previously operating as a net importer and Australia as a net inbound investor.
When it comes to European countries trading within their own region, there are countries that fall into each quadrant although the most popular is the net importer and net inbound investor category. The most extreme of these nations is France, which imports goods worth $146.7bn more than it exports from European countries. The country also attracts 56 more goods-focused FDI projects from European companies that French investors establish elsewhere in Europe.
In terms of the Americas, the two North American countries are the only net outbound investors. The US remains a net importer and Canada a net exporter compared with the global analysis. The rest of the countries within the Americas are net inbound investors with Chile and Mexico swapping quadrants when it comes to regional trade. Globally, Mexico is a net importer but within the Americas is a net exporter. Conversely, Chile is a net exporter globally and a net importer within its source region.
Globally, the only Middle East and North African country that was a net outbound investor was Qatar. However, at regional level, the UAE moves quadrants from a net inbound investor to net outbound while remaining a net exporter. Oman also changes from a net exporter to net importer when trading within its source region.
South Africa – the only sub-Saharan Africa country included in our analysis – is a net exporter and net inbound investor within its source region, which is the same way it operates globally. At a regional level, South Africa is one of only two countries that fall into this category alongside Russia.
Larger economies favour outbound FDI but vary when it comes to trade
Research from Investment Monitor shows that a larger economy is likely to invest more in goods-focused FDI abroad than foreign companies are to establish goods-based operations in their country. When looking at the top ten countries by largest GDP, eight were net outbound foreign investors, including the US, Germany, South Korea and Italy. Countries with an FDI surplus also tend to be service-based economies, with many finding it more cost-effective to invest in goods-focused operations abroad rather than domestically.
However, when it comes to trade, larger economies are more split, with several top players operating in trade surpluses and deficits.
There are also some outliers such as India and France, which buck this trend and received more inbound goods-focused FDI than outbound.