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The rise of this new network of globalised city-regions has been made possible through globalisation, and today FDI constitutes an important part of a world city’s economic success.

FDI is defined as overseas investment in production by firms based in other countries, including the establishment or acquisition of plants, factories, and offices (MacKinnon &

Cumbers 2007, p.95). Over the past 50 years, FDI has emerged as a new and decisive

determinant of economic growth and success. As such, the role of transnational corporations

6 Adapted from PriceWaterhouseCoopers (2008). Estimates and projections use UN population data and definitions. Growth rates in final column relate to the cities ranked by projected GDP in 2025 in the fifth column of the table. PPP = Purchasing Parity Power; pa = per annum.

as the drivers of economic development has changed significantly since the post-war period.

Whereas in the past, transnational corporations used to be primarily engaged in international activities through arm’s length export and import activities, FDI today is “not driven by trade, but largely determines trade” (Dunning 1994). Nowadays, FDI is widely accepted as surpassing international trade, becoming the most important driver of economic integration (Dicken 2003, p.52). FDI is now one of the leading drivers of the rise of a new class of world cities, notably including London.

The recent history of FDI flows was thoroughly investigated by Dunning & Lundan (2008). The authors found that the structure, distribution, and benefits of FDI have changed significantly since the 1970’s. During this period, South and East Asia and Central and Eastern Europe gained a significantly increased share of inbound investment, with the European Union showing modest gains. While the Americas, West Asia, and Africa recorded increased inbound FDI investments, they lost out in terms of the absolute distribution of total global investment.

In the 1980s, four countries (US, UK, West Germany, and the Netherlands) accounted for 73%

of outward investments. The nature of major FDI contributors has also changed significantly since the 1990’s, with 14 countries representing the major (78%) contributors to outward investments since the 1990s. Although developed countries remain the largest contributors, with the United Kingdom in third place behind France and the Netherlands, there have been significant increases in outward investment from developing and transition economies such as Hong Kong, Singapore, Taiwan, China, Brazil, and Russia (Dunning & Lundan 2008, p.27).

Dunning attributes the overall growth of FDI over the past 40 years to the renaissance of the market economy and the creation of common markets such as the European Union (EU) and the North American Free Trade Agreement (NAFTA), resulting in the liberalisation,

deregulation, and privatisation of markets, which led to significantly reduced trading costs for goods, services, and assets. Contributing to the lower trading costs were also significant advances in electronic communications technologies. Lower international trading costs also meant that access to markets and resources enabled increased competition between firms on a regional and global level, as opposed to a national level. Competitive pressures meant that transnational corporations faced the reorganisation of their activities on a global scale, resulting in relocation of functions such as research and development, outsourcing of

production and support functions, as well as increased transnational mergers and acquisitions.

According to the most recent report by the United Nations (2009), since 2008 the global financial crisis has significantly affected global FDI flows. The crisis has meant that global inflows have been dropping significantly since 2008 ($1.7 trillion), and were projected to bottom-out in 2009, to a level of $1.4 trillion. The crisis has significantly affected global flows:

investments to developing and transition economies surged (43% of global FDI flows); there was a large decline in FDI flows to developed countries (29%); inflows to Africa rose to a record level (a 63% increase over 2007); inflows to South, East, and Southeast Asia experienced a 17%

expansion; FDI to West Asia continued to rise for the sixth consecutive year; inflows to Latin America and the Caribbean rose by 13%; and the expansion of FDI inflows to Southeast Europe and the Commonwealth of Independant States (CIS), i.e. the former Soviet Republics, rose for the eighth year running.

The benefits of FDI have to date been investigated primarily at the level of inbound host countries (Caves 1996). Borensztein et al. (1998), for example, studied the effect of FDI on economic growth for developing countries, noting the positive effects of FDI. FDI was found to provide more growth than indigenous investment, and represents a vehicle for technology transfer, given a certain threshold of human capital by which the host country can retain the benefits. A more detailed look into the benefits of FDI reveals that transnational corporations today are the main producers and organisers of knowledge-based assets and innovative activities, such as research and development, in the global economy. Transnational

corporations shape economic progress and systemise and disseminate new knowledge and organisational techniques, increasing efficiency, productivity, and regional economic growth (Dunning 1994; Mullen & Williams 2005). These benefits accrue because foreign firms must have advantages that allow them to overcome the higher costs of becoming a multinational company (Hymer 1976; Girma et al. 2001).

FDI not only presents benefits to multinational companies, but it also increases the

competitiveness of the host country’s economy in a number of ways (Dunning 1994; Girma et al. 2001):

 More efficient production of goods and services through a reduction of organisational costs or raising labour or capital productivity;

 Innovation and the introduction of new products or improvements to existing products or services;

 Opening new foreign markets to investors; and

 Being more responsive, in terms of costs, speed, and flexibility, to structural adjustments in changes in global demand and supply conditions.

Conversely, there also has been work in looking at adverse effects of FDI. Specifically in the USA, Graham & Krugman (1995, p.4) note that there is resentment and fear that foreign ownership and investment will adversely affect employment and trade, leading to a shift of skills and jobs away from the USA. Despite the downsides, the authors consider both views of this argument and come to the conclusion that the benefits of FDI for an industrialised nation outweigh the negatives.