The Role of Foreign Direct Investment as a Structural Development Indicator of the Hierarchical World Economy

Abstract

The world-system perspective has been little employed for the examination of foreign direct investment (FDI) distributions in the world economy. We approach FDI distributions as a function of the structural hierarchy of the world economy. The goal is to examine some fundamental relationships between the structure of the world economy and the flows and stocks of FDI. A state-space approach is used such that the world-economy classification serves as a dependent variable to be explained by FDI behavior. An FDI capital distribution model is developed to generate hypotheses for statistical validation. Results of the analyses suggest that, while the world-economy classification accounts for a significant proportion of variability, FDI is more complex than the core–periphery capital distribution model predicts. Differences in average profit rate, investment risk, and investment purpose all serve to adjust variation in the FDI distributions. Investment risk exhibits a stable relationship among world-economy classes over at least a twenty-year period and seems to be a primary driver of investment behavior. FDI may therefore be a statistically reasonable covariate with country-level position in the world economy as well as a predictor of development potential.