Historically investment has gone where economic incentive and returns are best, which in turn has driven specialisation, innovation and trade.
Venice, the richest and most successful European economy from the 11th to the 16th century, used economic incentives to attract foreign investment. Venice created the institutional foundations for commercial capitalism by guaranteeing property rights and the enforceability of contracts. This combined with an efficient fiscal system that was favourable to merchant profits encouraged capital accumulation and specialisation while keeping costs low.
The Dutch Republic’s ascent in the 14th century was underpinned by the same model as Venice’s, as was the industrialisation of countries that followed. Each became a magnate for FDI. In early 1500 England adopted the Dutch economic model of industrial specialisation supported by a sound legal, financial and tax system.
Historically, foreign capital and entrepreneurs have played crucial roles in transferring technology and in helping drive local innovation. Britain is credited as the father of the industrial revolution but all the major innovations that drove the initial British industrial expansion came from the technically more advanced countries at the time - Germany, The Netherlands, Italy and France.
In the United States, the rapid transfer of technology from Britain, along with expanding trade and inward investment—coupled with America's abundant land and mineral resources—accelerated its industrialisation. By 1913 it was the US not Britain that operated closest to the technological frontier.
The rest is history – the rise of Japan, starting 1868, the Asian Tigers and China in the late 1970s.
Foreign direct investment flows
Figure 1 shows that while global FDI tend to be volatile from year-to-year, FDI as a share of global GDP, has risen through recessions, crises, geopolitical tensions, trade battles and wars. The exceptions are the Global Financial Crisis, the worst financial market meltdown since the 1929 crash, and the pandemic, when economies ground to a halt.
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