FOREIGN DIRECT INVESTMENT IN THE DIGITAL ECONOMY: EMERGING TRENDS AND ECONOMIC IMPLICATIONS

Abstract

The foreign direct investment environment has experienced the structural change in the international environment which is instigated by the burgeoning growth of the digital economy. This article is a review of how the digitalization is altering the trend of FDI, its impact on the host country, and policy frameworks of not only advanced economies but also emerging economies. We are reporting on three observable trends based on the analysis of data on the 72 countries between the years 2005 and 2024 (i) strong shift to intangible-asset-intensive FDI software, cloud infrastructure, e-commerce and fintech (ii) the dislocation of the investment activity to the more conventional determinants of location (i.e., labour cost and physical infrastructure) (iii) growing digital FDI absorption capacity between the digitally advanced and digitally more backward economies. We argue that these trends necessitate a radicalization of the FDI theory and policy due to the inapplicability of the traditional tools of investment promotion, regulation and impact measurement, to a mobile, light-footprint and complex form of capital in the organization structure. We propose a Digital Investment Readiness Index (DIRI) and show that it has an empirical predictive power of digital FDI attractiveness across the sample.