A Dynamic Growth Model for Flows of Foreign Direct Investment

Abstract

In this work, we for the first time study the dynamic flows of the foreign direct investment (FDI) with a dynamic growth theory. We define the FDI flow as a process which transmits throughout a given social system by way of diverse communication channels. In model formulation, seven assumptions are thus proposed and the foreign capital policy of the host country is considered as an external influence; in addition, the investment policy of the investing country is modeled as an internal influence. Classification of influences is mainly according to the operational strategy as well as the consideration of economical/financial factors. The dynamic model of FDI flow is a differential equation which is solved numerically and verified with collected realistic data. Application of the developed model to explore, taking the electronics industry in Taiwan as an example, Taiwanese direct investment (TDI) in China (i.e. FDI flows from Taiwan to China) since 2001 is conducted. Our preliminary results successfully account for the dynamics of FDI flow for different amount of TDI outflows. It is found that the internal influence dominates the growth of TDI flow from Taiwan to China during 2001-2006.Foreign direct investment, dynamic flow theory, growth model, and numerical simulation