One of the first major economic crises in a more globalized economy was the turmoil that struck East Asia beginning in 1997. Although the crisis was rooted in broader international economic developments, such as the severe and lengthy downturn in the Japanese economy, and weakness in bank supervision and loan practices in several East Asian countries, the presence of large amounts of short-term foreign portfolio investmentFPIFPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bondsA certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs . When you “redeem” or cash in the bond after ten years, the issuer repays the principal plus interest at a rate established when the bond was issued.) of a foreign enterprise that does not necessarily represent a long-term interest. is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bondsA certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs . When you “redeem” or cash in the bond after ten years, the issuer repays the principal plus interest at a rate established when the bond was issued.) of a foreign enterprise that does not necessarily represent a long-term interest. exacerbated what might have otherwise been a relatively small downturn in one region. The flight of that short-term capital out of South Korea and Thailand helped produce a collapse in those economies and several of their neighbors.

A recent study by the Bank for International Settlements quantified the economic impact of the volatility of this short-term investment capital, noting, “In many emerging markets, financial cycles have been particularly pronounced, typically being reinforced by large swings in the flow of international capital. The cost of these cycles has been high, with the direct cost of resolving bank crises often exceeding 10 per cent of gross domestic product and the indirect costs in terms of lost output higher still.” 

Another major economic crisis is the global financial and economic crisis of 2007-2009.  The main cause of this crisis can be sourced to a credit boom.  After the information technology bubble between the mid-1990s to early 2000s and its ensuing burst,¹³  the US Federal Reserve kept interest rates at the lowest levels in history—close  to one percent in 2003 and 2004¹⁴ in an attempt¹⁵ to offset the subsequent decline in stock prices; but that only fueled the real estate bubble.¹⁶

By the time that bubble had burst, the entire financial system had already become weak due to

the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting [as well as the] failure of regulators and supervisors in spotting and correcting the emerging weaknesses.¹⁷

Low-quality (or subprime) mortgages are not necessarily the direct cause of the crisis (a popular notion), although they did make its effects more widespread.  While the world is still feeling the overall effects of the crisis, Robert Zoellick, president of the World Bank, has prognosticated that the global financial system reached a “tipping pointA critical point in many processes at which the rate of change rapidly accelerates and the process may become irreversible. [which] will trigger business failures and possibly banking emergencies.  Some countries will slip toward balance-of-payment crises.”¹⁸

Specifically, with regard to global foreign direct investmentThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment., the crisis has had an effect, as well.  Prior to the crisis, from 2003-2007, global foreign direct investmentThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. generally increased, culminating in record levels in 2007.¹⁹ But as the US subprime crisis began in the summer of 2007, “various indicators during the first half of 2008 already suggested a decline in world growth prospects as well as in investors’ confidence.”²⁰ Indeed, FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. flows had already begun to decline by the middle of 2008.²¹

By late 2008, the crisis had worsened as non-financial sectors of the economy suffered and some nations were turning to the International Monetary Fund (IMF) for assistance; several economies are now experiencing a recession and according to IMF projections, a global slowdown is expected, as well.²²

Developed economies are experiencing more of a decline in foreign direct investmentThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. than transition or developing economies (see table below).  This is because the crisis originated in, and therefore more directly affects, the developed world.²³ Developing and transition economies are seeing a slowdown in FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. inflow growth, although growth rates will still remain positive (see table below).  Europe, Japan and West Asia will suffer the greatest decline in FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment., with the US experiencing a decline as well (see table below).

Due to declining profits and increasingly difficult access to credit, as well as bad short-term economic growth prospects, transnational companies are cutting down on foreign direct investmentThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment..  However, the situation could improve in the future as financial and economic crises provide opportunities for firms to purchase foreign assets at relatively low prices.

Firms also seem to be committed to longer-term investments in foreign nations; although FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. flows have decreased, FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. stocks have not.²⁴ Firms from “emerging economies and countries well-endowed with natural resources are becoming a growing source of FDI,”²⁵ too.

Lastly, specific industries might be well-suited for escaping from the crisis.  According to UNCTAD, these include industries in life sciences, agro-food, transport equipment, business services, personal services, information and communication technologies and energy, chemistry and environmental conservation.²⁶

13 Galbraith, James K. and Travis Hale. “Income Distribution and the Information Technology Bubble.” University of Texas Inequality Project. Working Paper 27. 14 January 2007.

14 http://www.federalreserve.gov/releases/h15/data/ Annual/H15_FF_O.txt

15 Sachs, Jeffrey. “Crowded Wealth: Economics for a Crowded Planet.” 4 March 2009.

16 Sachs, Jeffrey. “Crowded Wealth: Economics for a Crowded Planet.” 4 March 2009.

17 Fratianni, Michele and Francesco Marchionne. “The Role of Banks in the Subprime Financial Crisis”: 1. 10 April 2009.

18 Cho, David; Appelbaum, Binyamin. “Unfolding Worldwide Turmoil Could Reverse Years of Prosperity.” The Washington Post 7 October 2008: A01.

19 “Global FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. in Decline Due to the Financial Crisis, and a Further Drop Expected.” UNCTAD Investment Brief 2009: 2.

20 “Assessing the impact of the current financial and economic crisis on global FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. flows.”: 3. UNCTAD. 19 January 2009.

21 “Global FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. in Decline Due to the Financial Crisis, and a Further Drop Expected.” UNCTAD Investment Brief 2009: 2.

22 http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm

23 “Assessing the impact of the current financial and economic crisis on global FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. flows.”: 5. UNCTAD. 19 January 2009.

24 “Assessing the impact of the current financial and economic crisis on global FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. flows.”: 14. UNCTAD. 19 January 2009.

25 Ibid.

26 Ibid.

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