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Multinationals became the leading driver of the integration of the global economy. During the 1980s the average annual growth rate for FDI outflows reached 14 percent. Between 1996 and 2000 it reached 40 percent per annum. This was far faster than both the annual growth of world exports (4.2 percent) and of world output (1.2 percent). The huge sums of multinational investment were the result of cross-border mergers and acquisitions which had become the principal vehicle for FDI. These were driven by the new opportunities for globalization, Internet-related technological change, and the very high levels of stock valuation seen in global equity markets. The total stock of world FDI reached $6.8 trillion by 2001, before stagnating over the following two years as world share prices fell.

In 2004 the United States remained, by a considerable margin, the largest home economy. Yet the once-dominant trio of the United States, Britain, and the Netherlands only accounted for two-fifths of world FDI stock. German, French, and other European firms also held large shares of FDI. The surge in Japanese FDI, which had begun in the 1970s, increased rapidly following a sharp appreciation of the yen in 1985. Japan held almost 13 percent of world FDI in the early 1990s, but a decade later this share had fallen to 5 percent. There was also a relatively small amount of FDI from emerging markets, including South Korea.

The stock of multinational investment remained largely located in North America and Western Europe, but there was a striking rise of flows into China. For much of the 1990s China was the second largest recipient of FDI worldwide after the United States. This sum did not include Hong Kong, which reverted from being a British colony to part of the People's Republic of China in 1997, albeit administratively distinct for fifty years. From 1979 until 2000 China absorbed, on a cumulative basis, over $346 billion of FDI (Huang 2003). Although inward FDI only represented around 5 percent of Chinese GDP during the second half of the 1990s, and amounted to less than one-seventh of total investment, foreign multinationals accounted for one half of gross exports. In India, the amount of FDI was so small even after 1991 that it had little impact on overall growth. However, Indian diaspora may have been significantly directing outsourcing opportunities to their country of origin. The fast development of the IT industry in Bangalore has been attributed to business linkages with Indians working in Silicon Valley (Carana Corporation 2004).

While services represented around a quarter of the total world stock at the beginning of the 1970s, they accounted for at least one half by 2000. Although there are a large and diverse group of service sector activities, 85 percent of service FDI was in trade-related activities and financial services. The same percentage of the stock was located in developed countries, where they took advantage of the growing demand for consumer services from rising real incomes, the growing technological, information and knowledge component of many activities, and the new opportunities offered by deregulation and liberalization.

By 2004 if the level of world FDI was related to the world output, the globalization of international business was approaching that obtained before World War I. Corporations had a much greater flexibility to locate different parts of their value-added activities in different parts of the world. Production of goods and services became internationalized at a deeper level than in the past. A striking manifestation of these trends was a rapid growth of intrafirm trade in manufacturing, especially in high technology industries such as automobiles and machinery which had experienced the greatest rationalization on a world scale. In 1970 intrafirm trade was estimated to account for around 20 percent of world trade. By 2000 the share was over 40 percent. Multinationals were the drivers of world trade growth. . .

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