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| >> Foreign Aid in the National Interest >> >> Chapter 2 | |
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Jump to Chapter 2 Sections:
Improving the climate for foreign investmentForeign direct investment is one of the most important capital flows that an open economy can achieve. Such investment has attracted growing attention in recent years because it is typically accompanied by transfers of production, marketing, and organizational technology. Just as important, foreign direct investment provides valuable financial stability because it is much less vulnerable to investor runs and cross-border contagion than are portfolio investment and bank loans. Foreign direct investment in developing countries has also been a harbinger of globalization. During the 1970s and first half of the 1980s such flows were essentially flat, hovering around $11 billion (in 2000 dollars).27 These amounts were small relative to development assistance and other official flows. But in 1986 these flows began rising sharply, and between 1990 and 1999 net foreign direct investment in developing countries jumped from $30 billion to $188 billion in 2000 dollars. (About 20 percent of that investment went to China). Developing countries can attract foreign direct investment if they liberalize trade and investment policies, support free domestic markets, and strengthen the rule of law-particularly to protect property rights. Clearly defined property rights have been an important legal development in many East Asian countries and largely explain the high foreign direct investment in these countries in the 1990s. These rights allow foreigners to own local assets as well as equity in a broad range of companies. In fact, many of the region’s newly industrializing economies, including the Republic of Korea, Malaysia, and Taiwan, offer incentives to foreign investors, such as guaranteed repatriation of profits and tax relief. Still, in many countries the investment climate remains clouded by corruption, trade barriers, and market distortions. Evidence from a large sample of countries suggests that corruption significantly reduces domestic and foreign investment. A favorable investment climate requires transparent regulations, predictable laws, and low trade barriers. In developing and transition economies the environment for foreign direct investment is also directly related to the environment for private sector development. That brings the discussion to firms-the drivers of competitiveness in world markets and the main creators of jobs and wealth. A microeconomic agenda for development |
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