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... Much greater importance is now being placed on alternative sources of capital to finance national development (ECOSOC 2000) and Foreign Direct Investment (FDI)1 is now the largest source of foreign private capital reaching developing countries (Figure 1). Global flows of FDI have grown phenomenally over the last ten years. ... Of the middle to low income countries, Asia has experienced the fastest rate of growth in FDI but also the greatest volatility (World Bank 1999).
The Secretary General’s report “Financial Resources and Mechanisms” to the eighth UN Commission on Sustainable Development indicates increased international dialogue about whether FDI is a significant source of development finance. For all its potential, there is far greater awareness of the complex nature of FDI and the possible negative impacts of rapid and large growth for least developed countries. A crucial question is how FDI might be better applied to support more sustainable forms of development, particularly in those countries with burgeoning debts and widening income disparity to the rest of the world. This briefing paper seeks to review some of the pros and cons of FDI, to broadly consider possible roles and responsibilities of institutions in order to utilise FDI in a more effective manner and suggest some key questions that will need to be faced.
The pros and cons of FDI as a source of development
Attraction of FDI is becoming increasingly important for developing countries. However this is often based on the implicit assumption that greater inflows of FDI will bring certain benefits to the country’s economy. FDI, like ODA or any other flow of capital, is simply that, a source of capital. However the impact of FDI is dependant on what form it takes. ... Regional trends and prospects for FDI
Region Inflows Outflows Status and prospects
Latin America & Caribbean Total Inflows (1998): US$ 71 billion. ... FDI inflows have steadily risen since 1991 and this is expected to increase. ... Key sources: Russia, Hungary, PolandReceivers: Europe Resilient and increasing FDI inflow to region, especially compared to portfolio investment and bank loans. ... The financial crisis in Russia reduced FDI inflows but longer term outlook is more positive. ... Key sources: South Africa, Liberia, Nigeria Receivers: Namibia, Swaziland FDI has grown by 6 times in the last 10 years but only in a small number of countries and at a low level compared to international flows. ... Key sources: USAReceivers: Europe (54%) but also Latin AmericaKey Sectors: Services, banks, finance, insurance, manufacturing A strong FDI competitor. ... Although high FDI has little contribution to employment levels. ... , UNCTAD, ICC)
This includes the type of FDI, sector, scale, duration and location of business and secondary effects. A refocusing of perspective, from merely enhancing the availability of FDI, to the better application of FDI for sustainable objectives is crucial to push the debate forward. Various international fora and discussion have outlined a range of positive and negative aspects of FDI as a source of development for developing countries, some of which are discussed below. ... Stimulation of national economy
FDI is thought to bring certain benefits to national economies. ... There have been empirical studies indicating a positive link between higher GDP and FDI inflows (OECD a. ... over the last ten years FDI has increased in Central Europe whilst GDP has dropped. FDI can also contribute toward debt servicing repayments, stimulate export markets and produce foreign exchange revenue. Subsidiaries of Trans-National Corporations (TNCs), which bring the vast portion of FDI, are estimated to produce around a third of total global exports. However, levels of FDI do not necessarily give any indication of the domestic gain (UNCTAD 1999). ... Therefore the impact of FDI will largely depend on the conditions of the host economy, e. ... Stability of FDI
FDI inflows can be less affected by change in national exchange rates as compared to other private sources (portfolio investments or loans). ... FDI can stimulate product diversification through investments into new businesses, so reducing market reliance on a limited number of sectors/products (UNCTAD 1999). ... New inflows of FDI are especially affected by these global trends, because it is harder for a foreign company to de-invest or reverse from foreign affiliates as compared to portfolio investment. ... Examples of regional stability are mixed, whilst FDI growth continued in some Asian countries e. ... During Latin America’s financial crisis in the 80’s many Latin American countries experienced a sharp fall in FDI (UNGA 1999), suggesting that investment sensitivity varies according to a country’s particular circumstances. ... Social development
FDI, where it generates and expands businesses, can help stimulate employment, raise wages and replace declining market sectors. ... Within local economies, small scale and rural businesses of FDI host countries there is less capacity to attract foreign investment and bank credit/loans, and as a result certain domestic businesses may either be forced out of business or to use more informal sources of finance (ECOSOC 2000). ...
“Crowding in” occurs where FDI companies can stimulate growth in up/down stream domestic businesses within the national economies. ... Scale and pace of investment
It may be difficult for some governments, particularly low income countries, to regulate and absorb rapid and large FDI inflows, with regard to regulating the negative impacts of large-scale production growth on social and environment factors (WWF 1999). Also a high proportion of FDI inflows in developing economies are commonly aimed at primary sectors, such as petroleum, mining, agriculture, paper-production, chemicals and utilities. ... Skewed distribution
FDI inflows are still highly concentrated in certain countries and regions (Figure 2. ... TNCs are the largest source of FDI (about 95% of total inflows) and the majority of these are based in industrialised countries. The vast proportion of FDI flows go to other developed countries, especially the “Triad” of USA, UK, Japan, but also countries such as Germany, France, Canada, Netherlands.
In 1998, 92% of total FDI outflows came from developed countries and 72% of the total inflows returned to these economies (UNCTAD 1999). ... Over half of the FDI that does reach developing countries is concentrated in 5 countries. This is also true transitional countries, for example in Eastern Europe 75 % of FDI inflows is directed toward 5 countries (WTO 1999, OECD b.
Approximate Word count = 5016
Approximate Pages = 20.1
(250 words per page double spaced)
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