Decline in foreign direct investment

Experimental visualization of narrower problems
Other Names:
Disincentives to foreign private investment
A poor investment climate is made up of the following elements: cumbersome administrative procedures and inefficient decision-making processes which companies encounter when planning an investment; transportation bottlenecks; unfair competition from local companies; lack of balance in policies toward foreign investment accompanied by politically explosive issues which may lead to disruptive and costly litigation between the government and foreign companies; high intrinsic risks often associated with such investment; restrictions on the repatriation of profits; ignorance of investment opportunities; and the limited nature of the markets for manufactured products.

The investment climate in developing countries tends to discourage foreign direct investment. Factors which deter resource developers, for example, include fiscal and statutory instability in the host country, the requirement for parent company guarantees, insecurity of financial holdings and profits held within the country, and lack of international arbitration procedures in the event of disputes. Companies may spend very large amounts on feasibility and development studies and find they stand to lose these investments because a government has imposed unreasonable or arbitrary requirements inconsistent with the economics of the project. From the government's side, it clearly needs to attract investment and develop its resources, but it must be constrained by the extent of damage to local interests that should be permitted for the sake of a profitable project. Because of the politically sensitive nature of such investment issues, and despite all the measures taken to stimulate it, direct investment has long been the least dynamic element in the flow of private capital to developing countries.

World wide flows of foreign direct investment (FDI) tripled in the period 1984-87, but are concentrated in industrialized countries more than ever before. Total outflows from all countries increased 38% in 1985, 58% in 1986 and 44% in 1987. At the same time, developing countries' share of investment inflows declined from 27% of the total in 1981-83 to 21% in 1984-87, while industrialized countries, particularly the USA and western Europe, increased their share of total inflows.

Total FDI flows in 1993 amounted to $195 billion, up from $171 billion in 1992. Developing countries attracted $80 billion representing 40 percent of the global total. Of this portion 57 percent went to South and South-East Asia; China received $26 billion of FDI in 1993. There are still a number of markets in the region, notably India, that have yet to be fully tapped by foreign investors. Investments in Latin America and the Caribbean were up, but flows to all of Africa were just $3 billion. Flows to Central and Eastern Europe amounted to only $5 billion.

Statistics from the United Nations Development Programme (UNDP, reported to Rio+5 conference in 1997, are that 80 percent of direct foreign investment in the developing world goes to only a dozen countries, all classified as "middle income" with the exception of China. Just five percent goes to Africa and one percent to the 48 least developed nations.

Problem Type:
D: Detailed problems
Date of last update
16.02.1999 – 00:00 CET