Decline in foreign direct 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.