Mobilizing external financial resources for development

To attract external resources, developing countries strive to create a favourable and enabling investment climate to attract international investment flows. In addition, national efforts at liberalization are increasingly complemented by facilitation and protection efforts at the international level.

Investment - foreign as well as domestic - is critical for developing countries to achieve economic growth to achieve sustainable development and improve the welfare of their populations. The key roles of foreign direct and portfolio investment, especially for developing countries, are to provide opportunities for increased productivity and competitiveness and for benefits from the transfer of managerial and technological expertise.

The mobilization of external resources for development in the 1990s has been characterized by an increasing privatization of resource flows to developing countries. International investment flows have increased at a faster pace than world output and world trade since the early 1980s. As a result, international investment and in particular foreign direct investment (FDI) has emerged as one of the driving forces in the world economy, contributing not only to the integration of markets, but also, increasingly, to the integration of national production systems. The composition of capital flows has changed, with FDI and foreign portfolio investment (FPI) accounting for the largest shares of total net resource flows to developing countries.

Since 1980, FDI flows to developing countries have climbed significantly, but are heavily concentrated in a few countries. While FDI is a more stable form of investment, FPI is often more volatile. Both types of flows have different characteristics and may have differing impacts on the development of recipient countries. This is all the more important as FDI represents a package that includes not only capital but also technology, organizational and management practices, skills and access to international markets. Countries that do not attract sufficient FDI flows are also deprived of other tangible and intangible resources which are central to development.

In 1914 40% of western European investment went to Africa, Latin America and Asia. In 1990 less than 20% went to those regions.