Many of the concerns about foreign direct investment arise when countries use protection to stimulate local output. Foreign (as well as domestic) investors can then earn financial returns that are often much higher than the economic returns to the country. Thus, protection attracts foreign direct investment. But this can mean a net loss of foreign exchange for the developing country if the sum of repatriated profits and imported inputs exceeds the foreign exchange saved through local production. In such circumstances, foreign direct investment can even reduce a country's real income. Many controls on foreign investors therefore take the rents from protection that accrue to foreign firms and channel them to groups within the country, such as organized labour, shareholders, or domestic entrepreneurs. But this may deter foreign firms from investing in the first place.
Controls seem to matter more than incentives to foreign investors. Countries that follow outward-oriented strategies tend to have fewer problems with foreign direct investment. Since they do not discriminate between import substitution and exports, they tend to attract foreign firms wishing to take advantage of their resources. Foreign investments, therefore, are more likely to align themselves with the country's comparative advantage and to augment domestic resources in fostering efficient industrial development.