Strengthening national policies to encourage higher levels of foreign direct investment

The increase in the mobility of capital across borders is closely related to foreign direct investment (FDI) and the emergence of transnational corporations.

To attract international 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. However, while FDI flows to developing countries have increased, the LDCs' share in total FDI flows stood at less than one-half of one per cent in 1998. To remedy this situation, policies need to be developed by developing countries to attract and benefit from FDI. The international community should support developing countries in their efforts to devise FDI strategies and appropriate proactive policy frameworks and institutions which would impose the least possible burden on fiscal resources. Some countries have introduced home country measures to promote FDI flows to developing countries, and such measures deserve to be encouraged. A favourable and enabling investment climate which mobilizes FDI and domestic savings and channels them into productive investments also requires that the suppliers of capital have reliable, transparent and comparable financial information.

A multilateral rules framework for investment, which established a more transparent and non-discriminatory system, that recognised the right of host countries to regulate (in accordance with WTO principles) foreign investment activity within their national territory (and provided the necessary technical assistance to developing and least developed countries to strengthen domestic regulatory systems), that ensured that the dimension of sustainable development was built into the basic rules, and that ensured that the activities of foreign investors were compatible with developing countries' developmental policies and objectives, would be expected to have a positive and significant sustainability impact in each group of countries.

This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities. Agenda 21 recommends that mobilization of higher levels of foreign direct investment and technology transfer should be encouraged through national policies that promote investment and through joint ventures and other modalities.

Foreign direct investment (FDI) has become the single most important component of private external resource flows to developing countries. Investment inflows to developing countries have been increasing dramatically in the 1990s; as a result; their share in world FDI inflows reached 39 per cent by i 1993, with a value of 571,000 million (estimated to reach to US$80,000 million in 1994). Experiences with FDI are diverse, varying both among countries and regions.

The experience of different developing country regions and of the countries within them differs with respect to their success in attracting FDI. The sharp increase in FDI flows to developing countries during the 1990s has been confined to Asia and the Pacific (especially China) and to Latin America and the Caribbean. Africa is the region that has received the least attention from TNCs. This continues to be the case in the 1990s Africa's relative share in inflows to developing countries has declined considerably since the c early 1 1980s African countries have undertaken many efforts to improve invests conditions and there is considerable potential for investment in several countries of the region and in specific sectors and industries Privatization could provide one link between this potential and concrete investment opportunities in African countries.

Furthermore, within the Asia-Pacific as well as the Latin American and Caribbean regions, countries have performed unevenly with respect to inflows of FDI. This reflects mainly different underlying economic factors that are major determinants of FDI flows, including per capita income and its growth, market size, and availability of natural and human resources. Since the general trend in the majority of developing countries has been towards more liberal policies regarding FDI, the diversity of experience suggests that liberalization may be a necessary condition, it is not in itself sufficient for attracting FDI.

In line with the difference in experience, policy implications for countries also vary. Some countries need to make efforts to restore or maintain economic and political stability, as a general precondition for increased FDI. Others may need to continue with the process of liberalization of FDI regimes, harmonize FDI policies with policies for trade and technology, and/or improve administrative frameworks related to FDI, while generally ensuring an open and stable policy environment. Still others, particularly those with indicators of an FDI potential in excess of actual flows, could focus on promotional efforts, especially for attracting TNCs to particular projects. And finally, some countries may be able to shift towards policies for upgrading the FDI that they receive, by improving their human resource and infrastructural capabilities as well as becoming more selective with respect to the kind of investments that they encourage.

While FDI flows to developing countries have increased, the LDCs' share in total FDI flows stood at less than one-half of one per cent in 1998. To remedy this situation, policies need to be developed by developing countries to attract and benefit from FDI. The international community should support developing countries in their efforts to devise FDI strategies and appropriate proactive policy frameworks and institutions which would impose the least possible burden on fiscal resources. Some countries have introduced home country measures to promote FDI flows to developing countries, and such measures deserve to be encouraged. A favourable and enabling investment climate which mobilizes FDI and domestic savings and channels them into productive investments also requires that the suppliers of capital have reliable, transparent and comparable financial information.