How to promote development-friendly FDI: an agenda for policymakers in developing and transition countries

For FDI to help stimulate economic growth and alleviate poverty in developing countries, two conditions have to be met. The first requirement is to improve developing countries' attractiveness to foreign investors. Second, the host-country environment in which foreign investors operate must be conducive to favorable FDI effects with regard to overall investment, economic spillovers and income growth. To a certain extent, these two requirements involve similar policy challenges for developing countries. The development of local markets and institutions, an investment-friendly policy and administrative framework, as well as the availability of local complementary factors of production can be considered major driving forces of FDI. Hence, better access to FDI depends on policy actions on all these fronts. At the same time, empirical studies strongly suggest that favorable effects of FDI in the host countries would be more likely if these factors figured high on the policy agenda. Nevertheless, policymakers should be aware that meeting the first condition, i.e., attracting FDI, is no guarantee for reaping benefits from FDI. For all we can tell, it appears much more difficult to benefit from FDI than to attract FDI. Resource-based countries with low per-capita income frequently exemplify this dilemma. Many of these countries report fairly high FDI inflows, but the enclave character of FDI in commodity-related activities renders it unlikely that FDI contributes significantly to economic growth and poverty alleviation.