Redefining Foreign Direct Investment Policy: A Two Dimensional Framework

Many countries in the world have adopted policies to attract foreign direct investment (FDI), placing the traditional focus on the maximisation of FDI flows, what can be labeled as a quantitative approach. Recently it has been argued that the FDI policy should be more selective, promoting good quality FDI inflows. The "quality" implies a certain level of technological intensity of activities and functions encompassed in an investment project, and therefore its potential impacts on host country's development. Notwithstanding the importance of this new qualitative approach, a bias towards FDI flows has persisted. While they have received full attention, foreign-owned affiliates already established in an economy have been somehow neglected. This paper seeks to overcome this imbalance and proposes a new approach to FDI policy that incorporates both dimensions. Our main argument is that policy aiming to fostering the development and innovativeness of TNC affiliates can be more effective than the attraction of new affiliates.