Rethinking Foreign Investment for Sustainable Development: Is Foreign Investment Always Good for Development?

Summary In this chapter, I explore the effects that FDI can have on domestic investment in recipient developing countries. An attempt is made to determine the circumstances under which FDI may be expected to induce additional investment from national firms, which is labeled as “crowding in” (CI). Under other circumstances, FDI may well displace investments that would have been made by domestic firms in the absence of the foreign investor, i.e., “crowding out” (CO) those investments. A third possibility is that FDI may translate into real investment on a one-to-one basis, a situation I label as “neutral effect.” Recent findings suggest that FDI, over the period 1971 through 2000, has generally had neutral or CO effects on domestic investment. This means that a liberal policy toward FDI should be complemented with an effort to ensure that the recipient country attracts those investments that are more likely to maximize their investment rates. Introduction Foreign direct investment (FDI) is prized by developing countries for the bundle of assets that multinational enterprises (MNCs) deploy with their investments. Most of these assets are intangible and are particularly scarce in developing countries. They include technology, management skills, channels for marketing products internationally, product design, quality characteristics, brand names, etc. In evaluating the impact of FDI on development, however, a key question is whether MNCs crowd in (CI) domestic investment (as, for example, when their presence stimulates new downstream or upstream investment that would not have taken place in their absence) or whether they have the opposite crowding-out (CO) effect of displacing domestic G44 producers or pre-empting their investment opportunities.