Inward FDI flows to developing economies in 2014 reached their highest level at $681 billion with a 2 per cent rise. Developing economies thus extended their lead in global inflows. China became the world’s largest recipient of FDI. Among the top 10 FDI recipients in the world, 5 are developing economies. What are the advantages and disadvantages of foreign direct investment for developing countries?

1. Foreign Direct Investment, Growth & Development

2. Summary of Key International Financial Flows
Remittances
Overseas Development
Assistance (Aid)
Debt & Portfolio
Investment
Foreign Direct Investment
International
Financial Flows

3. Main Financial Flows to Developing Economies
The chart shows that foreign direct
investment and remittances are now
far more significant than overseas aid
as a source of external finance for
developing countries
Private debt includes loans from the
issue of international bonds and
borrowing through commercial banks

4. Global Foreign Direct Investment Flows
Inward FDI flows to developing economies in
2014 reached their highest level at $681
billion with a 2 per cent rise. Developing
economies thus extended their lead in global
inflows. China became the world’s largest
recipient of FDI. Among the top 10 FDI
recipients in the world, 5 are developing
economies.
Over the past decade (2004–2014), FDI stock
tripled in LDCs and SIDS, and quadrupled in
LLDCs
Less Developed Countries (LDCs)
Landlocked Developing Countries (LLDCs)
Small Island Developing States (SIDS)
Source: UNCTAD Investment Report, November 2015

5. Key Drivers of Foreign Direct Investment (FDI)
Corporate
rent-
seeking
Higher profits
Rising per
capita
incomes
Market access
Out-
sourcing
and off-
shoring
Cost reduction
By-passing
tariff &
non-tariff
barriers
Avoiding trade barriers

6. Attractive rates of
corporation tax
Soft loans and tax
reliefs / other subsidies
Trade and Investment
Agreements e.g. TPP
Flexible labour markets
+ up-skilling of workers
Creation of Special
Economic Zones
High quality critical
infrastructure
Open capital markets to
allow remitted profits
Attraction of relatively
low unit labour costs
Many countries rely on inflows of foreign direct investment (FDI) as a
key source of aggregate demand and as a driver of real growth
Policies to Attract Foreign Direct Investment

7. Advantages of Foreign Direct Investment (FDI)
Infrastructure
accelerator effects – a
rise in investment/GDP
Higher capital intensity /
capital deepening i.e.
more capital per worker
Better training for local
workers – improved
human capital
Grows a country’s
export capacity (e.g.
special economic zones)
Technology & know-how
transfer / diversification
of the economy
More competition in
markets which then
lowers consumer prices
Creates new jobs –
higher incomes and
household savings
Lift in the level of labour
productivity which
increases GNI per capita

8. Risks from Foreign Direct Investment (FDI)
Inequality – the profits from
FDI flow disproportionately
to powerful elites
Land grabs / extractive FDI
which generates little extra
tax revenues
Ethical standards from TNCs
may be poor – especially in
mining, farming and textiles
Volatile / footloose FDI flows
– FDI is much more volatile
than remittance flows
Limited job creation effects /
small spillover for local
content suppliers
Monopsony power of TNCs
who are able to negotiate
highly favourable prices

9. Assessing Benefits from Foreign Direct Investment (FDI)
Benefits / positive spill-overs
Positive multiplier effect
Technology transfers to
the host economy
Helps to increase host
country GDP (& exports)
Often Joint Venture only
(China, India)
Depends on size and extent
of the investment multiplier
Evaluation
Evaluation
Evaluation
Evaluation
Depends on the product and
quality of jobs created
May result in rapid natural
resource depletion which
makes growth unsustainable
TNC may bring many of their
own skilled workers into the
recipient economy

10. Foreign Direct Investment, Growth & Development