WASHINGTON, D.C., Sept. 21—Today the International Finance Corporation (IFC) released an in-depth study on one of the hottest stories in emerging markets - foreign direct investment. The study, the fifth in an IFC series entitled ‘Lessons of Experience,’ reviews the interaction between policy frameworks and the volume and performance of foreign direct investment.
The last decade has seen an unprecedented surge in foreign direct investment (FDI) flows to developing countries, stimulated by the increasing integration of the global economy. In 1996, developing countries received over US$100 billion in FDI, more than a five-fold increase from 1983. FDI is now the largest source of external finance for developing countries.
The IFC study finds that FDI flows are not necessarily easy to attract nor do the foreign investments lead to profitable enterprises. Appropriate policies are key to capturing foreign investor interest and to successful investments. Ingredients for a sound policy framework include few restrictions on foreign ownership, a liberal trade and payments regime, open access to land and labor, low and uniform taxes, limited public sector involvement in the economy, and a minimum of red tape. The study concludes that with sound policies even those countries considered risky by investors can attract FDI flows.
"Governments which have taken steps to liberalize their economic policies have not only witnessed rapid increases in FDI flows but have also experienced the gains of integrated international production, including higher relative wages and access to improved management techniques, new technology, and marketing links," said Dale Weigel, co-author of the study and General Manager of the Foreign Investment Advisory Service (FIAS). "Furthermore, FDI recipients have benefited from the additional economic activity, creating employment and tax revenue."
The top emerging market recipient of FDI has been China, with remarkable increases in FDI over the past 15 years. As a result of policy changes since 1979, China received some US$167 billion in FDI flows between 1990 and 1996. According to the study, economic giants with large domestic markets are not the only countries attracting FDI. Countries of all shapes and sizes have been able to attract FDI flows of significant economic impact; in 1996, countries as diverse as Angola, Cambodia, Czech Republic, and Malaysia received FDI worth more than 5% of GNP.
The study is one of a series called ‘Lessons of Experience,’ which draws together IFC’s experience as an investor and a policy advisor in emerging markets. Previous studies in the series include papers on IFC’s experience with privatization, leasing, investment funds, and financing infrastructure.
The study was written by Dale Weigel of FIAS, and Neil Gregory and Dileep Wagle of IFC’s Corporate Planning Department. Established in 1989, FIAS is a joint service of IFC and the World Bank, which advises developing countries on policies to promote FDI.
IFC is a member of the World Bank Group and is the largest multilateral source of equity and loan financing for private sector projects in developing countries.
