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Foreign Direct Investment for Development

Foreign Direct Investment (FDI) is an integral part of an open and effectiveinternational economic system and a major catalyst to Development . Yet, thebenefits of FDI do not accrue automatically and evenly across countries, sectorsand local communities. National policies and the international investmentarchitecture play an important part in attracting FDI to a larger number ofdeveloping countries. It is the responsibility of the host countries to put in place atransparent, broad and enabling Investment policy environment and to reinforcethe human and institutional potentials necessary for such an environment.

the effects on competition in national markets. Moreover, some host country authorities perceive an increasing dependence on internationally operating enterprises as representing a loss of political sovereignty. Even some expected benefits may prove elusive if, for example, the host economy, in its current state of economic develop-

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Transcription of Foreign Direct Investment for Development

1 Foreign Direct Investment (FDI) is an integral part of an open and effectiveinternational economic system and a major catalyst to Development . Yet, thebenefits of FDI do not accrue automatically and evenly across countries, sectorsand local communities. National policies and the international investmentarchitecture play an important part in attracting FDI to a larger number ofdeveloping countries. It is the responsibility of the host countries to put in place atransparent, broad and enabling Investment policy environment and to reinforcethe human and institutional potentials necessary for such an environment.

2 With most FDI flows originating in OECD countries, developed countries cancontribute to advancing this agenda. They can facilitate the access of developingcountries to international markets and technology, and ensure policy coherence fordevelopment more generally; encourage non-OECD countries to integrate furtherinto rules-based international frameworks for Investment ; actively promote theOECD Guidelines for Multinational Enterprises, together with other elements of theOECD Declaration on International Investment ; and share with non-members thepeer review-based approach to building Investment capacity.

3 The publication from which this Overview is taken provides a comprehensivereview of the issues related to the impact of FDI on Development covering aspectssuch as economic growth, technology transfer, human capital, competition,corporate governance and environment. It reviews the policies needed tomaximise the benefits. It is to be released in October DirectInvestment for Development MAXIMISING BENEFITS, MINIMISING Direct Investment for DevelopmentMAXIMISING BENEFITS, MINIMISING COSTS OECD's books, periodicals and statistical databases are now available via ,our online book is available to subscribers to the following SourceOECD themes:Finance and Investment /Insurance and PensionsDevelopmentAsk your librarian for more details of how to access OECD books onl ine, or write to us at OECD, 2002.

4 Software: 1987-1996, Acrobat is a trademark of rights reserved. OECD grants you the right to use one copy of this Program for your personal use reproduction, lending, hiring, transmission or distribution of any data or software isprohibited. You must treat the Program and associated materials and any elements thereof like any othercopyrighted requests should be made to:Head of Publications Service,OECD Publications Service,2, rue Andr -Pascal, 75775 Paris Cedex 16, Direct Investmentfor DevelopmentMAXIMISING BENEFITS, MINIMISING COSTSO verviewORGANISATION FOR economic CO-OPERATION AND DEVELOPMENTxx xNote by the editorThis report was prepared within the framework of the activities of theCommittee on International Investment and Multinational Enterprises(CIME).

5 It is based on a study by the OECD Secretariat, which wasreviewed by members and observers in the Committee at its meetings inDecember 2001 and April 2002. The process included consultations withthe Business and Industry Advisory Committee, Trade Union AdvisoryCommittee and other civil society partners of the Committee. This reporthas been approved for publication by the Committee. 3 OECD 2002 IntroductionForeign Direct Investment (FDI) is an integral part of an open and effectiveinternational economic system and a major catalyst to Development . Yet, the ben-efits of FDI do not accrue automatically and evenly across countries, sectors andlocal communities.

6 National policies and the international Investment architecturematter for attracting FDI to a larger number of developing countries and for reap-ing the full benefits of FDI for Development . The challenges primarily addresshost countries, which need to establish a transparent, broad and effectiveenabling policy environment for Investment and to build the human and institu-tional capacities to implement most FDI flows originating from OECD countries, developed countriescan contribute to advancing this agenda. They can facilitate developing countries access to international markets and technology, and ensure policy coherence fordevelopment more generally; use overseas Development assistance (ODA) toleverage public/private Investment projects; encourage non-OECD countries tointegrate further into rules-based international frameworks for Investment ;actively promote the OECD Guidelines for Multinational Enterprises, togetherwith other elements of the OECD Declaration on International Investment .

7 Andshare with non-members the OECD peer review-based approach to buildinginvestment capacity. 5 OECD 2002 Summary and ConclusionsThe present study focuses on maximisingthe benefitsof Foreign corporate countries, emerging economies and coun-tries in transition have come increasingly to see FDI as asource of economic Development and modernisation, incomegrowth and employment. Countries have liberalised their FDIregimes and pursued other policies to attract have addressed the issue of how best to pursue domes-tic policies to maximise the benefits of Foreign presence in thedomestic economy.

8 The study Foreign Direct Investment forDevelopment attempts primarily to shed light on the secondissue, by focusing on the overall effect of FDI on macro- economic growth and other welfare-enhancing processes, andon the channels through which these benefits take overall benefits of FDI for developing countryeconomies are well documented. Given the appropriatehost-country policies and a basic level of Development , apreponderance of studies shows that FDI triggers technol-ogy spillovers, assists human capital formation, contributesto international trade integration, helps create a more com-petitive business environment and enhances enterprisedevelopment.

9 All of these contribute to higher economicgrowth, which is the most potent tool for alleviating povertyin developing countries. Moreover, beyond the strictly eco-nomic benefits, FDI may help improve environmental andsocial conditions in the host country by, for example, trans-ferring cleaner technologies and leading to more sociallyresponsible corporate while also taking stock of the possible costs and proposing ways to reduce report does not focus solely on the positive effectsof FDI for Development . It also addresses concerns aboutpotential drawbacks for host economies, economic as wellas non- economic .

10 While many of the drawbacks, referred toas costs in this report, arguably reflect shortcomings inForeign Direct Investment for Development : Overview 6 OECD 2002the domestic policies of host countries, important chal-lenges may nevertheless arise when these shortcomingscannot easily be addressed. Potential drawbacks include adeterioration of the balance of payments as profits arerepatriated (albeit often offset by incoming FDI), a lack ofpositive linkages with local communities, the potentiallyharmful environmental impact of FDI, especially in theextractive and heavy industries, social disruptions of accel-erated commercialisation in less developed countries, andthe effects on competition in national markets.


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