There is increasing interest in development circles on measures to promote foreign direct investment in developing countres. Thierry Mayer at the OECD has published a new study (pdf) of the interactions between aid, trade and investment policies to inform donor decisions about how to maximise foreign direct investment and its broader benefits.
The study draws some unexpected and disconcerting conclusions:
- The relationship between FDI and economic growth is not as strong as was previously claimed – indeed, while there is a correlation between inward FDI and growth, it is not possible statistically to invalidate the hypothesis that those two outcomes are results of a common cause – namely the pursuit of sound economic policies.
- The benefits to the local economy of FDI are limited – and indeed FDI can have a negative effect on local industries.
- There is no statistically significant relationship between bilateral aid and the amount of FDI (once you control for country characteristics).
The paper concludes that for FDI to have a beneficial impact, it is important to increase absorption capacity, by increasing human capital accumulation, increasing and improving transport infrastructure, improving market access for poor countries to increase trading opportunities, and facilitating trade between developing countries. Mayer also calls for more detailed examination of the impact of investments in infrastructure and in education and the interaction with the benefits from FDI.
It is true that this paper looks only at middle income countries (because of data constraints in least developed countries). Nonetheless, it should challenge to the development industry to consider carefully what we know about the impact of foreign direct investment on development, and to reappraise the policies we pursue both to promote FDI and to increase its beneficial impact.