title: Is foreign direct investment losing clout in development?
Creators: name: Berger, Axel
name: Ragoussis, Alexandros
Publisher: name: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
publisherIdentifier: https://ror.org/01t3zke88
publisherIdentifierScheme: ROR
Year: 2022
Subjects: subject: foreign direct investment
subject: development policy

description: Over the last decade, only a single projection of foreign direct investment (FDI) flows
 by the United Nations influential "World Investment Report" has proposed a negative
 outlook in the medium term. Based partly on surveys of business executives, these
 forecasts reflect expectations of investment growth which, however, have repeatedly
 failed to materialise. In fact, FDI flows to developing countries have remained stagnant
 over the past decade. <br> Such wishful thinking is nurtured by a long series of positive
 narratives and facts about foreign investment. FDI has been one of the pillars of
 international development efforts for over 70 years. Its promise has not been limited to
 critical finance, but extends to longer term competitiveness through access to better
 technology, managerial know-how and, above all, prosperity through more and better paid
 jobs in the formal sector. From the old prescriptions of the so-called Washington
 Consensus to the hopeful Addis Ababa Action Agenda, the dominant development narrative has
 therefore favoured a rather indiscriminate pursuit of investment volume. <br> This brief
 calls for rethinking of narratives and policies that help to improve the impact of FDI,
 based on secular trends that challenge our expectations. Four such trends stand out: <br>
 First, while other sources of finance for development have grown considerably over the
 last decades, foreign investment has not followed the trend. Second, the kind of
 investment that is associated with stronger gains and longer term commitment in host
 economies – greenfield FDI – has also been in consistent decline as a share of total
 investment, while mergers and acquisitions and project finance have gained in importance.
 Third, the top 100 multinational enterprises (MNEs), accounting for nearly a quarter of
 global FDI stock, rely less on employment today than they used to in order to grow their
 foreign presence. Job creation, knowledge transfer and spillovers are therefore less
 likely to materialise through the presence of mega-firms and their corresponding
 investment at scale. Fourth, the growth of Chinese outward FDI within a strategic
 expansionary political agenda stands to change rules and attitudes towards foreign
 investment moving forwards. <br> We argue that, collectively, these trends invite a
 renewed conversation around the kind of foreign investment we want and expectations of
 this source of finance for development. These facts obscure neither the broad benefits of
 FDI to developing countries, nor the value proposition of FDI attraction. Rather, they
 raise questions about expectations, priorities and the alignment of investment policy with
 the realities experienced across developing countries. <br> To that end, we propose four
 priorities that stand to make a difference in the current context. We call for
 policy-makers to: <br> 1) Place additional emphasis on retention of investment and
 linkages with the domestic economy. <br> 2) Try new approaches for FDI attraction that
 focus on improving domestic investment facilitation frameworks. <br> 3) Be selective as
 to investment sources and activities in order to mitigate political risks and align inward
 investment better with sustainable development. <br> 4) Add evidence to improve our
 understanding of investment and inform decision-making. <br> Overall, it is critical to
 engage in a serious multi-stakeholder conversation around expectations, actors and
 solutions that respond to the investment reality of today.
description: Briefing Paper, 2/2022