Moreover, sixty per cent of total foreign direct investment is investment in services, where a local presence is key to being able to compete. Investment abroad creates secondary flows such as exports of machinery and other capital goods, and increases demand for manufactured intermediary products and the provision of know-how and specialised services. But the story about the gains from trade and investment liberalisation is not all positive. The message that open markets lead to gains in aggregate welfare is of little consolation to people whose lives may be adversely affected by change and who may need to uproot their families in search of alternative employment. Nor does it sit well with displaced workers whose new jobs may pay lower wages.
Rapid adjustment is critical.
Here many governments are guilty of a policy deficit. Postponing adjustment through trade protection or restrictions on capital outflows has been amply shown by theory, history, and empirical evidence to be a blind alley. There is a better way. Labour market policies that provide adequate income security, while facilitating the reemployment of displaced workers in expanding firms and sectors, can produce important equity and efficiency gains. With the proper mix of policies, governments can maximize the benefits and minimize the costs of trade and investment liberalisation.