# **Introduction**

As the much-discuissed "global market" has become a reality over the last ten years, all countries find it more difficult to stay competitive without FDI. Noteworthy, the most competitive economy in the world, the United States, is not only the largest single source of, but also the largest single destination for FDI. The countries of the European Union are also among the largest sources and destinations of FDI. Among the developing colntries, and among the transition countries of both Europe and Asia, the fastest growing ones are the biggest recipients of FDI. The empi rical evidence suggests that for emerging economies, a one percentage point increase in FDI (measured as a proportion of GDP) leads, _ceteris paribus,_ to an extra 0.8 percentage point increase in per-capita income.<sup>1</sup> Of course, part of the cause-andeffect is that growth attracts FDI. But there are important causation forces from FDI to competitiveness - - FDI brings at least four things of value: financial capital, mamagement skills, technology, and access to export markets -- and therefore sustains growth as well.

Russia can and should take full advantage of benefits associated with inflows of FDI. Given the country's large endowment of natural resources and educated labor force, as well as its potentially large market, this might; seem as a not too difficult task. Yet the record is discouraging. In spite of explicit efforts by government to hIre investors, Russia has received far less FDI than it could, both relative to its economy's size and in comparison with other emerging rrarkets. From 1992-1999, cumulative FDI inflows to Russia total about US$16 billion. This level of FDI is very low in light of Russia's vast attractive resources-both. natural and human-and her great economic potential. It is also very low relative to other transition countries in the region, adjusted for population size: on a per capita basis, cumulative FDI in Russia is US$15, compared to US$84 for Poland,, US$118 for the Czech Republic and US$221 for Hungary. This result implies, in part, a flawed policy strategy regarding FDI.

This paper analyzes Russia's policy regime governing FD][ and suggests policies to bring it in line with international practice. We begin with a discussion of how the emergence of globalization has affected the nature of FDI, both from the standpoint of investors and host countries. We then turn to a review of the provisions related to FDI embodied in the WrO, to, which Russia is seeking accession. This is followed by **ani** analysis of the current FDI policy f^amework in Russia. We then present an overview of best international FDI practices. The paper concludes with recommendations for improving Russia's FDI policy regime-stemming both from the necessily to attract cutting edge FDI and to comply with WTO norms.

# **Globalization** and **Implications for Competition for FDI**

In many transition economies, there is poor comprehension of important changes in a world-wide pattern of FDI over the last two to three decades. The key word ifor these changes is _globalization_ of FDI.

- This paper updates and draws on Bergsman, Broadman and Drebentsov (1 999).

- 1 See JPMorgan (1998).