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<!-- Start of picture text --> XDebt and International Finance X<br>WPS 712<br><!-- End of picture text --> This paper-- a product of the Debt and International Finance Division Division, Internationial Economics Departmcnt--- is part of a largereffort in PRE to assess the potential for increasing foreign direct investment in support of economic development. Copies are available free from the World Bank, 1818 H Street NW, Washinigton DC 20433. Pleasc contact Sheilah King-Watson, room S8-045, extension 31047 (58 pages).

Drawing on the findings in 11 country studies, Brewer conk .jdes that the public policy environment for foreign direct investment (FDI) has improved in recent years. There is more appreciation of FDI's contributions (such as the transfer of technology and managerial skills, the development of export markets, and the stimulation of local entrcpreneurship, competition, and innovation) and greater appreciation of the role of the private sector and private investment in development.

But to improve the flow of FDI into develop- ment, more is needed especially changes in policies toward FDI and changes in macroeconomic policies and conditions.

Positive policy shifts have improvcd the climate for FDJ in Korea, Mexico, and Nigeria. Continuing restrictions limit FDI flows to India, Brazil, and some of the largest developing countries. Macroeconomric conditions and policies will continue to affect FDI flows and to dominate investors' decisions, as recent experiences in Mexico and Brazil indicate.

Policy reform designed to attract investors will be only marginally effective unless accompanied by appropriatc macroeconomic policies. Marginal, isolated policy changes are not enough. Investors risk estimates are highly sensitive to perceptions of change and unccrtainty.

Developed countries' guarantee programs to protect their own investors against noncommercial risks associated with FDI projects in devel- oping countries together with other developed - country promotional activities are an important part of the policy framework that affects FDI in developing countries.

Total FDI flows to developing countries are unlikely to rise significantly in the next few years. Average flows of about SDR 15 billion a year (or 1 percent of developing countries' GDP) are likely for the next threc years.

Absolute flows of FDI might increase significantly in some countries but the developing countries' share of total world FDI flows will probably remain relatively low (about 15 percent) largely because FDI in the United States will continue at high levels.

This paper was completed under the supervision of Kwang W. Jun. The background paper for this report is available on request. The background volume reviewed FDI experiences of 11 developing countries in three regions: Argentina, Bra/il, Colombia, and Mexico in Latin America; India, Indonesia, Malaysia, Korea, and Thailand in Asia; and Kenya and Nigeria in Africa. The main author of the background paper was Gyorgy Becsky. Other contributors were Young-Hoi Lee and Aloysius Ordu.

The PRE Working lpaper Series disseminates the findings of work under way in the Bank's Policy, Research, and Extemal AffairsComplex. An objectiveoftheseries is togettthesefindingsoutquickly, even if presentations are less than fully ;xlished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

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