Review of Economic Policy Impact on FDI in Developing Countries
Dr Mohammad Amer,
University of Sydney, Australia
Abstract
This review was aimed at evaluating the impact of economic policies of developing countries on their FDI inflows and the effect of recent global economic crisis on it. Google Scholar was searched AND 35 reports were selected. The review yielded the following findings.
Some specific FDI-favourable policies are related to capital market liberalisation and privatisation of state-owned companies, easing out of foreign participation, good governance, free of corruption, good quality institutions, corporate tax rates, low tariff rates, degree of openness to international capital flows, no exchange rate distortions, contract enforcement, no nationalization risk, no bureaucratic delay, low inflation rate, greater economic freedom, adequacy of human capital, economic stability, public efficiency in terms of tax systems, easiness to do business, good contract laws, security of property rights, efficiency of justice, prudential standards and increased competition. Sometimes, international commitments in terms of bilateral agreements and preferential treatment may substitute for institutional quality needs. Certain constraints identified on FDI are: macro-economic instability, investment restrictions, corruption and political instability. Policies to remove them increases FDI. The policies addressing the risks of vulnerability to crisis of capital account liberalisation, political risks, macroeconomic variables and business conditions need to be in place. It is possible that conflicts may arise between country policies and interests of global firms, the need to be sorted out.
FDI may not always be the best option for economic growth of the country. FDI in developed countries is never m than 12% of total investments. Instead of policies specifically to promote FDI, credible enforcement mechanisms are required. Especially, when seeking international capital markets, policies to improve investment climate and functioning of markets need to be introduced. FDI cannot serve highly protected domestic markets. Domestic competition with foreign firms destroy local entrepreneurship. FDI for equity promotes inequality, decreases return on investment and infrastructure in open economy.
There was no policy change in any country during the recent global economic crisis except increase of import tariffs by a few countries and antidumping duty in US. Yet, only 2% of total global trade losses were accounted by them.
Responses to the global economic crisis were in the form of financial and monetary policies. Most countries selected one or more policies and combinations of recapitalisation of pledged or used amount, asset or bank creditor’s guarantees, asset purchases and lending by treasury of pledged amount or used amount, liquidity support, change in ST interest rate and fiscal stimulus.