Economies of Cities and Regions
Is a relaxed policy on foreign ownership of land
and foreign direct investment optimal for a
developing country and its economy?
•Foreign direct investment has grown significantly over the past 20
years, rising from US$59 billion to US$651 billion HOWEVER the
majority of foreign direct investment is NOT to developing countries.
• Peaked 1997-1998 at around 40 per cent of all direct foreign
investment around the globe’ . However it fell drastically at the turn of
•Recent years Argentina, Brazil, and China have accounted for almost
half of FDI
Positive theoretical impacts of FDI
FDI is normally regarded as amongst ‘the most stable
forms of capital inflow’.
FDI can have a positive net transfer on the capital
account which will lead to a net increase in total
investment and economic growth.
FDI has long been regarded
to be a major vehicle
of technology transfer.
FDI has a considerable
positive effect on total
factor productivity (TFP)
•The studies credits the recent
success in attracting FDI is due to
changes in the legislation governing
•Particularly the changes in legislation relating to the
Brazilian privatization programme.
• The study proclaims that government policy on ‘lower
barriers to trade, FDI and portfolio capital flows’ coupled
with decreased transport and communications costs,
has resulted in the expansion of options available to
firms as to where to produce and sell.
•Policies towards foreign investment
‘provided incentives but placed
restrictions on the degree of foreign equity
participation in preferred non-pioneer areas of investment’ and
allowed for nationalization in new, undiscovered areas.
• The enactment of the Foreign Investment Act in 1991, the
‘restrictions on foreign equity participation were greatly relaxed in
an attempt to offer conditions widely comparable to those
prevailing in neighboring economies’
• As a result, full foreign equity ownership is now permitted in most
industries. Subsequently growth since 1990 has grown steadily,
with 1990’s averaging 3.1% and 2000’s averaging 4.6%.
is important to note that of course this increase is not solely
because of relaxed FDI
Negative Impacts of FDI
•Foreign investors have the ability to exploit workers in poor
countries by ‘initiating a "race to the bottom" in environmental
and labour standards’ .
• An underlying assumption is often that what is ‘good for
growth is good for the poor, although the growth-poverty
relationship is far more contentious than this would suggest’.
• Fourteen studies were reviewed by Chase-
Dunn and all conclusively reported that
‘FDI did lead to an increase in inequality’ .
•FDI can temporarily affect the balance of
payments indirectly through the trade
•Finally, FDI can affect tax revenues,
through the competition to offer tax
breaks to foreign investors.
•The extent to which foreign investment can help or harm developing
countries ‘largely depends upon what governments and firms choose
to do’ (OECD 1999). There are clearly major economic benefits and
drawbacks from relaxed policies on FDI. Ultimately it’s up to
implementation of sound, reasonable government policies.
• Overall FDI has the ability to increase developing countries economic
growth, promote education, worker training and develop further
infrastructure. Hence it should be promoted by developing country’s
governments; however regulations should be put in place to avoid the
negative spin-offs of FDI.