• FDI and growth

FDI and growth

This briefing paper takes the view that foreign direct investment (FDI) can play an important role in developing countries. At the macroeconomic level, it brings new capital for investment, contributing to the balance of payments, and potentially adding to future economic growth. Against this perspective, it tackles the issue of declining global non-extractive FDI in Africa due to fears that too much foreign intrusion into the economy will crowd out local producers and businesses. Based on case studies from Tanzania, Kenya and Uganda, the paper argues that foreign firms are more productive, bring management skills, investing more heavily in infrastructure and in the training and health of their workers, and are more connected to global markets. In light of this evidence it recommends that African governments should take positive steps to attract more FDI, including further liberalisation and measures to directly ameliorate binding constraints.

Policy implications from the paper are:

• African host governments should reconsider some of their skepticism toward foreign investment and move to lower barriers to entry and operations through further liberalisation
• donors should continue to work with African governments to take steps to directly ameliorate some of the binding constraints on firm entry and expansion
• measures in multilateral trade or investment agreements to protect low-income countries, such as excluding them from reciprocal obligations on non-discrimination and national treatment need to be addressed.

• Full text of document
• Publisher details
• Send to a friend