How to Promote Development-friendly FDI: – An Agenda for Policymakers in Developing Countries –

1. How to Promote Development-friendly FDI: – An Agenda for Policymakers in Developing Countries – Peter Nunnenkamp Kiel Institute for World Economics

2. Why Attractiveness to FDI Is Not Enough Two conditions have to be met: • attractiveness to FDI • growth-enhancing local conditions It is much more difficult to benefit from FDI than to attract FDI.

3. Limitations of Targeted FDI Policies More emphasis to be placed on the quality of FDI, rather than its quantity? For two reasons, this is easier said than done: • Policymakers are legally constrained in pursuing selective FDI policies • various performance requirements no longer allowed (TRIMs, etc.) • binding FDI provisions in FTAs and BITs • Effectiveness of still existing policy options is open to question

4. The Example of FDI Incentives Incentives may make a difference and may be justified theoretically. But the elusive nature of spillovers hardly justifies the extensive use of incentives. Spillovers depend on local absorptive capacity. FDI incentives are no substitute for local strengths. Conclusions: • Local firms to be treated equally • „Race to the top“ to be stopped • DCs have to bind their own hands

5. Some More Do‘s and Dont‘s Privatization-related FDI: • Governments conceded too much to MNEs • Do not relieve MNEs from business risks such as exchange-rate risk • Strong public regulation needed Competition for high-tech FDI: • Positive growth efforts of high-tech FDI are unlikely when the technological gap is large • Policymakers should undertake a realistic assessment of local capabilities • Scarce public resources are typically better spent on improving local capabilities, rather than encouraging high-tech FDI

6. How to Develop Linkages? UNCTAD list of policy options: • Information and matchmaking • Services must not necessarily be provided by governments • Matchmaking cannot remedy supplier weaknesses • Technology upgrading • Mandatory technology transfers increasingly prohibited • Effectiveness of technology-transfer requirements highly questionable

7. Linkages continued • Training and finance • Local capacity building is key to linkage creation • Improving the qualification of the local work force • Easing financial constraints of local suppliers • Conclusion: For promoting development-friendly FDI, governments must no longer concentrate on narrowly defined FDI policies.

8. Ingredients of a Broad-based Strategy Policymakers need to know: • the major factors shaping the impact of FDI on host-country development • the critical bottlenecks in the country they rule Major requirements for benefiting from FDI include: • Better education and training encourage technology spillovers • Local financial market development improves the allocation of resources and enhances the capacity to absorb FDI • Opening up to trade fosters the integration into corporate networks (efficiency-seeking and export-oriented FDI!) • Institutional development seems required to benefit from both efficiency-seeking and market-seeking FDI.

9. Broad-based Strategy continued The crux is that creating a local environment in which FDI delivers social returns amounts to a daunting task exactly where development needs are most pressing. In any case needed: a detailed account of competitive strengths and weaknesses. • Reasonable starting point: Global Competitiveness Report. • Policy priorities are likely to differ from country to country. • Many measures may be time-consuming to implement, hardly visible in the short run in terms of higher FDI, and, hence, politically unattractive. • From an economic point of view, however, it is high time to turn the FDI agenda upside down.