Is foreign investment always good for development?

Manuel Agosin
In Kevin P. Gallagher and Daniel Chudnovsky (with a foreword by José Antonio Ocampo). Rethinking Foreign Investment for Sustainable Development, Lessons for Latin America. Anthem Press

In this paper, I explore the effects that FDI can have on domestic investment in recipient developing countries. An attempt is made to determine the circumstances under which FDI may be expected to induce additional investment from national firms, which is labelled as “crowding in” (CI). Under other circumstances, FDI may well displace investments that would have been made by domestic firms in the absence of the foreign investor (“crowding out”, CO). A third possibility is that FDI may translate into real investment on a one-to-one basis, a situation I label as “neutral effect”. Recent findings suggest that FDI over the period 1971 through 2000 has generally had neutral or CO effects on domestic investment. This means that a liberal policy toward FDI should be complemented with an effort to ensure that the recipient country attracts those investments that are more likely to maximize their investment rates.