In
countries with protected and distorted economies, FDI is harmful to economic
welfare.
Where
there is little FDI, the harm is little. Where FDI is large, however, the
adverse effect on economic welfare is also large. Conversely, in countries with
low barriers to trade and few restrictions on operations, foreign firms can
increase the efficiency of existing economic activity and introduce new
activities with strongly favorable effects on host country development.
Consequently, host governments should adopt open trade and investment policies.
Developing
country hosts should prohibit domestic content, joint venture, or technology
sharing requirements on foreign investment.
Such
requirements neither increase the efficiency of local producers nor produce
host country growth. To the contrary, such provisions interrupt intrafirm
trade, which is a potent source of host country growth, and lead to inefficient
production processes, outdated technology, and waste of host country resources.
Host
countries should avoid competing to give the best tax incentives to foreign
investors.
Available
resources for promoting investment are better spent on improving local
infrastructure, the supply of information to investors, and education and
training that benefits foreign and local firms alike.
Developed
countries should back only FDI that promotes the economic welfare of developing
country hosts.
Most national political risk
insurance agencies do not screen projects to eliminate those that require trade
protection. Such FDI hurts rather than helps hosts countries. Neither are
taxpayers in developed countries served by FDI projects that lower developing
country welfare and impede trade expansion. Thus these agencies should assess
the degree to which an FDI project promotes host country welfare as a criterion
for agreeing to insure it.