Is foreign direct investment losing clout in development

• Published in: IDEAS Working Paper Series from RePEc
• Main Authors: Berger, Axel, Ragoussis, Alexandros
• Format: Paper
• Language: English
• Published: St. Louis Federal Reserve Bank of St. Louis 01.01.2022
• Subjects: Foreign investment; Narratives; Trends

Over the last decade, only a single projection of foreign direct investment (FDI) flows by the United Nations influential "World Investment Report" has proposed a negative outlook in the medium term. Based partly on surveys of business executives, these forecasts reflect expectations of investment growth which, however, have repeatedly failed to materialise. In fact, FDI flows to developing countries have remained stagnant over the past decade. Such wishful thinking is nurtured by a long series of positive narratives and facts about foreign investment. FDI has been one of the pillars of international development efforts for over 70 years. Its promise has not been limited to critical finance, but extends to longer term competitiveness through access to better technology, managerial know-how and, above all, prosperity through more and better paid jobs in the formal sector. From the old prescriptions of the so-called Washington Consensus to the hopeful Addis Ababa Action Agenda, the dominant development narrative has therefore favoured a rather indiscriminate pursuit of investment volume. This brief calls for rethinking of narratives and policies that help to improve the impact of FDI, based on secular trends that challenge our expectations. Four such trends stand out: First, while other sources of finance for development have grown considerably over the last decades, foreign investment has not followed the trend. Second, the kind of investment that is associated with stronger gains and longer term commitment in host economies - greenfield FDI - has also been in consistent decline as a share of total investment, while mergers and acquisitions and project finance have gained in importance. Third, the top 100 multinational enterprises (MNEs), accounting for nearly a quarter of global FDI stock, rely less on employment today than they used to in order to grow their foreign presence. Job creation, knowledge transfer and spillovers are therefore less likely to mat