Foreign direct investment: A vehicle for combatting the global economic slowdown?
Where's the line between development and destruction?
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The issue
The global economy is currently experiencing the slowest half-decade of GDP growth in 30 years. Debt servicing costs have more than quadrupled in low- and middle-income countries in the last decade. According to Indermit Gill, Chief Economist at the World Bank, developing countries will be faced with the difficult choice of either servicing their debts or investing in public goods. Consequently, Ayhan Kose, Deputy Chief Economist at the World Bank, stresses the need for “investment booms” to help mitigate the projected slowdown in growth in the remaining decade. Such foreign direct investment (FDI) may be facilitated by enhancing a country’s fiscal and monetary frameworks, trade, and overall investment climate.
FDI done right
Following a bilateral trade agreement between the US and Vietnam in 2001, US import tariffs on Vietnamese exports decreased. Employment in American industries most exposed to the tariff reduction rapidly increased. This was driven by foreign multinationals entering Vietnam, whose employment shares increased by over 80 percent from 2000 to 2017. Vietnam’s subsequent growth has enabled it to export to other markets.
Between 2008 and 2012, Africa experienced a boom in submarine internet cable connectivity. Following the arrival of high-speed internet, the probability of subnational districts receiving FDI in services increased by almost 6 percentage points. This effect is amplified by access to electricity and road connectivity, further emphasizing the importance of infrastructure quality in attracting foreign investment. These policies demonstrate FDI’s multiplier effect facilitated by sustainable economic growth initiatives.
FDI gone wrong
Moreover, researchers find that an unexpected oil or gas discovery in a developing country increases FDI by 56 percent on average in the following 2 years. For instance, in 2009, natural gas reserves were discovered in Mozambique, resulting in a multibillion dollar investment boom in the following years. Within five years, the number of FDI projects unrelated to resource extraction increased fivefold. Each new FDI job created almost 4.5 jobs locally. Though Mozambique’s investment climate improved, it also led to an 11 billion dollar corruption scandal that pushed 2 million people into poverty. This led to the country defaulting on its external debt in 2016.
Closing thoughts
FDI can be an important tool for promoting economic development when implemented sustainably. As shown above, successful trade agreements and infrastructure projects can in turn generate further investment. Such investment promotion activities are a cost-effective means of attracting FDI to a developing country, yielding higher returns for its citizens.
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