There are two major fields of studying FDI. One way of studying is looking at the effects that FDI creates, while the other tries to establish the reasons or determinants for FDI. Studies on the effects distinguish between the effects of FDI on capital formation, exports, employment, technology transfer, economic structure, and the socio-political climate. Studies on the reasons and determinants of FDI try to explain why MNCs engage in international production through FDI rather than carrying out international business through market transactions such as trade.   

Since the late 1980s more attention is being paid to the possible role of FDI in economic development, where the focus is on how to maximise the positive effects of FDI. Most countries today welcome and actively compete for FDI, and many countries have established specialised agencies to attract and facilitate inflows of FDI. It should however be recognised that FDI is a complement to domestic investment and that sustainable development benefits to host countries largely depend on the absorptive capacity among the local enterprise sector in the host country.  

FDI can affect national development in different ways, both positively and negatively. Systematic evidence is not abundant, and the issue whether FDI is positive or negative, for developing countries in particular, is continuously being discussed. Positive effects from FDI stated are increased financial resources and investment; enhanced technological capabilities and export competitiveness; increased employment; strengthening of the skills base; and protection and improvement of the environment and social conditions. Other positive effects from FDI are its potential contribution to international trade integration and access to markets, and a more competitive business environment, which enhance enterprise development. Negative effects of FDI often mentioned are the deterioration of the balance of payments as profits are repatriated; social disruptions because of accelerated commercialisation in less developed countries; and increasing dependence on MNCs, which might jeopardise political sovereignty. 

In this section, a selection of the literature on FDI is presented, discussing both positive and negative effects of FDI. The main issues that are subject of research are the following: 

• FDI general effects: Papers that discuss the general effects of FDI, both positive and negative.
• FDI determinants: What are the factors that make a country attractive for FDI?
• FDI and trade: Is FDI complementary to trade, or is it substitution? 
• FDI and spillovers: The effects of FDI on technology & knowledge transfer.
• FDI and environmental and social issues.

FDI general effects

This section reviews some of the publications that give a broad overview of possible positive and negative effects of FDI on national development.

FDI: the current state of play, Anna Soci, Department of Economics, University of Bologna, November 2002

The paper is divided in three sections. Section I and II give an overview of the literature on FDI. Section I briefly reviews the general theoretical setting from the appearance of the Ownership Location and Internalisation (OLI) paradigm in the late 70’s to what has been evolving through the subsequent two decades. Section II surveys the main effects of FDI on the home and the host countries respectively. Finally, Section III focuses on the effects of European economic integration on the activities of multinationals in the form of FDI.

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Foreign Direct Investment for Development: Maximising benefits, minimising costs, OECD Observer, OECD 2002 Paris

This report elaborates on maximising the benefits of foreign presence in the domestic economy. The focus lies on macroeconomic growth and other welfare-enhancing processes, and the channels through which these benefits take effect. The report concentrates on four policy areas:

• FDI and trade integration;
• FDI and technology transfers;
• FDI and competition; and
• FDI and environmental and social issues.

Policy analyses are given at the national level, both for home and host countries, and at the enterprise level.

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New Horizons for Foreign Direct Investment, OECD Global Forum on International Investment, March 2002, Paris

This in-depth report provides a selection of papers presented at the opening conference of the OECD’s Global Forum on International Investment (GFII), held in Mexico City, November 2001. The conference reaffirmed the importance of FDI flows and emphasized the importance of linking these to local enterprise development. Governments need to go beyond traditional liberal FDI policies and pay more attention to the broad set of regulatory and institutional frameworks conducive to an enabling environment both for foreign investment and domestic entrepreneurship. These include the prevalence of rule of law, more transparent administrative practices, effectively combating corruption, good corporate governance, sound competition policy, as well as protection of labor rights and the environment. At the same time, the need was felt to establish strong and new partnerships and to contribute to the domestic capacity building efforts in FDI host countries. These partnerships should include host and home countries, multinational enterprises, international organizations, and civil society groups.

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European Economy: Responses to the Challenges of Globalisation, European Commission Directorate-General for Economic and Financial, Special report No 1 / 2002 (p.75-p.87)

The chapter on FDI in this report is rather general, and focuses on the current set of multilateral trade rules. It points out that the main policy challenge concerning FDI will be the negotiation of multilateral investment rules within the WTO. This should help to ensure transparency, predictability and non-discrimination for FDI, thereby supporting higher levels of FDI worldwide.

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Foreign Direct Investment and Poverty Reduction, M.Klein, C. Aaron and B.Hadjimichael, World Bank Working Paper 2613 (2001), World Bank.

This paper poses the question as to whether FDI supports sound development and, in particular, whether it contributes to poverty reduction. The paper examines: the main trends in FDI; the role of FDI as a mechanism to transfer best practices across borders and the domestic diffusion of best practice; the potential of FDI to improve the quality of growth through reduced volatility of capital flows and incomes, improved corporate governance, and better social and environmental standards; and pre-conditions for beneficial FDI. According to the authors, FDI is an effective tool to reduce poverty. The paper further includes an annex of studies relating to FDI, economic growth, and poverty reduction, detailing the methodology and main findings of each study.

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How Beneficial Is Foreign Direct Investment for Developing Countries?, Prakash Loungani and Assaf Razin, Finance and Development, IMF, June 2001

Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries. However, FDI also has potential risks, which can reverse or nullify the positive effects attributed to it. This article elaborates on these potential risks of FDI. The authors point out that although the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuanced view of the likely effects of FDI. The article concludes by pointing out that developing countries should focus on improving the investment climate for both domestic and foreign capital.

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Foreign Direct Investment Policy and Promotion in Latin America, OECD Workshop Report, Lima, 15-17 December 1998.

This workshop took place against the background of the challenges that were posed by the financial crisis that has hit emerging markets in Asia, but also elsewhere, including in Latin America. This crisis has made it imperative for emerging markets to ensure the sustainability of foreign direct investment inflows. The objective of this workshop was to identify the policies and promotion methods that are necessary to achieve this. Two broad themes were addressed at the workshop:

• Foreign Direct Investment: Trends, Assessment and Policies; and

• Best Practice in promoting FDI in Latin America.

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