Foreign Direct Investment Policy

By: EconomyWatch   Date: 29 June 2010

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Foreign direct investment (FDI) has become a key battleground for emerging markets and some developed countries. Government-level policies are needed to enable FDI inflows and maximize their returns for both investors and recipient countries.

Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world. Attracting FDI inflows with conductive policies has therefore become a key battleground in the emerging markets.

Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capital-intensive industries and advanced technology.

The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types.

Investors tend to look for predictable environments where they understand how decision-making processes work. Governments therefore are incentivized to build up a track record of rational decision making. The business environment often requires work to remove onerous regulations, reduce corruption and encourage transparency. Governments often also seek to improve their domestic infrastructure to meet the operational needs of investors.

Providing fiscal incentives for attracting FDI is a subject of controversy – analysts have argued both in favor and against the idea. A general consensus is developing in favor of certain incentives which have been proven historically to grow profits and therefore foreign investments.

When policies are effective, significant FDI investments are injected into countries that help the domestic economy to grow. Different countries and regions offer various kinds of fiscal incentives, with a related variance in the level of FDI investments attracted.

Governments are increasingly setting up promotional agencies to foster foreign direct investment. These agencies promote FDI-friendly policies, identify prospective sectors and investors, and structure specific deals and incentives for major foreign investors such as multi-national corporations (MNCs).

Global trade associations also play a major role in some of these investment activities. These associations are tasked with creating a positive environment for foreign direct investors and ensuring that both investors and recipient countries enjoy a favorable environment.

The formation of human capital is vital for the continued growth of FDI inflows. To enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are necessary. Governments must therefore enact policies to provide training and skills upgrading to develop their workforce and meet the employment needs of foreign investors.

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