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Are Foreign Investors Still Welcome?

World flows of foreign direct investment (FDI) have soared over the past two decades, from $40 billion in the early 1980’s to $900 billion last year. The cumulative stock of FDI has reached close to $10 trillion, making it the most important mechanism for delivery of goods and services to foreign markets: sales by foreign affiliates total roughly $19 trillion, compared to world exports of $11 trillion. At the same time, the liberalization of FDI regimes by virtually all countries has been a driving force of intra-firm trade – the lifeblood of the emerging system of integrated international production and already around one-third of world trade. But are the good times coming to an end?

FDI can bring a range of benefits, but it also can have costs. During the 1970’s, when the transnational corporations (TNC’s) undertaking such investment caught the public eye, many governments believed that the costs of FDI outweighed its benefits, so they controlled it. Led by the developed countries, the pendulum began to swing in the 1980’s. Once viewed as part of the problem, FDI became part of the solution to economic growth and development.

Nothing exemplifies this more than changes in national FDI regimes. As the United Nations Conference on Trade and Development reports, of the 2,156 changes that took place between 1991 and 2004, 93% were in the direction of creating a more hospitable environment for TNC’s. But there is a real danger that the pendulum is beginning to swing back, leading to a reversal of that liberalization process.

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