Measures to Attract FDI Investment Promotion , Incentives and Policy Intervention

The working assumption nowadays is that in a relatively non-distorted domestic policy environment, foreign direct investment (FDI) brings in much-needed capital, technical know-how, organisational, managerial and marketing practices and global production networks, thus facilitating the process of economic growth and development in host countries [Lall 2000; OECD 2002:Chapters 1 and 3]. For instance, according to the UNCTAD (1999), FDI can complement local development efforts by: (a) increasing financial resources for development; (b) boosting export competitiveness; (c) generating employment and strengthening the skills base; (d) protecting the environment and social responsibility; and (e) enhancing technological capabilities (transfer, diffusion and generation of technology). Technology transfer from FDI in turn operates via four related channels: (i) vertical (backward and forward) linkages with suppliers or purchasers in the host countries; (ii) horizontal linkages with competing or complementary companies in the same industry; (iii) migration of skilled labour; and (iv) the internationalisation of R and D [OECD 2002:69]. In view of this largely benign view of FDI, there has been an intense ‘global race’ for foreign investment. No doubt, FDI is attracted into countries for different reasons – resource seeking (natural or human resources), market seeking, efficiency seeking or strategic-asset seeking. Nonetheless, at a general level, in order for a country to be more attractive to investors (both local and foreign), there is a need to put in place measures to ensure an enabling environment by reducing socalled hassle costs. But what are these costs? Apart from costs arising from an unstable macroeconomic and regulatory environment, administrative barriers and red tape – such as those outlined in Table 1 – can significantly raise the costs of establishing and doing business. A new study involving 32 developing economies indicates there exists a statistically and economically significant negative nexus between administrative costs and FDI to GDP ratio after controlling for other factors [Morisset and Neso 2002].