Foreign direct investment (FDI) in developing countries has a bad reputation. In some discussions, it is presented as tantamount to postcolonial exploitation of raw materials and cheap labour. However, recent data shows that FDI in developing countries increasingly flows to medium and high-skilled manufacturing sectors, involving elevated income levels. What’s more, many emerging economies have built their growth on FDI flows.
quality FDI
The challenge is to attract “quality FDI,” which connects international investors to the host country’s economy.
Quality FDI is defined as: contributing to the creation of decent, value-adding jobs; strengthening host economies’ skill base; facilitating the transfer of technology, knowledge, and know-how; enhancing domestic firms’ competitiveness and market access; and operating in a socially and environmentally responsible manner.
To do this, host nations must just wait to see what international market forces deliver. Rather than that, they require specialized strategies to address domestic impediments to the seamless integration of indigenous and foreign companies into global supply-chain networks.
Recent study demonstrates that developing nations’ methods for converting FDI to quality FDI have been successful. The following recommendations are based on the concept of learning through experience.
Strategies for attracting quality FDI
1- Facilitate market access and FDI inflows. Reduce FDI limitations. Provide open, transparent, and dependable conditions for all types of businesses, local and international, including ease of doing business, access to imports, reasonably flexible labor markets, and intellectual property protection.
2- Establish a Promotion of Investment Agency (IPA). A successful IPA may be able to attract qualified international investors and act as a conduit between them and the home economy. On the one hand, it should serve as a one-stop shop for investors’ requirements of the host country. On the other hand, it should function as a spur in the host economy, encouraging it to invest in high-quality infrastructure and ready access to qualified employees, technicians, engineers, and managers that may be necessary to attract such investors. Additionally, it should provide post-investment care, taking into account the demonstrative effects of pleased investors, the possibility for reinvestment, and the potential for cluster expansion as a result of subsequent investments.
3- Consider the sectors/activities to be targeted carefully. Suppliers’ investment and location decisions may be influenced by those of the host economy’s largest multinational investors.
4- Establish the infrastructure necessary to attract a quality investor, such as adequate nearby transportation facilities (airport, ports), an adequate and reliable energy supply, an adequately skilled workforce, and facilities for vocational training of specialized workers, all of which should be optimally designed in collaboration with the investor.
5- Consolidate backward links between FDI and the local economy. Allow foreign entrants to exert competitive pressure on their domestic suppliers in order to boost the latter’s competitiveness, and permit multiple forms of direct assistance from foreign to domestic firms, including training, assistance with setting up production lines, management coaching regarding strategy and financial planning, financing, assistance with quality control, and introduction to export markets.
6- Encourage FDI spillovers into indigenous economies. Local businesses founded by managers who previously worked for global corporations are more successful and productive than others. Local business owners learn about new technology and marketing methods by researching and copying their international competitors. Similarly, labor migration from big corporations to small businesses helps disseminate knowledge and skills.
7- Facilitate the entry of first-time foreign direct investors. Foreign businesses that are not already connected to a vast network of subsidiaries are more receptive to establishing relationships with domestic suppliers.
8- Encourage diaspora members to invest directly in the country. Additionally, these are more likely to develop connections with domestic businesses and contribute to the host country’s internationalization.
9- Increase credit availability through domestic financial market reforms. Establishing a business-friendly financial structure enables indigenous businesses to respond to foreign entrants’ challenges and impulses, self-select into supplier status, and therefore expand and thrive.
10- Establish a vendor development program to aid in the process of matching international customers with local suppliers. To bolster the domestic economy’s capacity, it may offer financing to indigenous suppliers for necessary investment based on purchase contracts from foreign buyers (see Singapore’s Local Industry Upgrading Program (LIUP)), or reimburse the salary of a manager in a foreign plant acting as a talent scout among domestic suppliers.
11-Construct Export Processing Zones (EPZs) in such a way that they serve as a catalyst for local economic growth. Avoid EPZ laws that discriminate against the establishment of ties with local suppliers. Establish a supplementary industrial zone for domestic suppliers, either physically next to official export processing zones or legally, to facilitate foreign-domestic connections with, for example, databanks and “marriage counselors” to aid in supplier selection.
12- Refocus the “Who Are We?” approach and appropriately handle associated problems. “Us” should be interpreted as the businesses that contribute the most to the local economy, regardless of their owners’ nationality. Be a result, the businesses that generate the highest-skilled and highest-paying employment, the most affordable goods, and the most competitive exports are referred to as “Us.”
13- Be patient and rely on the home economy’s steady structural change. Investors might arrive in waves. For instance, investors in thermionic tubes, valves, and transistors are the first, followed by investors in television and broadcasting systems, and ultimately, investors in computers, computer peripherals, and data processing systems. Along these lines, FDI may help diversify and upgrade indigenous industry.
