The need for a coherent approach to enhance the development impact of Foreign Direct Investment (FDI)

Statement by Jens Martens, WEED at the Financing for Development Roundtable on Coherence in Development (B4), March 20, 2002

One important aspect of coherence in development is the coherence between development policy and international investment policy.

While Foreign Direct Investment (FDI) can play a significant role in financing development, FDI can also have negative social, environmental and economic effects, for instance when it disrupts local industries, when it leads to excessive capital outflows or when the jobs it creates are in export processing zones disconnected from the national economy.

Furthermore, a growing share of foreign investment capital is not used to set up new production facilities ("greenfield investments"), but for mergers and acquisitions. They often reduce competition in the domestic market and lead to an increase in the market power of Transnational Corporations (TNCs).

The potentially positive effect of a capital inflow from a foreign investment for the balance of payments of the recipient country is reduced by opposing effects. In particular, the direct or indirect remittance of profits and dividends has a negative effect on the balance of payments. According to figures by the World Bank the remittances of profits from developing countries to foreign investors reached US$ 50.2 billion in the year 2000, an amount nearly as high as the worldwide ODA in the same year.

Finally, the worldwide competition to attract FDI has important fiscal implications for developing countries. Developing countries systematically lowered their corporate tax rates on foreign investors during the last decade. This destructive tax competition results in a loss of the tax revenues available for development. There are estimates that if developing countries were applying OECD corporate tax rates, their revenues would be at least US$ 50 billion higher.

In addition to these aspects, which dampen the hopes of pro-development effects by FDI from the macroeconomic point of view, it is important to examine every investment project with regard to its social and environmental impacts.

However, FDI can play a positive role and can be coherent with the objectives of sustainable development,

- when it is subject to social, economic and environmental impact assessments;
- when it is regulated in order to counter the negative effects of restrictive business practices, transfer pricing, diminishing tax bases and anti-competitive practices;
- when it improves the productive resource base in the host country; - when it contributes to the transfer of appropriate technology; and
- when it has a long-term perspective in the host country.

Unfortunately, the Monterrey Consensus completely failed to address the role of FDI in a balanced way. It emphasizes the promotion and protection of foreign investment but neglects the negative effects of FDI.
It will be one of the challenges for the follow up process of the Monterrey Conference to re-establish a more balanced approach towards FDI. This endeavour should not take place within the WTO, which is a forum that is limited and biased in favour of business interests. The neoliberal approach of the WTO would not give developing countries the necessary flexibility to implement investment policies which are consistent with their own national development strategies. A balanced approach has to integrate the international organizations responsible for social, economic, environmental and human rights issues.

Therefore, as a first step, the United Nations should take up this question again, by setting up an ad hoc forum on Investment to bring together representatives of governments, international organizations, business, labour and NGOs in order to facilitate a dialogue on policy and technical assistance issues relating to foreign direct investment. The objective should be to facilitate such flows to developing countries -especially LDCs-, identify obstacles and examine multilateral policies for maximizing the contribution of FDI to development while minimizing any negative effects.