FDI’s real transfer of value: Fundamental challenge for developing countries

Opinion article by: Estefania Tirado-Ramirez* (etirado2@eafit.edu.co)

*International Business and Economics Student, Universidad EAFIT, Medellin, Colombia.

During the last couple of years the world has witnessed an increase in the amount of FDI flows that has been absorbed by developing countries, which has been reflected in the 52% of global FDI that went directly to the developing economies in 2012 (UNCTAD, 2013).

Though this high percentage of FDI can represent a progress opportunity for the receiving economies, as jobs, national income, productive capacity and skill building are supposed to be increased, what governments and policy makers are constantly forgetting is the global pattern of just one-third of FDI income remaining in the host economy, and two-thirds of it being repatriated.

When there is such a small portion of income staying in the developing world, the economic sector or activity in which FDI is being directed to takes major importance, as it can become the breaking point between remaining locked into low value added activities, and therefore into underdevelopment, and truly building economic capacity. As developing countries tend to attract more flows into low value-added activities, especially into natural extractive industries, they raise the risks of external shocks as they become dependent on foreign demand and limit FDI’s contributions to skill building and technology dissemination.

In this context the fundamental challenge is not to attract as much as FDI as possible, like some countries do, but to carefully analyze each country’s trade profile and industrial capabilities, so the necessary legal framework and infrastructure prerequisites can be put in place to focus on a determined activity that would generate economic value and would create a commercial relation between countries and individuals, that in the context of liberalization, can lead to a win-win sustainable economic development.

References:

UNCTAD (2013).World Investment Report 2103. Ginebra y Nueva York: Naciones Unidas.