FINANCIAL EFFECTS OF FOREIGN DIRECT INVESTMENT IN THE CONTEXT OF A POSSIBLE WTO AGREEMENT ON INVESTMENT
By David Woodward
Published by: Third World Network
Year Published: 2003
No of pages: 22
Price: US$8.00 (price is inclusive of postage cost by air mail)

This paper presents a graphical presentation of the increasing flows and accelerating build-up of the stock of foreign direct investment in developing countries, and its likely financial effects in the long term.

It argues that the stock of inward investment, which has reached unprecedented levels, is equivalent to a large foreign debt at a very high interest rate; that it will have a strong negative impact on host countries’ balance of payments over the long term; and that this effect was a major factor underlying the 1997 financial crisis in some South East Asian countries.

The paper concludes by emphasising the importance of selective policies towards FDI as a means of limiting the adverse financial effects, and warns of the danger that a WTO Investment Agreement will take away the policy space developing country governments need to manage FDI flows prudently.

ABOUT THE AUTHOR: DAVID WOODWARD is an independent development economist.  He has previously worked as an economic adviser in the British Foreign and Commonwealth Office, as technical assistant to the British Executive Director at the IMF and World Bank, and most recently as development economist in the Strategy Unit of the World Health Organisation.  He has also written on a wide range of development issues for non-government organisations, UNDP, UNCTAD and the Institute of Child Health (University of London).  He is the author of Debt, Adjustment and Poverty in Developing Countries (London: Pinter Publishers/Save the Children (UK), 1992), and The Next Crisis?  Direct and Equity Investment in Developing Countries; and co-editor of Global Public Goods for Health: Health Economic and Public Health Perspectives (Oxford: Oxford University Press, forthcoming).

TWN TRADE & DEVELOPMENT SERIES is a series of papers published by Third World Network on trade and development issues that are of public concern, particularly in the South.  The series is aimed at generating discussion and contributing to the advancement of appropriate development policies oriented towards fulfilling human needs, social equity and environmental sustainability.

CONTENTS

1.   Introduction

2.   The Background: Financial Flows to Developing Countries
      Figure 1:   Grants and Loans to Developing Countries, 1970-2000
      Figure 2:   Financial Flows to Developing Countries, 1970-2000
      Figure 3:   FDI Inflows as a Proportion of Total Investment, 1990-95 and 1999-00
      Figure 4:   Inward FDI Stock as a Proportion of GNP, 1980-2000

3.   Financial Effects of FDI: The Simplified View

4.   Financial Effects of FDI: A More Complete View
      Figure 5:   A Framework for Analysis of the Financial Effects of FDI
      Figure 6:   Financial Effects of FDI: A Balance Sheet
      Figure 7:   Share of Exports in Total Output of US Majority-Owned Foreign Affiliates, 1993: By Regions
      Figure 8:   Share of Exports in Total Output of US Ma.jority-Owned Foreign            Affiliates, 1993: By Countries

5.   FDI and Financial Crises

      Figure 9:   Contribution of FDI to Pre-Crisis Current Account Deficits           (Simplified View)
      Figure 10:  Malaysia: Trade Deficit of FDI Enterprises, 1990-96
      Figure l l: Malaysia: Current Account Deficit of FDI Enterprises, 1990-96
      Figure 12:  Malaysia: Current Account Deficit with and without FDI-Related             Transactions, 1990-96
      Figure 13:  Malaysia: FDI-Related Current Account Deficit and FDI Capital            Inflows, 1990-96

6.   Summary and Conclusion