FDI can reflect weaknesses

OECD Observer

For many poorer countries, foreign direct investment (FDI) is essentially "a good market response to a bad situation" rather than a sign that the destination economy is in good shape, a new publication from the OECD Development Centre argues.

This does not mean FDI is a bad thing, rather that having to rely on it may reflect a weak economy’s inability to win the confidence that would enable local firms to borrow abroad. In such cases, encouraging FDI inflows may be the only way of accessing foreign capital.

The key is whether a country is suffering from what the authors of the report, Foreign Direct Investment Versus Other Flows to Latin America, call the "original sin". This is the inability by local companies to borrow long-term in the local currency, forcing them to borrow in international currencies like the dollar. If emerging markets and developing countries are unable to fix the currency or maturity mismatch of their debt, they are "condemned" to bring in cash through FDI.

The report says FDI has accounted for the lion's share of financial inflows into Latin America in recent years, chiefly because debt inflow has fallen to virtually nil.

©OECD Observer No 225, March 2001

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