ABSTRACT
This chapter explores the idea that trade liberalization needs to be complemented by a sound investment climate if developing countries are to achieve greater foreign trade and investment and higher growth. What we mean by investment climate is the institutional, policy, and regulatory environment in which firms operate: factors that influence the link from sowing to reaping. It seems likely that in a country whose government is highly bureaucratic and corrupt, or whose provision or regulation of infrastructure and financial services is inefficient so that firms cannot get reliable services, the returns on potential investments will be low and uncertain. If the investment climate is poor, it will be difficult to get foreign investors to locate in that country or to get domestic entrepreneurs to invest in response to potential export opportunities.
