Foreign direct investment as an engine for economic growth and human development

Until the 1970s many developing countries — in Latin America and South-East Asia as well as Africa — were rather reluctant to accept foreign investment and pursued a policy of import substitution. But during the past three decades — mainly as a result of the structural adjustment programmes that started in the late 1970s — most developing countries have opened up their economies. ¹ Countries in Eastern Europe and the former Soviet Union also opened up during the process of transition from state-controlled to market economies during the 1980s and 1990s. As part of the liberalization policies, and stimulated by international donors such as the World Bank and the IMF, low-income countries are increasingly adopting policies to attract foreign direct investment (FDI). ² Such policies are based on the belief that FDI could contribute significantly to the growth and development of these nations. This chapter critically assesses the contribution FDI has made — so far — to economic growth and human development in low-income countries. We will review theoretical arguments and assess their empirical validity, using evidence from the available literature.