The Role of Foreign Direct Investment in Less-Developed Countries

The Role of Foreign Direct Investment in Less-Developed Countries

Chengchun Li (Changzhou University, China) and Sailesh K. Tanna (Coventry University, UK)
DOI: 10.4018/978-1-5225-3026-8.ch003

Abstract

This chapter analyses a number of economic and developmental issues in less-developed countries (LDCs), reviewing the related literature and outlining the challenges ahead for LDCs. The issues considered include foreign direct investment (FDI) policies, recent trends on growth, civil conflict, institutional development, financial sector development, external debt, and other macroeconomic factors. These are identified as pertinent areas where LDCs have faced major challenges in their endeavours to improve economic welfare since they are related to the absorptive capacities, which are important for accruing growth benefits from inward FDI in LDCs. It is anticipated that coverage of these issues will enlighten the issues that these countries face in order to attract and utilise inward FDI. Additionally, it is argued that LDCs can avoid the risk of civil conflict by adopting proactive policies to attract FDI.
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The Role And Concerns Of Fdi In Ldcs

Increasing FDI Inflows and a Promising Outlook

In 2001, a consensus was reached at the United Nations Conference on Trade and Development (UNCTAD) to help LDCs which led to the initiation of so-called ‘The Programme of Action of LDC for the Decade 2001-2010’. According to the programme, the member countries of UN realised that FDI would be a very important source for LDCs to obtain capital formation, technological and knowledge know-how, employment creation, and trade opportunities. Since the conference, LDC governments and partner countries have indeed promoted FDI inflows into LDCs. There has been around 15% growth rate per year of FDI inflows into LDCs (the UN definition for the 50 poorest countries) in the past decade starting from 7.1 billion USD in 2001 to 24 billion USD in 2010, and the ratio of LDCs inflows over total amount worldwide increased from 0.9% to more than 2% (UNCTAD, 2011). From Figure 1, it is clear that the amount of FDI inflows into LDCs had been even larger – with around 110 billion USD in 2010. However, this is still below the global average.

Figure 1.

Total volume of FDI inflows to LDCs

Source: The World Bank (2016)

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