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Foreign direct investment occurs when a firm invests resources in business activities outside its home country Many barriers to international trade took the form of high tariffs on imports of manufactured goods Such tariffs aimed to protect domestic industries from foreign competition In addition to reducing trade barriers many countries have also been progressively removing restrictions on barriers to foreign direct investment FDI According to the United Nations between 1991 and 1996 more than 100 countries made 599 changes in legislation governing FDI Some 95 percent of these changes involved liberalizing a countrys foreign investment regulations to make it easier for foreign companies to enter the markets Governments desire to facilitate FDI has also been reflected in a dramatic increase in the number of bilateral investment treaties designed to protect and promote investment between two countries Although foreign direct investment FDI contributes to growth in developing countries there is evidence that the benefits are not equally distributed Foreign-owned firms tend to pay higher wages in developing countries but skilled workers tend to benefit more than less-skilled workers This conclusion is based on new research conducted into the effects of FDI on wages in five East Asian economies and the effects of foreign ownership in five African countries While FDI may support development in the aggregate more attention should be focused on the distribution of gains from FDI notably effects on wage inequality The issue Foreign Direct Investment FDI is an important source of private capital for developing countries The UN conference on Finance for Development FfD argues that private international capital flows particularly foreign direct investment along with international financial stability are vital complements to national and international development efforts Outcome point 20 p 5 Other international policy documents eg the Cotonou Partnership Agreement NEPAD also emphasize the importance of private sector investment for development both domestic and foreign for development and private sector investment features prominently in the UK White Paper Making Globalization
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