Foreign Capital Investment into Developing Countries: Some Economic Policy Issues

Abstract

This paper analyses the role of foreign capital in the economic development of developing countries, particularly South Asian and East Asian countries. Mainstream economists suggest that foreign investment would benefit developing countries by increasing the availability of capital, and through their positive impact over productivity and the general economic wellbeing of the host country. After the Second World War, the rapid economic growth first of Japan and later on of South Korea, Hong Kong, Singapore, and Taiwan has been widely cited in support of foreign capital. It is true when we look at the records in terms of the removal of poverty, job creation, educational achievements and improving the overall living conditions. I find however, that such discussions have ignored the experiences of developed countries in their early phase of industrialisation. In addition there is a lack of attention to the analysis of the issue of capital inflows in the context of neoliberal economic reforms and financial deregulation. After the global financial crisis in 2008, capital inflows to developing countries have witnessed a sharp decline. Foreign investments are highly sensitive to foreign exchange rate fluctuations. Thus, under such a situation, it is difficult to build a long term industrialisation strategy.