The Fallout from the Financial Crisis (4): Implications for FDI to Developing Countries

Foreign direct investment (FDI) has been one of the principal beneficiaries of the liberalization of capital flows over recent decades, and now constitutes the major form of capital inflow for many developing countries, including low-income ones like Chad, Mauritania, Sudan and Zambia. But while there are reasons to celebrate this success, the current financial turmoil does not bode well for the sustainability these flows in 2009. FDI inflows generally provide a more stable source of external financing than private debt and portfolio equity flows. And there is no gainsaying the importance of FDI inflows for its contribution to sustaining current account imbalances in countries such as Pakistan, South Africa and Turkey, where the value of FDI inflows is estimated to have covered their entire current account deficit in 2007. Once the crisis is over, FDI might actually be one of the forms of cross-border flows that will be privileged.