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Foreign Direct Investment for Development: Policy Challenges for Sub-Saharan African Countries

Research reports

Written by Dirk Willem te Velde

At least two issues make Foreign Direct Investment (FDI) a hotly debated issue in the Sub- Saharan African (SSA) context: 1) SSA countries attract only a small share of total FDI flows and 2) Concerns exist as to whether FDI really leads to economic and social development in SSA. This paper discusses these issues on the basis of ten challenges faced by SSA policy makers to make FDI work for development. We do not contend that the list of challenges in this paper offers sufficient or even necessary guidelines for SSA countries wanting to attract FDI. Rather, it is a checklist for those countries in need of appropriate policies to make FDI work for development. Each country will have different answers and priorities in relation to these challenges, but here we mention challenges in the more general context of Sub-Saharan Africa. We focus on what host countries can do to influence FDI. This leaves aside whether and how regulation and voluntary initiatives at regional or global level can affect the level and impact of FDI. Actions at national and international level may not be substitutes but can act as complements. Host country policies need to address information gaps in the international investment process (e.g. Lall, 2000), market failures in the market for skills and technologies which limit the possibilities for TNCs to upgrade and finally, capture possible externalities associated with TNCs, for instance in the form of promoting linkages between TNCs and local firms.

Dirk Willem te Velde