Foreign Direct Investment and National Competitiveness – Financial Aspects

Renewed confidence in the positive benefits of FDI to the economic development of the host country has led many countries to be more open towards FDI since the beginning of 1990s.1 As a result of increased liberalisation and technological advances, FDI flows rapidly increased during last few decades. FDI increased as a ration of domestic investment and GDP in many countries (UNCTAD, 2005). However, while some countries attracted large FDI flows, others were less successful, even though they had liberalised FDI regimes. A huge number of different studies on the impact of FDI on economic growth and productivity of domestic economy have been published.2 A general conclusion of these studies is that the benefits of the foreign companies in terms of economic development, even though they possesses a bundle of desirable assets (including a long-term external financing, new technology, skills, management practice and market access), and in general they are more productive, pay higher wages and are more export intensive than local firms, are by no means automatic. In addition, researches showed that FDI can also lead to some less desirable or undesirable outcomes such as rising inequality between individuals or groups of individuals in the society and between the regions, direct or indirect crowding-out of local capabilities or an erosion of the tax base or labour and environmental standards. Development of the local absorptive capacity (skills, R&D, infrastructure and etc.), is of the key importance in shaping the ultimate effect of FDI, suggesting an important role of complementary policy. Different programmes of encouraging linkages between TNCs and local firms, programmes supporting clusterisation and upgrading FDI are also approved as important. In this paper we analyze appropriate role of FDI policy in raising national competitiveness. The first section discusses the role of FDI in technology transfer, learning and competitiveness. Here we analyze benefits and costs of internalized technology transfer through FDI flows and in general, this type of technology transfer is very efficient mean of transferring a package of capital, skills, information, networks, and brand names to developing countries. For many technologies, internalised transfers are the only possible mode of transfer. Also, internalization may be the most efficient way of transferring the tacit knowledge involved and in the case of rapid technology changes. However, internalized technology transfer may also have some expenses. In general, the more standardized and diffused the technology and the more capable the buyer, the more economical will externalized modes be. A more subtle reason in favour of externalization concerns the existence of learning benefits, deepening and externalities. Costs of internalized technology transfer are especially expressed on the top level of technological capabilities where local innovative efforts become viable. At this stage, there is a case for restricting reliance of internalized forms to promote local R&D capabilities based on externalized forms, or for intervening in the FDI process to induce MNCs to transfer more advanced technological functions. We discuss the rationale for FDI policy and preset the experience of Ireland and Singapore since these two countries have been highlighted for using the best-practice policies toward attracting FDI. Using benchmarking method we analyze FDI policy in Bosnia and Herzegovina.