Direct Foreign Investment and Manufacturing for Export in Developing Countries: A Review of the Issues

The precarious condition of the global financial system has generated a wide range of suggestions for reform, and continuing advocacy of ‘adjustment’ for the developing countries. Among the most consistent instruments suggested for achieving the twin objectives of more stable development finance and structural adjustment in production is a quite traditional one: direct foreign investment. Too much reliance was placed upon debt finance in the 1970s, particularly short-term debt, the argument runs, a form that has proven highly unpredictable both in its servicing obligations and in its gross flow to the developing countries; its future is now very much in doubt, except for those few creditworthy countries who ‘underborrowed’ in the past (e. g. India, Malaysia), as commercial banks attempt to restructure their portfolios in response to the adverse experience of the post-1981 period. At the same time, the urgent need for key inputs of management and marketing skills, technology, and know-how in ‘nontraditional’ tradeable goods and services sectors — into which the balance of payments pressures of recent years are driving the developing countries — seem most readily available in the familiar and traditional ‘packaged’ form of direct foreign investment, however desirable it might be to ‘shop’ for individual components thereof in less desperate and more leisurely times.