Reach, Range, Reason
Global Development Network series
Edited by José María Fanelli and Lyn Squire
Chapter 4: Government Policies and FDI Inflows of Asian Developing Countries: Empirical Evidence
Rashmi Banga According to Amartya Sen, social change creates interdependence. This is why the methods used in the process of economic reform must have a wide range. Policymakers must understand that restructuring the rules of the game concerning specific dimensions of economic activity can have important repercussions in the broader economy. This ripple effect is particularly apparent concerning the reforms which bring the national economy in contact with the rest of the world. The process of integration into the world economy has increased the range of domestic market-oriented reforms, that now include instruments and policies to attract foreign direct investment (FDI). Developing countries no longer regard FDI with suspicion, and controls and restrictions over the entry and operations of foreign firms are now being replaced by selective policies which aim at encouraging FDI. In fact, the developing countries of Asia are now competing with each other to attract FDI. These changes have spawned an extensive network of bilateral and regional investment agreements which seek to promote and protect FDI coming from the partner countries.1 This process thus induces changes not only in the behavior of domestic agents, but also changes in the behavior of foreign agents, and the institutional and policy framework must be correspondingly adapted. For example, authorities must evaluate whether FDI coming from developed and developing countries responds to incentives in the same way. Given this broad context, it is not surprising that the range of methods which reformers have used to influence the behavior of foreign investors...
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