Foreign Direct Investment And Host Country Government Policy

Governments of developing countries are appreciating the beneficial effects of FDI and competing vehemently against each other. The economic attractiveness of a country depends primarily on its advantages as a location for FDI investors (mainly TNCs) of various types. Many factors relating to location advantage can be affected by policies of host countries, such as direct incentive policies and other FDI-related policies, including educational policies, technological policies and etc,. Governments of host countries can use policies as instruments to selectively protect the development of domestic industries to ensure that FDI brings more benefits, to harmonize the conflicts between strategic objectives of TNCs and development goals of host country government, and to minimize the potential dangers of FDI.Traditional FDI theories focused on analyzing motivations, determining factors and investing conditions of TNCs. Although Dunning's Eclectic theory recognizes host country factors influencing FDI, the theory still restricts in static state description, and overlooked the inter-active process between host country government and TNCs in making FDI policies. So it is both theoretically and practically valuable to study FDI policies and the role of host countries governments.Before mid-1980's, most literatures on host country FDI policies almost exclusively converged to restrictive policies; after that, economists begin to target incentive policies and tend to use empirical research as measures to test their effectiveness. In this paper, first I will analyze theoretically the interactive process between host country governments and TNCs, the effect mechanism of FDI on the development of host countries and the evolution process of FDI policies, in order to pave ways for the following analysis.In chapter 3, I concretely discuss government policies. Some of them have direct effect on FDI, such as fiscal/ financial incentive policies; other are indirect policies which can upscale location advantage of the country and strengthen the linkages between TNCs and domestic enterprises, for example, trade policies, education policies and technological policies. The effectiveness of each policy is judged by comparing actual benefits from FDI and policy costs. Empirical studies indicate that successful FDI policies usually combine three generations of FDI policies, they are incentive policies, regulative policies and policies strengthening linkages. In current situation, the third generation policies are increasingly important.I choose FDI polices of Costa Rica government as case study. According to WIR 2002, Costa Rica is one of the countries that successfully introduced a "proactive" policy to attract FDI in certain high technology sectors. In this chapter, I use investment from Inter as starting point, to discuss the interactive process between Costa Rica government and Intel, to discuss the effect of Intel investment on Costa Rica's economy. Hence we can get a comprehensive examination of theoretical analysis in former chapters. In conclusion, it's my strong sense that other developing countries can draw lessons from Costa Rica's experience and pay attention to conditions and differences while applying these policies to their own countries.In the end, I discuss FDI policies implemented in China and negative effects produced by TNCs. According to the former theoretical research and successful experience of Costa Rica, I put forward some suggestions and directions on China's future FDI policy adjustments.