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FDI should be distinguished from portfolio investment. FDI typically involves some form of effective control and active management of assets in host countries, while portfolio investment typically involves passive investments in host countries. Over the last several decades, there has been a dramatic increase in FDI around the world, much of it between developed countries, but increasingly developing countries have been major recipients of FDI, including countries such as China, and in some cases have themselves become exporters of FDI (again, China is a prominent example).1 More than 40 per cent of world FDI inflows are directed to developing countries and FDI flows to developing countries now exceed foreign aid flows by a factor of about 5 to 1.2

In their early post-independence years, many former colonies viewed FDI with scepticism and, in some cases, outright hostility, as it was perceived to be a new form of economic imperialism (reflecting again dependency theories that were influential in many developing countries in the 1950s and 1960s, as discussed in Chapter 2). More recently, many developing countries have come to see FDI as having at least the potential for making significant contributions to their economies – as a source of investment in infrastructure, as a source of technology transfers and spillovers, as a source of investment in human capital and skills upgrading, as a source of investment in major natural resource extraction projects, and as a major source of local employment in low-wage, low-skilled manufacturing activities.3

Foreign direct...