Opening up to FDI

Opening up to FDI

Opening up a closed economy to the world is a process that needs close attention by the national government. Not only to orchestrate the economic development of their country best, but also to provide transparency and a clear direction to foreign investors.The pace of opening up is of utmost importance. Too fast is indeed equal to letting a child run a marathon immediately after it has set its first steps in the world.

The process of opening up generally consists of three stages: 1. Export led growth, 2. import substitution and 3. economic globalization. By starting with an export led growth model, a national product with an international comparative advantage provides a developing country with a rapid expansion in employment and hard foreign currency by which they can import commodities.

However, over time, export led growth makes a country (e.g. China) dependent on foreign markets. To reduce foreign dependency, the model of Import substitution is appropriate. Here governments reduce foreign dependency by using their hard foreign currency to stimulate local production of industrialized goods(through subsidies and tariffs). This protects young and local industries (so-called infant industries) from foreign domination and enables the national industries and markets to develop.

Transition to a globalized economy is the gradual lowering of tariffs and subsidies down to zero. By communicating well with their local industries that protection will not last forever, the industries are encouraged/forced to achieve the same level of competitiveness as their international competitors and will not become inefficient state owned companies. The Asian tigers are a good example of a successful transition.

Opening up a country successfully to FDI takes time and coordination between local industries and governments. Some pre emerging countries are in the first phase of economic development or in transition to the second phase. They should not want to attract FDI fully and directly. By taking small steps and demonstrating a clear focus, foreign investors also know what they can expect. This also avoids confusion, frustration and a negative international image.

Frank Peterse
Senior Consultant - ICA