Foreign Investment: Making it Work for Sustainable Development

The document analyzes the drivers of foreign direct investment (FDI) and the policy frameworks necessary to align these flows with sustainable development goals. It distinguishes between types of FDI—natural-resource-seeking, market-seeking, and efficiency-seeking—and examines the impacts of investment on domestic savings, technology transfer, and the environment. The author argues that while international treaties like the WTO's TRIMs and various Bilateral Investment Treaties (BITs) are common tools for attracting capital, they can constrain a government's ability to regulate for public health and environmental protection. The paper recommends a combination of domestic institutional strengthening—such as robust environmental management and infrastructure—and strategic international engagement to maximize the developmental benefits of FDI.

• Foreign direct investment (FDI) can either 'crowd out' or 'crowd in' domestic investment; evidence suggests that strategic, partial liberalization in Asia between 1976 and 1990 led to neutral or crowding-in effects, whereas unrestricted liberalization in Latin American economies during the same period resulted in neutral or crowding-out effects.
• The impact of FDI on the environment is mixed: while transnational corporations are often cleaner than domestic firms, a lack of strong environmental management regimes can lead to devastating effects, including increased pollution and the depletion of renewable resources like forests and fisheries.
• Investors prioritize stability and predictability; a survey of FDI in Central and Eastern Europe identified profitability and competitiveness as the top concerns, followed by the risk of unstable economic reforms.
• International investment agreements, such as the Energy Charter Treaty (ECT) and NAFTA, may inadvertently restrict a state's regulatory capacity. Investor-state dispute resolution processes often judge government measures on commercial grounds alone, ignoring legitimate public policy objectives like health and environment.
• To ensure FDI fosters sustainable development, governments should implement domestic actions including environmental impact assessments, clear legal liability for 'brownfields' investments, and programs to retrain workers displaced by liberalization.

APA

International Institute for Sustainable Development (2002). Foreign Investment: Making it Work for Sustainable Development. https://www.iisd.org/system/files/publications/trade_ee_investment.pdf

Chicago

International Institute for Sustainable Development. Foreign Investment: Making it Work for Sustainable Development. 2002. https://www.iisd.org/system/files/publications/trade_ee_investment.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Foreign Investment: Making it Work for Sustainable Development |date=September 2002 |url=https://www.iisd.org/system/files/publications/trade_ee_investment.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopment2002foreign, author = {{International Institute for Sustainable Development}}, title = {{Foreign Investment: Making it Work for Sustainable Development}}, institution = {International Institute for Sustainable Development}, year = {2002}, month = sep, url = {https://www.iisd.org/system/files/publications/trade_ee_investment.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }