In many countries, FDI outperforms aid, remittances, and portfolio investments as the largest source of external financing. The investments create jobs, boosts incomes and productivity, improves management expertise, and spurs technology transfer.
The spillover effects of FDI have led to better working conditions and environmental practices. Industries modernize, supply chains emerge, infrastructure develops, as do regulatory reforms. The impact of FDI is often larger than the initial investment. For example, research supported by the Hinrich Foundation estimates that, during the mid-2010s, around one-third of China’s GDP was generated by the investments, operations, and supply chains of foreign invested companies. These impacts have helped China become the world’s second largest economy, its leading exporter, and a leading destination for investment.
FDI has suffered a steady decline in recent years, both in aggregate and in developing countries, despite its potential to boost economic recovery. Instead, restrictive policies such as FDI screening have increased.
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