Measures to promote Growth and development (Growth and Development in developing emerging and developed Economies)

Foreign direct investment (FDI) is investment by a firm or multinational from one country into productive assets or operations in another country (1) — for example building a factory, or acquiring a controlling stake in a local business, in the host economy (1).

Market-oriented (market-led) strategies promote development by freeing up markets and attracting private capital, on the view that markets allocate resources efficiently (1). Examples include trade liberalisation, promoting FDI, privatisation and deregulation, and floating the exchange rate — the government steps back (1).

Interventionist strategies instead rely on the government acting directly to correct market failures and build capacity the private sector under-provides (1). Examples include government spending on education, health and infrastructure, industrial policy and infant-industry protection — the government steps in (1).

Attracting FDI brings in foreign capital that a developing economy, with low domestic savings, could not raise itself. This helps to fill the savings/investment gap: multinationals fund factories, machinery and infrastructure, raising the country's capital stock.

The new operations directly create employment, so household incomes rise and poverty falls — a development gain that shows up in living standards, not just GDP. Multinationals also transfer technology and management skills, training local workers and (through supply linkages) local firms, which raises productivity across the economy.

Finally, the extra output can be exported, earning foreign currency, while profits and wages generate tax revenue that the government can spend on schools and healthcare, and workers' spending has a multiplier effect on domestic demand. Through these channels — more capital, jobs, technology, exports and tax revenue — FDI can raise both real GDP and living standards, promoting economic development, though some profits may be repatriated rather than reinvested locally.

Interventionist measures promote development by having the government act directly to build the capacity that markets under-provide. Two examples follow.

Measure 1 — investment in human capital (education and health). Government spending on schools, training and healthcare raises workers' skills and health, and therefore their productivity. More productive, healthier workers earn higher incomes, so poverty falls and output rises; better education also lowers birth rates and improves the next generation's prospects. This is a broad development gain — it improves living standards directly, not only GDP — though it works only over the long run and is expensive to fund.

Measure 2 — investment in infrastructure. Government provision of roads, ports, power, water and telecoms lowers firms' costs, connects producers to markets and is a precondition for other investment (including FDI) to pay off. Better infrastructure raises the productivity of all other factors and can unlock a country's agricultural and industrial potential. It is, however, very costly, often requires borrowing, and carries risks of corruption and 'white-elephant' projects.

Both measures build productive capacity the market alone would under-supply, raising output and living standards — though each is slow, expensive and depends on the funds being spent effectively.

An export-led (export-oriented) growth strategy means a developing economy builds industries aimed at world markets, typically using its comparative advantage in low-cost labour — the route taken by the East-Asian 'tiger' economies such as South Korea and Taiwan.

The likely benefits. First, world markets are far larger than a small domestic market, so firms can grow, exploit economies of scale and raise output rapidly — boosting real GDP and, through job creation, incomes and employment. Second, competing internationally forces efficiency and quality, and exposes firms to foreign technology and best practice, raising productivity. Third, exports earn foreign currency, easing the balance of payments and funding imports of the capital goods needed to keep industrialising. Fourth, industrialisation diversifies the economy away from volatile primary products and, following the Lewis model, absorbs surplus labour from agriculture into higher-productivity manufacturing — raising living standards over time.

Evaluation — how likely and how beneficial? The gains are real but conditional.

First, export-led growth depends on open world markets: if trading partners raise protectionism, or a global recession cuts demand, an export-dependent economy is badly exposed.

Second, it may rely on keeping wages and the exchange rate low, which can suppress living standards at home in the short run and provoke trade disputes or accusations of a 'race to the bottom'.

Third, the benefits may be unevenly distributed — concentrated in export zones and among firm owners — and rapid industrialisation can bring environmental costs, so growth may not translate fully into inclusive, sustainable development.

Fourth, success is not guaranteed: it requires supporting infrastructure, human capital and stable institutions, which is exactly why the tigers combined export-led growth with heavy intervention.

Judgement. An export-led strategy is likely to raise growth and, over time, development — it delivered the fastest sustained development in modern history in East Asia. But its success depends on context: open world markets, adequate infrastructure and human capital, and complementary government support. It is most effective when combined with interventionist investment in capacity, and it exposes the economy to external shocks — so it is a powerful but not risk-free route to development.

A developing economy can pursue growth and development through market-oriented measures (freeing up markets and attracting private capital), interventionist measures (government investment in capacity), and external assistance (aid, debt relief, the World Bank and IMF). Promoting FDI — attracting multinationals with a stable, open, low-tax environment — is a leading market-led option. Whether it is the best route depends on the economy's circumstances.

The case for FDI as the best route. FDI's great strength is that it fills several gaps at once. Developing economies typically have low domestic savings, so investment is low; FDI brings in foreign capital to fund factories, machinery and infrastructure. It creates jobs, raising incomes and cutting poverty; it transfers modern technology and management skills, lifting the productivity of local workers and supplier firms; and it can generate exports (foreign currency) and tax revenue to fund health and education. Unlike aid, FDI is not a hand-out — it does not add to debt or create the same dependency, and it comes with the multinational's incentive to make the venture succeed. For a capital- and technology-scarce economy, this bundle of capital, jobs, technology and market access can be transformative, and it works faster than building a skilled workforce from scratch.

The case against — FDI's limitations. First, the gains can be overstated: multinationals may repatriate profits to their home country, leaving little lasting benefit, and may exploit cheap labour and lax environmental/regulatory standards, so growth need not raise living standards or be sustainable. Second, FDI often has weak linkages to the local economy (enclave production, imported inputs) and can crowd out or undercut domestic firms. Third, it is footloose — investors can withdraw quickly, and a country competing for FDI may be forced into a 'race to the bottom' on wages, taxes and regulation. Fourth, FDI does not by itself fix the deeper constraints: without human capital, infrastructure and stable institutions, FDI will not arrive or will not deliver — which is why interventionist investment in education, health and infrastructure is often the true precondition. Alternative routes may be better matched to the constraint: human-capital and infrastructure spending for a low-skill/poorly-connected economy, debt relief for a debt-crippled one, fair trade or diversification for a primary-product-dependent one, and export-led industrialisation to build lasting domestic capacity.

Evaluation and judgement. Whether promoting FDI is 'best' depends on the binding constraint and the conditions in place. Where the key shortage is capital and technology, and where institutions, infrastructure and some human capital already exist to make FDI productive and to regulate it, promoting FDI can indeed be the single most powerful lever — the fast-industrialising economies of East and Southeast Asia used it heavily. But FDI is rarely sufficient on its own: its benefits leak away without local linkages, it can worsen inequality and sustainability, and it depends on prior public investment to attract and anchor it. The most defensible conclusion is that promoting FDI is one of the most effective market-led measures, but best as part of a package — combined with interventionist investment in human capital and infrastructure and, where relevant, targeted external help — with the 'best' strategy ultimately determined by which constraint is holding that particular economy back.