policies, as they would t

policies, as they would treat foreign and domestic firms equally with regardto incentives.The presentation examined in detail the actual policy instruments forattracting, promoting and accompanying FDI. It is important to bear in mindthat the design and the implementation of policies firstly depend on theactual policy instruments. Secondly, they should be converted into law. Infact, it is the country’s legal and regulatory system that is the highestauthority in attracting, guiding and shaping inward FDI, and it is of crucialimportance that all policy tools are translated into consistent national laws orsub-laws. The different policy instruments and regulatory measures arerelated to; i) admission and project establishment; ii) ownership and controlissues; iii) the actual FDI operations; and iv) the main incentives offered toforeign investors.The advantages and disadvantages of FDI policy instruments arise not inabsolute terms but relatively from the way they are calibrated andrecalibrated and applied in changing circumstances. For example, regardingownership, a primary resource driven economy would need high modalneutrality to enable wholly owned subsidiaries (as the likelihood of local firmsable to joint venture meaningfully would be low) and have policy instrumentsthat secure property rights. It would be disadvantageous to insist on FDIpolicy that required MNEs to joint venture with local firms in order to investin vertically specialised minerals production. Regarding capital depreciationas another example, policies need careful calibration or else intendedbeneficiaries might not actually alter their capital/labour ratios and capitalintensities, in order to upgrade the technological capacity of manufacturingindustry.The discussion on the pros and cons of specific FDI policy instrumentsactually embodies the debate on whether developing countries should opt forreform in the direction of greater policy liberalisation, or greater policyregulation. Shafaeddin (2000) argues that no country has developed its26

industrial base without relying to some extent on infant industry protection.“Both early industrialised and newly industrialised countries applied the sameprinciple, although to varying degrees and in different ways” (p. 2). In aworld of different levels of industrialisation, market failures do not enablefree international competition to promote effective industrialisation in theleast developed countries. Therefore, it appears reasonable that developingcountries encourage their infant industry by using the regulation of foreigninvestment. Nevertheless, regulation should be on a selective, rather thanon a universal, basis and the level of protection should not be excessive.It is also arguable that regulation impedes FDI activity, and thus disfavoursdeveloping countries. In fact, these countries often have very high officialcosts of entry, and MNEs have to follow long procedures before investing.Whereas regulation is meant to achieve socially superior outcomes bycountering market failures (such as monopolies and negative externalities),in real terms regulation is very often associated with higher corruption andunofficial economies. Gratuitous regulation can benefit the regulator and notthe whole society, and can prevent MNEs from investing. Therefore,extensive regulation can have the opposite effect from its initial purpose,since it is associated with socially inferior outcomes. Thus, as a logicalcorollary, FDI policies should be liberalised.However, it is worth mentioning that policies aiming at liberalising FDI arenot necessarily the best policies for creating a favourable investment climate,and even less so for attracting or promoting FDI. Moreover, one can notethat the liberalisation process should not be seen as a decline of the role ofthe state, since the measures mentioned above relate to governmentregulation. In fact, whereas the two first measures imply FDI liberalisation,their overall beneficial impact depends highly on the presence of competentand well-organised market supervision. Thus, one can argue thatliberalisation and regulation of FDI are not contradictory, but rathercomplementary, in order to attract and promote FDI that is beneficial forboosting industrial development.27