Government Regulation of Foreign Investment: Emerging Lessons from Latin America
In Latin America, as elsewhere in the developing world, the attitudes held and policies applied toward foreign direct investment (FDI) have varied widely over time. From the end of World War II through the early 1960s, for example, FDI was viewed as an "engine of development." Accordingly, host country governments employed a variety of incentives to attract such investment. Thereafter, the benevolent nature of FDI began to be questioned and doubts emerged concerning its contribution in advancing the cause of economic development. Over the years, these initial doubts gradually escalated, giving way to intense and systematic criticisms of FDI by academics, journalists, politicians, government agencies, and even international organizations.
Foreign firms, it was now argued, drained capital from host countries by exporting, over the long run, more funds than were brought in. Other charges leveled at foreign investors included generating distorted consumption patterns, transferring inadequate technology, absorbing or displacing established local firms, contributing to the creation and consolidation of small, powerful, foreign-oriented sociopolitical elites, intervening in local politics, altering income distribution patterns, and generally eroding the living conditions of the majority of the population. The ensuing debate showed that some of these allegations were exaggerated, and that the same empirical evidence could yield varying conclusions and policy implications. 1 Nonetheless, the generalized perception among Latin American academics and policy makers was that foreign firms and their investments merited careful and specialized treatment.
By the early 1970s in Latin America, granting explicit incentives and other forms of preferential treatment toward foreign firms became almost unthinkable. Allowing the free entry of foreign firms into the national economy was no longer considered sound policy. Instead, foreign investment was barred from entering "reserved" sectors and limits were imposed on new foreign firms wishing to operate in the local economy. Constraints on the autonomy of both new and existing foreign firms were introduced in order to mitigate the socioeconomic "costs" attributed to their operations,