share in project benefits, though, is the result of many factors in addition to the balance sheet definitions of participation. These include local taxes, financial incentives, and threats to appropriability of profits.
The resulting sharing rules are important determinants of the efficiency of FDI along three dimensions: managerial incentives, risk spreading, and contract stability. All deserve careful attention in the design and operation of control systems and incentives for FDI. Every investment should be examined in terms of the sharing of risk and reward and not just the stated ownership percentages and financing structures.
The risk spreading and incentive implications of foreign share financing are important at an aggregate, national level, as well as at a project or enterprise level. Our conceptual framework suggests that most developing countries should include some form of share financing in their external financing, even though they recently have relied more heavily on general obligation finance. The extent to which share financing is important depends on the country's overall obligations relative to its likely foreign exchange earnings, its comparative advantage in bearing particular risks, and on the extent to which it wants to shift some of the responsibility of its selection and execution of projects or programs to foreign interests.
Even if these aggregate-level considerations are not strong in a specific case, a country may want to employ substantial foreign share financing in order to make up for incomplete internal mechanisms for spreading risk and creating appropriate managerial incentives. In such cases, though, an important further consideration is whether the form of the foreign share financing employed will stimulate or retard the development of appropriate domestic markets. 22