Attracting Foreign Investment in Developing Countries

Basing our study in line with new dependence theories and reviewing literature on foreign investment, this paper challenges the generally held view about the advantages of foreign investment. Supporter of foreign investment advancing their argument by considering foreign investment as a mechanism of filling the savings and technological gaps. In this paper we show that these objectives would not be fulfilled without institutional preconditions. The advantages often advanced for foreign investment such as its spillover effects and linkages would not be realized without appropriate absorptive capacity of the host country. We believe that without appropriate institutions foreign investment would not meet the objectives, rather it may result in capital flight and exclusive privilege for foreign investors and multinational companies without having development impact on the host developing countries. It may even deepen their dependency on other countries. Iran being an oil exporter has been endowed with huge amount of oil revenues was able to overcome shortages of savings and capital considered to be the main constraint hindering development of underdeveloped countries but has not been able to diversify its economy and advance the country to join the development camp. Thus the experience of Iran once again show that without appropriate institutional infrastructure, the available domestic capital has not been converted into productive Investment. Thus when a country is not able to utilize its own capital for investment, logically it is difficult to believe that it would be be able to utilize foreign capital appropriately specially when there is weak bases of technology and incomplete definition and enforcement of property rights.