How foreign capital can hinder, or help, economic development | Aeon Essays
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How foreign capital can hinder, or help, economic development | Aeon Essays
"In Nigeria's oil fields, international giants have pumped crude for decades - yet the country struggles to develop its own refineries or high-tech industries. In Mexico, global car companies churn out vehicles for export, but local suppliers and engineers remain stuck making low-value parts. Stories like these reflect a troubling pattern across the developing world: foreign capital pouring in, while domestic capabilities stagnate or even erode."
"Policymakers in poor and middle-income countries are often told that attracting foreign investors is key to prosperity: inflows are treated as a 'vote of confidence' and their decline as a sign of distress. According to this dominant narrative, capital naturally flows to places where it's needed most, bringing not just money but advanced technology and managerial expertise in its wake. By this logic, if investors hesitate to come, the fault lies in the host country's policies or politics."
"Some of the world's most successful economies rose to prosperity by keeping foreign capital on a tight leash. South Korea and Taiwan, for instance, leveraged foreign money and know-how on their own terms, ensuring it aligned with national priorities. Even the United States and Japan - today's wealthy giants - were once very cautious about foreign investment on their soil."
Foreign capital often flows into developing countries but frequently fails to build local industrial capabilities, leaving resource extraction and low-value manufacturing controlled by foreign firms. Policymakers commonly view foreign investment as a sign of confidence and a source of technology and managerial expertise, blaming domestic policy when investors stay away. Historical experience shows that several now-advanced economies limited foreign capital and used it selectively to promote national priorities. South Korea, Taiwan, the United States and Japan historically regulated foreign investment tightly in strategic sectors to nurture domestic industries. Controlled engagement with foreign capital can better support long-term development.
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