The Changing Composition of FDI to the Poorest Nations and the Need for a Competition Culture supported by Regulatory Institutions and Openness.

Like their wealthier counterparts, the poorest developing economies saw their share of foreign direct investment (FDI) in the form of mergers and acquisitions (M&A), and privatizations rise in the late 1990s. To be sure, greenfield investments still dominated overall FDI inflows, but certain sectors (notably utilities) saw considerable M&A by overseas firms. Without in any way diminishing the potential benefits of overseas takeovers and participation in privatization deals, policymakers need to be aware of-and take action against-the possible deleterious effects that can occur when foreign investors exercise market power against domestic consumers and producers. A first line of defense is to ensure that domestic barriers to entry remain as low as possible. A second line of defense-which is particularly powerful in tradeable sectors where the distribution channels are not all owned by manufacturers-is to have no policy-induced impediments to trade. A third line of defense is an open FDI regime, which allows other overseas investors to chase profitable opportunities. Unfortunately, bitter experience has taught is that sometimes these three lines of defense are not enough-and that carefully calibrated interventions to support a competition culture are needed. The widespread adoption of competition laws in developing world in the 1990s suggests that this lesson has been learnt. Moving from legislation to legal implementation is the next challenge-and provides the final line of defense against the persistent exercise of market power, be it by foreign or domestic firms.