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Abstract
Most developing countries combine some degree of regulation of direct investment, aimed at improving their net benefits, with various incentives designed to attract it. During the 1960s and much of the 1970s there was a general trend toward greater restrictions: alternative forms of external financing were more readily available, there was disappointment with some of the results of previous direct investment, and nationalist sentiment in many countries was growing. A number of developing countries also restricted foreign portfolio investment in securities of domestic enterprises. In recent years, however, some countries have adopted more flexible policies, partly because of the need to bolster weakening external economic and financial positions. This section will discuss these policies, as well as the effects of some of the principal restrictions and incentives adopted in many developing countries. In discussing such policies, however, it should be remembered that the provision of a stable economic environment and the adoption of appropriate financial and exchange rate policies may be even more important for encouraging foreign investment and for increasing net benefits to the host country than policies related specifically to promoting such investment.
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