The state of world economy and the changing patterns of Direct foreign investment (DFI) are of great importance to the developing countries. As the flows of foreign capital, including aids and bank lending, is decreasing, DFI is regarded as the alternative to finance their development and growth.
The purpose of this paper is to find out the role DFI can play in the development and growth of developing countries. A case study on nine Asian developing countries is made to investigate the contribution of DFI in those economies.
It is concluded that DFI cannot substitute for other foreign capital flows as its share is still relatively small in total capital flows. Nevertheless, it can be used as a complement. In addition, it plays a key role in transferring technology and expertise as well as expanding export production. In supporting such conclusion, the case study in nine Asian developing countries found that DFI is an important source of finance in most countries and means to restructure the economies toward export production.
To attract more DFI flows, developing countries should adopt realistic finance and investment policies as well as provide a stable and sound political and economic environment. Effort has to be done at international level to resume DFI flows.