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Improving Russia's policy on foreign direct investment

Listed author(s):
  • Bergsman, Joel
  • Broadman, Harry G.
  • Drebentsov, Vladimir

Foreign direct investment brings host countries capital, productive facilities, and technology transfers as well as employment, new job skills, and management expertise. It is important to the Russian Federation, where incentives for competition are limited and incentives to becoming efficient are blunted by interregional barriers to trade, weak creditor rights, and administrative barriers to new entrants. The authors ague that the old policy paradigm of foreign direct investment (established before World War II and prevalent in the 1950s and 1960s) still governs Russia. In this paradigm there are only two reasons for foreign direct investment: access to inputs for production and access to markets for outputs. Such kinds of foreign direct investment, although beneficial, are often based on generating exports that exploit cheap labor or natural resources, or are aimed at penetrating protected local markets, not necessarily at world standards for price and quality. They contend that Russia should phase out high tariffs and non-tariff protection for the domestic market, most tax preferences for foreign investors (which don't increase foreign direct investment but do reduce fiscal revenues), and many restrictions on foreign investment. They recommend that Russia switch to a modern approach to foreign direct investment by: 1) Amending the newly enacted foreign direct investment law so that it will grant non-discriminatory"national treatment"to foreign investors for both right of establishment, and post-establishment operations, abolish conditions (such as local content restrictions) inconsistent with the World Trade Organization agreement on trade-related investment measures (TRIMs), and make investor-state dispute resolution mechanisms more efficient (giving foreign investors the chance to seek neutral binding international arbitration, for example). 2) Strengthening enforcement of property rights. 3) Simplifying registration procedures for foreign investors, to make them transparent and rules-based. 4) Extending guarantee schemes covering basic non-commercial risks.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2329.

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Date of creation: 31 May 2000
Handle: RePEc:wbk:wbrwps:2329
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  1. Broadman, Harry G. & Xiaolun Sun, 1997. "The distribution of foreign direct investment in China," Policy Research Working Paper Series 1720, The World Bank.
  2. Broadman, Harry G., 2000. "Reducing structural dominance and entry barriers in Russian industry," Policy Research Working Paper Series 2330, The World Bank.
  3. Harry G. Broadman & Xiaolun Sun, 1997. "The Distribution of Foreign Direct Investment in China," The World Economy, Wiley Blackwell, vol. 20(3), pages 339-361, May.
  4. Harry Broadman, 2000. "Reducing Structural Dominance and Entry Barriers in Russian Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 17(2), pages 155-175, September.
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