Every year, the publication of new data on FDI inflows by international organizations or national central banks is followed by media reports, equating host countries’ FDI performance with the size of inflows, creating the impression that the objective of FDI policy is to attract ever growing investments. The author argues that the objective is to achieve and increase benefits and to reduce or avoid FDI costs. Benefits [and costs, considered in detail in the sequel to this book] are central to policy analysis. Foreign affiliates of MNEs exert impacts – positive and negative – as domestic enterprises do, on almost all economic and social aspects of host countries. Key benefits and costs are associated with unique characteristics of MNEs, distinct from domestic enterprises. They have been formulated in early FDI/MNE theories and confirmed by empirical studies. The modification of theories resulting from globalization has not significantly altered these characteristics and host country effects. FDI is a package of resources and attributes transferred by MNE parents to their foreign affiliates, useful for economic development. Transfers give rise to high productivity and competitiveness of affiliates, which exert stronger and different impacts on domestic enterprises than the latter do on each other. Foreign affiliates can stimulate host countries’ exports, but they can also leave countries for other locations. FDI is the source of foreign savings for host countries, but MNEs can alter financial benefits from FDI to their advantage through transfer pricing.The said benefits are not automatic. Higher than in domestic firms’ productivity and wages in foreign affiliates are common in all kinds of host countries. They result from the transfer of superior assets and practices from parents to affiliates: technology, organization, management, access to international markets or marketing, or, in general, of business and technological knowledge. However, positive externalities – transfer of knowledge from foreign affiliates to domestic enterprises – do not always occur, because they depend on the absorption capacity of the latter. In its absence, negative externalities will prevail. In globalization, FDI has become the largest stream of foreign capital for emerging economies, crowding in domestic investment, but at times crowding it out.After World War II, inward FDI policy of countries, especially developing ones, has evolved from confrontational in nature to FDI liberalization, competition for better types of FDI and improvements of investment climate. FDI promotion, including incentives and activities of investment promotion agencies, has become a common and important instrument of attracting FDI and benefitting from it, although its effectiveness differs among host countries. Inward FDI policy interacts with economic determinants of FDI inflows, supplementing them and enhancing countries’ FDI potential. Improvements of investment climate have been found, ceteris paribus, to increase FDI inflows.Investment incentives, that is, subsidies to foreign affiliates, are a key instrument to benefit from FDI. They are costs, host countries are ready to incur, in exchange for expected gains such as new jobs, advanced economic activities, exports, R&D or linkages with domestic enterprises. General theory postulates that a subsidy should not exceed expected benefits. Adapted to FDI, it suggests that an FDI project deserves support, if it delivers positive externalities. However, the practical application of this recommendation gives rise to controversies. Over time, the use of FDI incentives in the world has evolved, and it differs among countries as regards its objectives, types, scope and scale. Incentives are typically an integral part of special economic zones, popular in many countries. Incentive competition has intensified, especially for large greenfield or export-oriented projects, resulting sometimes in unreasonably large and doubtful subsidies. The case analysis in this book indicates that, eventually, even a very large support may prove to be valuable for a host country. The European Union is the only organization in the world limiting the size of investment incentives. Empirical studies have not reached consensus on the effectiveness of incentives. But the absence of incentives for export oriented FDI projects typically deprives a host country of the chance to be placed on the short list of investment locations.Poland has attracted large FDI inflows, especially after the accession to the European Union, becoming the largest host country in the Central and Eastern Europe. Over time, foreign enterprises have emerged as an ever increasing and important part of the Polish economy, contributing to economic development, particularly in manufacturing and modern business services, increasing productivity and wages, stimulating innovation and exports, and improving the country’s economic structure. These contributions can continue if Poland meets challenges associated with competition for FDI, including low competitiveness of its FDI promotion system, an average investment climate and low technological readiness, as well as an ambivalent and, at times averse, attitude of the Government to FDI.Lessons for Poland are preceded for each issue by theoretical considerations and comprehensive analysis of worldwide trends and situations. As a result, most of the book is on world’s FDI policy rather than on that of Poland
