Investment plays a central role in poverty reduction, by increasing the productive capacity of the economy and generating increased employment. A good investment climate provides incentives for all firms — small, medium and large, as well as micro enterprises — to invest productively, create jobs, expand and introduce new technologies that can serve to increase the productivity and sustainability of other factors of production.
While in developing countries the bulk of private investment is domestic in nature, foreign direct investment (FDI) is an important factor as it brings, apart from major financial resources, improved know-how, modern technology, access to international markets, and a corporate culture of efficiency and competitiveness. Perhaps the greater contribution of FDI is through innovation, transfer of knowledge and technology, and productivity. Its contribution to growth is likely to be higher if the knowledge of better technology it brings can be spread to domestic businesses through business linkages. In this sense FDI can be a driver for the growth of local business and can improve the overall investment climate.