On 13 October 2026, at the IMF annual meetings, a presentation by Isabel Duarte of the IMF Fiscal Department looked at Fiscal Drivers of FDI in Low Income Countries. Duarte noted that only around 1% of global foreign direct investment (FDI) flowed into the low-income countries (LICs) in the past ten years. The low-income countries therefore need to attract more FDI. This could be attempted by generous fiscal incentives or by stronger fiscal institutions and sustainable public finances.
Duarte has looked at 20 years of investment data in up to 70 LICs, drawing on bilateral investment information; project level evidence; and countries’ experience with policy reforms. The study found that fiscal credibility and strong fiscal discipline attract more FDI. Also, institutions must be strong to ensure effective revenue administration; sound financial management; and reliable fiscal reporting. Improving fiscal discipline from a low level to the highest level is associated with an increase in FDI of up to 8%; and improving fiscal institutions to the highest level is associated with an increase in FDI of up to 18%.
Investors care about predictability. Sound fiscal administration can lower their compliance costs. Strong fiscal management can also strengthen policy credibility and reduce concerns about the future business environment. The impact of fiscal discipline and fiscal institutions can be even stronger when fiscal uncertainty is high. Investors become more selective in uncertain times, and better institutions attract more investment. The type of investment attracted is higher quality if there is fiscal discipline with strong institutions. Industries that have high research and development expenditure are attracted by a country with stronger institutions. Fiscal institutions determine how policies are implemented; and how taxes are administered.
Incentives work better when fiscal discipline and incentives are strong. For example, the impact of adopting special economic zone (SEZ) laws on FDI; or the adoption of tax cuts can be more effective if backed up by strong institutions. If institutions are weak, there can be a race to the bottom by countries introducing reduced tax rates for specific industries, without much effect in attracting investment. Duarte concludes that fiscal discipline and strong institutions are the main drivers of FDI. They are important for both local and external investors into a country. Strong institutions and fiscal discipline create credibility and a level playing field.
