The privatization of government assets has supplied many developing countries with their main source of foreign direct investment in recent years. But that money is now drying up—a problem brought on by the very success of privatization. To an increasing extent, the most important channel for foreign direct investment in many countries is reinvestment by existing businesses (Exhibit 1).

In a 1999 study of Hungarian investments made by 42 companies belonging to the Investors' Council, which represents foreign investors in Hungary, McKinsey found many companies ready to reinvest there, at least under a sympathetic government. Half of the fears mentioned by the companies related to government policy (Exhibit 2).

These 42 companies have invested some $9 billion in Hungary, 41 percent in greenfield projects and 59 percent in assets obtained through privatization. About 70 percent of the companies said that they planned new invest- ments in the country—mostly fresh equity investments—in the next three to five years (Exhibit 3). But during that time, they expect their total annual reinvestment to reach only $500 million to $530 million, just 40 percent of what privatization spurred them to invest.

The companies do believe that Hungary has progressed over the past two...