Cop­ing with For­eign Di­rect In­vest­ment

Weekend Mirror - - CHILDREN’S CORNER - By Anis Chowd­hury and Jomo Kwame Sun­daram


Chowd­hury, Ad­junct Pro­fes­sor, West­ern Syd­ney Univer­sity and the Univer­sity of New South Wales (Aus­tralia). He held se­nior United Na­tions po­si­tions dur­ing 2008-2016 in Bangkok and New York.

Jomo Kwame Sun­daram, a for­mer eco­nomics pro­fes­sor, was United Na­tions As­sis­tant Sec­re­tary-Gen­eral for Economic De­vel­op­ment, and re­ceived the Wass­ily Leon­tief Prize for Ad­vanc­ing the Fron­tiers of Economic Thought in 2007.

For­eign Di­rect In­vest­ment (FDI) can make im­por­tant con­tri­bu­tions to sus­tain­able de­vel­op­ment, par­tic­u­larly when projects are aligned with na­tional and re­gional sus­tain­able de­vel­op­ment strate­gies. Credit: Ed McKenna/ IPS

(IPS) - For­eign di­rect in­vest­ment (FDI) is in­creas­ingly touted as the elixir for economic growth. While not against FDI, the mid-2015 Ad­dis Ababa Ac­tion Agenda (AAAA) for fi­nanc­ing de­vel­op­ment also cau­tioned that it “is con­cen­trated in a few sec­tors in many de­vel­op­ing coun­tries and of­ten by­passes coun­tries most in need, and in­ter­na­tional cap­i­tal flows are of­ten short-term ori­ented”.

FDI flows

UNCTAD’s 2017 World In­vest­ment Re­port (WIR) shows that FDI flows have re­mained the largest and has pro­vided less volatile of all ex­ter­nal fi­nan­cial flows to de­vel­op­ing economies, de­spite de­clin­ing by 14% in 2016. FDI flows to the least de­vel­oped coun­tries and ‘struc­turally weak’ economies re­main low and volatile.

FDI in­flows add to funds for in­vest­ment, while pro­vid­ing for­eign ex­change for im­port­ing ma­chin­ery and other needed in­puts. FDI can en­hance growth and struc­tural trans­for­ma­tion through var­i­ous chan­nels, no­tably via tech­no­log­i­cal spill-overs, link­ages and com­pe­ti­tion. Transna­tional cor­po­ra­tions (TNCs) may also pro­vide ac­cess to ex­port mar­kets and spe­cial­ized ex­per­tise.

How­ever, none of these ben­e­fi­cial growth-en­hanc­ing ef­fects can be taken for granted as much de­pends on type of FDI. For in­stance, merg­ers and ac­qui­si­tions (M&As) do not add new ca­pac­i­ties or ca­pa­bil­i­ties while typ­i­cally con­cen­trat­ing mar­ket power, whereas green-field in­vest­ments tend to be more ben­e­fi­cial. FDI in cap­i­tal-in­ten­sive min­ing has lim­ited link­age or em­ploy­ment ef­fects.

Tech­no­log­i­cal ca­pac­i­ties and ca­pa­bil­i­ties

Tech­no­log­i­cal spill-overs oc­cur when host coun­try firms learn su­pe­rior tech­nol­ogy or man­age­ment prac­tices from TNCs. But in­tel­lec­tual prop­erty rights and other re­stric­tions may ef­fec­tively im­pede tech­nol­ogy trans­fer.

Or the qual­ity of hu­man re­sources in the host coun­try may be too poor to ef­fec­tively use, let alone trans­fer tech­nol­ogy in­tro­duced by for­eign firms. Learn­ing ef­fects can be con­strained by lim­ited link­ages or in­ter­ac­tions be­tween lo­cal sup­pli­ers and for­eign af­fil­i­ates.

Link­ages be­tween TNCs and lo­cal firms are also more likely in coun­tries with strict lo­cal con­tent re­quire­ments. But purely ex­port ori­ented TNCs, es­pe­cially in ex­port pro­cess­ing zones ( EPZs), are likely to have fewer and weaker link­ages with lo­cal in­dus­try.

For­eign en­try may re­duce firm con­cen­tra­tion in a na­tional mar­ket, thereby in­creas­ing com­pe­ti­tion, which may force lo­cal firms to re­duce or­ga­ni­za­tional in­ef­fi­cien­cies to stay com­pet­i­tive. But if host coun­try firms are not yet in­ter­na­tion­ally com­pet­i­tive, FDI may dec­i­mate lo­cal firms, giv­ing mar­ket power and lu­cra­tive rents to for­eign firms.

Con­trast­ing ex­pe­ri­ences

The South Korean govern­ment has long been cau- tious to­wards FDI. The share of FDI in gross cap­i­tal for­ma­tion was less than 2% dur­ing 1965-1984. The govern­ment did not de­pend on FDI for tech­nol­ogy trans­fer, and pre­ferred to ‘pur­chase and un­bun­dle’ tech­nol­ogy, en­cour­ag­ing ‘re­verse en­gi­neer­ing’. It favoured strict lo­cal con­tent re­quire­ments, li­cens­ing, tech­ni­cal co­op­er­a­tion and joint ven­tures over wholly-owned FDI.

In con­trast, post-colo­nial Malaysia has never been hos­tile to any kind of FDI. Af­ter FDI-led im­port-sub­sti­tut­ing in­dus­tri­al­iza­tion pe­tered out by the mid-1960s, ex­port-ori­en­ta­tion from the early 1970s gen­er­ated hun­dreds of thou­sands of jobs for women. Elec­tron­ics in Malaysia has been more than 80% FDI since the 1970s, with lit­tle scope for knowl­edge spillovers and in­ter­ac­tions with lo­cal firms. Al­though lack­ing many ma­ture in­dus­tries, Malaysia has been ex­pe­ri­enc­ing pre­ma­ture dein­dus­tri­al­iza­tion since the 1997-1998 Asian fi­nan­cial crises.

China and In­dia

From the 1980s, China has been pro-active in en­cour­ag­ing both im­port-sub­sti­tut­ing and ex­port-ori­ented FDI. How­ever, it soon im­posed strict re­quire­ments re­gard­ing lo­cal con­tent, for­eign ex­change earn­ings, tech- nol­ogy trans­fer as well as re­search and de­vel­op­ment, be­sides favour­ing joint ven­tures and co­op­er­a­tives.

Solely for­eign- owned en­ter­prises were not per­mit­ted un­less they brought ad­vanced tech­nol­ogy or ex­ported most of their out­put. China only re­laxed these re­stric­tions in 2001 to com­ply with WTO en­trance re­quire­ments. Nev­er­the­less, it still prefers TNCs that bring ad­vanced tech­nol­ogy and boost ex­ports, and green-field FDI over M&As.

Thus, more than 80% of FDI in China in­volves green­field in­vest­ments, mostly in man­u­fac­tur­ing, con­sti­tut­ing 70% of to­tal FDI in 2001. China has strictly con­trolled FDI in­flows into ser­vices, only al­low­ing FDI in real es­tate re­cently.

Al­though long cau­tious of FDI, In­dia has re­cently changed its poli­cies, seek­ing FDI to boost In­dian man­u­fac­tur­ing and cre­ate jobs. Thus, the cur­rent govern­ment has promised to “put more and more FDI pro­pos­als on au­to­matic route in­stead of govern­ment route”.

De­spite sharp ris­ing FDI in­flows, the share of FDI in man­u­fac­tur­ing de­clined from 48% to 29% be­tween Oc­to­ber 2014 and Septem­ber 2016, with few green-field in­vest­ments. Newly in­cor­po­rated com­pa­nies’ share of in­flows was 2.7% over­all, and 1.6% for man­u­fac­tur­ing, with the bulk of FDI go­ing to M&As.

Pol­icy lessons

FDI poli­cies need to be well com­ple­mented by ef­fec­tive in­dus­trial poli­cies in­clud­ing ef­forts to en­hance hu­man re­source de­vel­op­ment and tech­no­log­i­cal ca­pa­bil­i­ties through pub­lic in­vest­ments in ed­u­ca­tion, train­ing and R&D.

Thus, South Korea in­dus­tri­al­ized rapidly with­out much FDI thanks to its well-ed­u­cated work­force and ef­forts to en­hance tech­no­log­i­cal ca­pa­bil­i­ties from 1966. Korean man­u­fac­tur­ing de­vel­oped with pro­tec­tion and other of­fi­cial sup­port (e.g., sub­si­dized credit from state-owned banks and govern­ment-guar­an­teed pri­vate firm bor­row­ings from abroad) sub­ject to strict per­for­mance cri­te­ria (e.g., ex­port tar­gets).

In­deed, FDI can make im­por­tant con­tri­bu­tions “to sus­tain­able de­vel­op­ment, par­tic­u­larly when projects are aligned with na­tional and re­gional sus­tain­able de­vel­op­ment strate­gies. Govern­ment poli­cies can strengthen pos­i­tive spillovers …, such as know-how and tech­nol­ogy, in­clud­ing through es­tab­lish­ing link­ages with do­mes­tic sup­pli­ers, as well as en­cour­ag­ing the in­te­gra­tion of lo­cal en­ter­prises… into re­gional and global value chains”.

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