Though FDI is a major aim of developing economies so as to enhance industrialization, exports and development, it could have many demerits as well for developing economies, Can you suggest both sides of FDI for such economies?
I read many papers giving different impacts of FDI on economic growth. Sometimes, FDI helps to complement the existing capital in the recipient companies to increase production. At other times, it may act as a substitute to capital and not raise productivity and or production...
Attracting foreign direct investment for developing countries usually contribute to the development of coutntries. Developing countries has many objectives for that, such as, creating new jobs and attracting more businesses. At the same time, these investments may have the potential of adversely affecting the net capital flow of the economy.
The problem with FDI, is that they get their profit, and if the find better conditions leave and then the country may have very serious problems. The example of China, is characteristic. They ask the the investors should leave for chine the know-how, so that even if the leave Chine, the country can continuo an independent development. If we are in the case like Europe, with a common currency, then the things are more severe. The capital is free to go from country to country, hunting more profit, leaving behind something like the PIGS!
I agree with contents of the contributions of @Mahfuz and @Costas. But I have a related question.
Should the capital be free to go from country to country, hunting for more profit? without any conditions and limits!
FDI in general is good. It depends upon the type of industries in which they are invested. FDI provides valuable financial resources to the developing country. If it is invested in infrastructural and basic industries in the country, then it will improve employment, provides economic activity in the area where they are invested and allows to grow ancillary industries. Examples could be the automobile manufacturers or Pepsi when it first came to India.
If it is invested in some sectors such as retail, it will kill the existing mom and pop shops, thus net employment gain may not be there. It may provide some efficiencies in retail business but may not be all that good. It can be good if it is also accompanied in the development of local supply chain to source the goods to be supplied in retail stores setup by FDI.
Read through the following for further details.
http://hal.archives-ouvertes.fr/docs/00/84/68/25/PDF/Effects_of_Foreign_Direct_Investment_FDI_in_the_Indian_Economy.pdf
I think @ Nageswara makes an important point, it is not black and white and depends a great deal on the internal conditions of the country. In a sense economic growth does not depend directly on FDI, but rather they both depend on market conditions, factor pricing, trade linkages, good governance and competition. The second stages of ISI in Latin America depended significantly on attracting FDI, but only way of doing so was to provide foreign companies with a protected market and this may have actually farmed long-run growth. I would argue getting the conditions right to attract FDI into a competitive market may be more important than the actual investing / technology brought by the FDI.
I agree with @Mahfuz
I think @Costas focuses too much on FDI and not the type of investment or the final market, while internationalized companies, by their nature may find it easier to exit, almost all large companies can get-up an leave if they find a cheaper production platform. If the investment is principally oriented at producing for the domestic market, the likelihood of it picking-up and leaving is much lower than investment using the country simple as a production platform.
FDI suppose to be able to increase employment and solve some part of economical problem in developing country.
But from my observation its closely and highly related with political interest more than economical.
Cause if another fdi that related with develop country usually goes to imperialism and soft slavery.
If the fdi have a great impact usually they negotiate with local or national government for restructurization of policy to make them easier.
As in my country case is freeport from usa that rule papua rather then our own government, if the government change the tax policy,they will raise an issues to bringdown our government or separation of papua from indonesia.freeport mcmoran is the overlord of gold and mineral in papua with tax lower than 10%.but the surrounding region doesnt get the share still live under poverty.
As my view bad impact of fdi are exploitation of resources and employer with underweight salary,nature disaster with toxical waste around neighbourhood and policy breaker as corruption gap goes along with politics.
@Debi, here is the example of FIAT "investment" in Serbia!!! "The Serbian government subsequently agreed to compensate Fiat for this by paying it €10,000 for each employee it took on—not the first time a government has had its arm twisted by a carmaker into providing subsidies. It also promised Fiat a further €3,000 per car to make cheaper 500Ls for the Serbian market."
http://www.economist.com/news/business/21588926-fiat-goes-east-lower-costs-balkan-legacy
Developing economies such as India need revenue on an immediate basis through FDI which will not only help in augmenting fiscal deficit but also creating employment and income generation activities This will kick start the more-or less stagnant economy affected by low agricultural growth,negative industrial growth and the like to a growing and vibrant economy. But apart from this what is needed is to use these FDi in overall development of the economy by concentrating on their spillover effect .
FDI in emerging market is a classic case of letting some one Inn to fix problems in the short term. The major problem with FDI is it gives you lot of money in the short run but take out lot more money in the long run. Also, substantial FDI comes in sector only once government allow 100% foreign ownership which basically kills domestic companies as green field project are setup and foreign companies eats into domestic companies market share leading to job cuts. As domestic companies in emerging markets are labor intensive while foreign companies are capital intensive which leads to net job cuts than job additions in the long run.
However, its good if government give more favorable position to domestic companies and help them in creating competitive advantages and quality standards at global level. Thus, leading to overall economic development.
Theoretically, FDI promotion can greatly benefit host countries through the introduction of new technologies and skills, the creation of new jobs, surging domestic competition and expanding access to international marketing networks.
However, the empirical literature review implies that the impact of FDI on economic growth is conditioned by some factors. Xu (2000) and Li and Liu (2005) showed that when the technological gap between foreign and local firms is small, the impact of FDI on growth in the host economy will be significant. Some studies provided robust evidence that the education level is crucial to catalyzing FDI effects on growth because it enables larger technological spillovers obtained from workers’ mobility (Blomstrom et al., 1994; Borensztein et al., 1998; Lipsey, 2000; Li and Liu, 2005). It was also shown that trade openness (Balasubramanyam et al., 1996; OECD, 2002), export diversification (Nicet-Chenaf and Rougier, 2009), financial development (Hermes and Lensink, 2003; Alfaro et al., 2004), or a more efficient and stable legal and institutional environment (Bengoa and Sanchez-Robles, 2003) all favor the positive effects of FDI on economic growth.
"THE INVESTMENT POLICY AND REGIONAL DEVELOPMENT OF SERBIA IN THE TRANSITION PERIOD" is a paper that brings the major issues of this thread. Also,the investment policy is in the function of equal regional development of Serbia! Here it is!
http://www.doiserbia.nb.rs/img/doi/0350-7599/2011/0350-75991103047A.pdf
Academic and policy debate regarding the impact of FDI on the developing country FDI remains inconclusive. FDI is a source of capital, technology and skills, which developing countries need. However, technology and skills should be appropriate for the host countries to make real impact. South-South FDI is often felt to have an advantage over the traditional FDI from developed countries because the technologies from the South are ‘more appropriate’ to a 'South' host country. The following may be a helpful reference.
Aykut, D. & Goldstein, A. 2007. Developing country multinationals: South-South investment comes of age. OECD Working Paper No 257, OECD, Paris.
Much depends on a government's view of where FDI fits in the economy. In the 1950s and 1960s, multinational investments in Latin America were typically used for import substitution (making things LOCALLY with foreign money, and therefore not having to import those goods). This strategy didn't turn out well...lots of corruption, state take-over of the industries, and low levels of technological transfer. On the other hand, the Asian model of export-based FDI has been wildly successful (e.g., China, Taiwan, Korea). Few argue that FDI has hurt Asian economies.
As for the overall cost/benefit analysis of FDI, the sociological literature has some interesting takes on this. Most find that the flow of FDI is beneficial, but the stock of FDI can harm an economy (although what this means is controversial). Try this game-changing article and then follow the debate from there:
Firebaugh, Glenn. 1992. "Growth Effects of Foreign and Domestic Investment." American Journal of Sociology 98:105-130.
Dear Edward. Thanks for your intervention. While Glenn did indeed solve a big problem in the literature. He concluded that domestic investment was better than foreign investment based on the size of the coefficients. However, John Oneal and I show that the real effects must be looked at dollar for dollar since FDI is relatively much scarcer in an economy than domestic capital. Our estimates based on the dollar for dollar calculation shows that FDI produces much more growth than does domestic investment. Also published in American Sociological Review. An important aspect of this debate is the composition of FDI since extractive activity is likely to be less productive than manufacturing.
Why yes, Indra, yours is one of the studies I was encouraging them to follow. It's just that (within sociology, at least) Glenn's article was a turning point. Thereafter, the dependency/world-systems school began to lose its near-monopoly on the sociology of development, something I welcomed because my own approach (human ecology and demography) is more functionalist and less conflict oriented (although it can accommodate conflict theorizing).
By less productive, do you mean that extractives have a lower value-added, or that their multiplier effects (via capital-intensity) are very low? I would generally agree, but also note that foreign-owned manufacturing is often dependent on infrastructure, whereas extractive industries often build their own. This would suggest that the influence of FDI on economic growth is conditioned (i.e., interacts with) the level of development (although whether or not someone's tested that, I don't know). It might also suggest that countries at mid-levels of development might benefit more from FDI given their more complex economies that can accommodate manufacturing, whereas extractives (while not as good for the local economy) may be the only game in town for very poor countries (that lack roads, rails, ports, airports, educated workforces & the like). So, extractives may be inferior for reasons inherent in such economies but also because only very poor countries "load up" on them. And then of course there is the additional variable of resource ownership. I think the empirical literature demonstrates that private ownership of extractive resources helps avoid the "resource curse" - the source below is a good review of these arguments.
Luong, Pauline Jones and Erika Weinthal. 2006. "Rethinking the Resource Curse: Ownership Structure, Institutional Capacity, and Domestic Constraints." Annual Review of Political Science 9:241-63.
You are bang on. I think several studies show that the multiplier effects are greater at higher levels of development. Yes, I also think Pauline and others are right to point out that much of the RC can be avoided with privately owned resource extraction. Yes, the multiplier effects are likely to be small even if capital investment is heavy, which means FDI/GDP ratios are going to be large but growth slower than environments where the capital ratios maybe lower.
New Business organisation, job creation and reduced unemployment rate, increased value of currency, less pressure on local currency at foreign exchange are benefits of FDI flows to Developing countries. The Issue of net capital flight depends on foreign exchange policy of the central Banking unit. The Overall effects is more positive than negative
As someone who has worked in McDonalds and other fast food restaurants, and has eaten at many kinds of restaurants in many developing countries, I can defintely state that there is far more to FDI than flipping burgers. American fast food investments bring with them a set of very high standards for cleanliness, hygiene, customer service, consistent quality of product, inventory and supply chain management. They train workers to implement all of these, but also assume workers' potential for advancement into management. McDonalds also opens business in a country only when it can source its inputs locally, so they train farmers how to provide a steady supply of high-quality meat, potatoes, and other items. Whether or not fast food restaurants meet local demand is made clear by how many people choose to eat there. If the American fast food is not attractive, the restaurant closes. I agree that a steady diet of fast food is not healthy, but I believe most non-Americans see it as an occasional opportunity to eat American cuisine, not their main source of food.
This leads me to a more general observation that FDI outside of natural resource extraction is usually a good opportunity for a developing country. It brings world-class technology in manufacturing and sevices, and the know-how and management needed to make it sustainable. The number of jobs it creates depends on the sector. The spillover effects on local companies and management should be beneficial. When governments restrict foreign entry into professions such as insurance, banking, advertising, or accounting, they cut themselves off from world-class practices, and perhaps from other FDI. For example, stock exchanges in the U.S. and OECD countries require that publicly traded companies must be audited by an accounting firm that meets international standards and practices so that the public reports are reliable and accurate. Barring foreign accounting/audit firms from entering the local market prevents these companies from investing in that country.
Worker rights is one of my areas of focus, and I can say that American firms apply very high standards for training and treatment of workers, especially non-discrimination policies that protect women and minorities. It is very expensive to send American managers to run foreign affiliates, so American firms seek to hire and train local managers who also know local conditions. American firms actually try to understand and comply with local labor laws. Where those laws or their enforcement is deficient, media attention to abusive labor practices and consumer boycotts pressure U.S. firms to demand their local affiliates or contract suppliers improve their practices. Yes, American firms often dislike labor unions and do not offer maternity leave, but they do forbid sexual harassment and do pay their workers on time. Nothing is perfect, and you can always find bad actors.
I am aware that the natural resource extraction sector is subject to a variety of abuses by local and foreign investors and by local governments. The fact that local populations often do not see benefits from resource exploitation in their locale is as much or more the failure of local governments, officials and leaders as the foreign investor. If a government is corrupt or incompetent, some might claim it would be better to leave the resource in the ground until the society and government evolve into a more representative and accountable form that can spread the benefits and control the costs (such as environmental damage). However, the cash income from the natural resource extraction may be needed to fund that evolution. It can be a chicken/egg argument.
'FDI and PPP are the trojan horse of urban neoliberal development', Inspring an article by Proff. MirAftab.
FDI in iranian cities are destroing local communities and local economic.
There are several types of FDI, the main categories being equity investments and capital and production investments. Equity investments increase corruption and create asset bubbles. Capital and production investments' effectiveness depends on the linkages and spillover impacts of the project and sector in which the investment takes places. If the investment allows for the transfer of skills and technology and provides significant value-added components to the products produced or services created, then that tends to promote development. If as part of the FDI, infrastructure is added, then that also is a plus. If there is limited corruption, rule of law, and a governmental strategy to maximize the spillovers with appropriate civil society participation, then there can be a multiplier effect of the FDI. Extractive industries are often highly problematic in that they often have limited spillovers (.eg., infrastructure, additional businesses, skills transfer, and technology transfer). Unfortunately, when you have weak and tyrannical governments or even worse, those governments that want to emasculate themselves as a government or as individuals in neoliberalism, the costs to the country through FDI will be paid for my the population, usually the poor and marginalized.
Robert...can you cite studies demonstrating the equity investment encourages corruption? I have never heard this before.
Also, like many, you use the term "neoliberalism" like it was a dirty word (I think it's replaced "capitalism"). You should know that it has a better record of encouraging human welfare than statism:
http://intra.sociology.ohio-state.edu/people/emc/crenshaw%20&%20anthony%20neoliberalism%20CompSoc2012.pdf
At the micro level see the following regarding corruption: http://privateequityreport.debevoise.com/Fall_2013/issuedetail.aspx?ID=6a08730a-13e3-4320-8b28-9751108a3d00
At the macro level please see: Looting Africa by Patrick Bond
In regards to statism, the developmental state model has a degree of efficacy in Singapore, Japan, South Korea, and Taiwan. As Amsden and Wade point out, statecraft can play a role in development. Neoliberalism is not a substitute for capitalism. Neoliberalism is unbridled capitalism without regulation, as articulated by David Harvey.
my research on economic freedom´s effects on peace are very clear. There is a direct effect on civil peace, respect for human rights and ethnic calm. These results are robust to a host of factors. If capitalism (neoliberal policies) associate with social stability directly, net of per capita income and level of democracy, then such policies are surely better for poor countries seeking development? Almost all the states Robert mentions had export-led economic policies, open to FDI, and access to credits from the US due to their strategic importance. They got their prices right by relying on markets primarily. The great success of state-led development, Japan, is hardly a model to emulate today.
Thank you, Robert. I will read it with interest.
And I wasn't saying that "capitalism" and "neoliberalism" are actually the same thing...just that many scholar now seem to equate the two (usually with ritualized disdain).
My own research (which I linked) demonstrates that trade is positively related to economic growth, but that state activism dampens the welfare effects of both economic growth and democracy. So, I can't really agree that strong states are the path to development and human welfare. When it comes to government, a little goes a long way (and I would agree that a little is absolutely necessary), but a lot can damage both an economy and its people.
Some quick thoughts on the matter.
There aren't enough decent accountants and lawyers in those countries, imagining that the legal structure (courts, etc.) were there to keep things in line.
So probably FDI will bring many problems as a direct result of institutional weaknesses.
But taxing their investments will help to pay for those structures.
And the businesses will usually prefer a predictable legal structure to a political structure where strings are too easily pulled, most especially because, as foreigners, they are less able to pull those strings.
@ Kamal
If a country didn't need foreign capital in the first place, they wouldn't have invited the investments.
If the investor made off while profits, while political leaders made off with billions and squandered the rest on programs to feed the poor without helping industry to get off the ground, then don't blame the few investors who stuck it out in the long run. The US now punishes people who offer (or accept demands for) bribes for these kinds of deals. If your head of state negotiates away national wealth, the US will hold the company responsible for paying out the bribe, but it is not their job to hold foreign political leaders to account on behalf of the populace (I think you will agree with me very strongly on this count!).
But if you're talking about oil, and just oil, then I think there is more legitimacy to this perspective. I do not think it is constructive as a general perspective, however.
Maybe Polish experience with economic transformation will be interesting for you. There is an interesting book of prof. Witold Kiezun - Pathology of transformation issued in 2013 which maybe very relevant. Belowe I cite a part of an interview that he gave after issuing the book:
– You say that it was a classical neo-colonization. Wasn’t it too severe?
– I know what I am saying, I have experiences of the period of neo-colonization, which started in Africa. In the 60s of the last century there was a period of de-colonization there, on the one hand, inspired by the Soviet Union, on the other hand – by the American policy, starting from Roosevelt, who had planned to liquidate the British empire after the II World War, with the agreement of the Soviet Union. Finally, independent countries were established, which, in a big percent, accepted the structure of the pro-socialist planning economy. Some of them became capitalist countries, but with very strong soviet proceeds (present in most countries), whose expression was mainly the military help: arming, military instructors, etc. The 70s of the XX century are a new concept of neo-colonization, based on assumptions of liberal economy: open borders, privatization. And just then I had a very responsible function in Burundi.
– In 1987 there was a coup.
– The authority is being taken over by a new group, the previous mayor of the local army becomes a president, I am a director of the economic project of the United Nations Organization and he appoints me his personal advisor, which gives me a lot of possibilities of action. And the area of observation, because I see that at once an enormous action of neo-colonization starts. There appears a big group of American businessmen realizing the philosophy of neo-liberalism of Milton Friedman. They start with testing raw materials and other natural resources of Burundi. And they have there: gold, tin and also coffee considered as the third among the best ones in the world. In the first place investors want to buy a factory of coffee, built during the Belgian times. I receive a price, it looks humorous. I inform the president about it. I hear that at the moment he will not make a decision. He recommends: do your own control. I am thinking about my best specialists, four PhDs of economy. African men but after studies in Paris. We have the price 5.3 times higher than the offered one. We submit analysis and there is a discussion and the businessman willing to buy the factory, also the representative of the World Bank, says: - We had the best specialists and you rely on knowledge of some Africans. Then I asked if at least one PhD of economy was in his team. He answered: No, they are specialists. I say: Well, but not in economy. The decision of the president is: fifty-fifty. And they paid three times more than they had intended. Later my activity is diminishing, and, finally, it finishes with a conclusion of the World Bank, that there is a chief of the UNO project Kieżun who is causing a commotion here. It was a serious problem for the government: proceeds of the World Bank are very strong, I know that they will dismiss me, but there is a slight problem. In the annual evaluation of effects of particular projects, I receive the first place and a high prize in dollars for myself and a few thousand dollars for the team. In this situation Kieżun cannot be dismissed, so he is moved to Rwanda.
– Why are you referring to Africa? Because was it possible to look at what processes of transformation looked like as well as relations of businessmen arriving with the elite from this country? Similar as in our country?
– Absolutely yes. It took place in a ‘soft’ way. The Europeans and the local elite were gathering in their free time in a beautiful club which remained after the Belgians. Available: 15 horses, golf course, 4 tennis courts, 2 swimming pools, a luxurious restaurant, and many others. And, certainly, direct, informal contacts. I am a chief of tennis section and I see how a big group of powerful businessmen, arriving to do business, are pushing their way there, and realize the fact how things are going on. It is all about creating the following situation: you have the authority, administration, education, your political system and your people. You will surely have your own agriculture, middle-rank enterprises, but the big ones will become loot of the government, like in Poland: when the government is changing, directors of state enterprises are changing. Whereas the most profitable enterprise are getting into hands of the foreign capital. I was perfectly informed how it was functioning. If I had an influence on transformation in Poland, in the first place I would not have allowed for the robbery of the national property
(...)
Maybe he is really sometimes too severe. The point is that after 1989, national private capital was poor and we really needed foreign investment, but in the history of Polish tranformation you can find easily examples of exploitative practices of foreign investors.
Sorry for a long post.
Best regards,
Mariusz
A very specific case are also Baltic countries regaining nowadays control over their gas transmission networks from the mix of soviet and Western shareholders. Generally you can find CEE and Baltic countries an interesting case of the FDIs. Especially in the area of energy.
Money=Dept.
The method is, first to make a country "over-dept", then the international corporations come and get anything worth, and when they are leaving the country is a lot more poor than before!
Direct foreign investments in Serbia were EUR 1.92 bln in 2016. My prime minister and government finance every worker hired with sum of 6000-12.000 EUR!!!
Such co-financing should be better if that money was delivered to domestic investors!
http://serbianmonitor.com/en/investing-in-serbia/26512/vucic-foreign-investments-serbia-eur-1-92-bln-2016/#.WNOAaNIrLcc
http://serbianmonitor.com/en/economy/29013/vucic-at-world-economic-forum-davos/#.WNOAKNIrLcc
Thanks Ljubomir Jacić,
I will read. Where they ivest is very importantif we want inclusive development!!
The question that stay or arises is ... What kind of development do we want?
Multinational companies (MNCs) invest in developing countries to make profits. They are business organizations. They look for resources, market, well developed infrastructure, demand for their product - both internal and external. For example, in Brazil, MNEs invest in the southers regions helping government toinvest more in producing and distribution renewable energy because this enhances the demand for electrical goods. MNEs can easily supply such goods in the southern regions due to well developed infrastructure and market. This has not happened in the Amazonian northern regions due under developed infrastructure. However the question is whether the entry of MNEs in the south has been increasing inequality? Whose employment is rising due to MNEs or FDI in their destination?
There is no doubt that foreign direct investments (FDIs) constitute a central pillar of the Serbian government’s development strategy. In fact, all previous governments over the last couple of decades have heavily relied on FDIs as their sole source of economic development.
Yet simultaneously, through pushing the process of deindustrialization that accompanied the disintegration of the socialist Yugoslavia in this direction, all former governments have systematically contributed to the destruction of the country’s development potential...
http://www.rosalux.rs/sites/default/files/publications/6_Radenkovic_engl_web.pdf
The inviting of foreign direct investment has a risk on the developing economies. Especially with a poor investment law in these countries.
Yes...But the investment is probably not enough. Need an excess of exports over imports and control (management) demand...
https://www.researchgate.net/post/Terms_of_economic_sustainability_the_economic_entity_enterprise_organization_export_more_than_import_investments_demand_for_products_services?_tpcectx=profile_questions
And... don't forget about investment in world 3.0 (where possible), smart production (industry 4.0), smart grids, fog computing, avatars...
MNCs invest in developing countries either to reduce production costs and/or to gain marker access. Often both is the case. One can apply a perspective of exploitation, but this is at times difficult, especially when wages and social standards in MNCs are above national standards of the countries they invest.
I believe the benefit from FDI is country and economy specific. Countries that have infrastructural and human capital development to take advantage of the fresh capital and technological investment will benefit enormously, but for third world countries it may be used as a means to exploit the available cheap labor and their raw material.
MNCs invest in developing countries either to reduce production costs and/or to gain market access. Often both is the case. One can apply a perspective of exploitation, but this is at times difficult, especially when wages and social standards in MNCs are above national standards of the countries they invest.
Previous studies that attempted to answer whether FDI contributes to economic development of the host economy came up with conflicting results. Scientific community is still divided over the very concept of spillover effects, which is based on the thesis that FDI has a positive effect on local companies, thus stimulating the host economy. According to this theory, employment growth is among the main benefits of FDI inflow for the host country. Given that unemployment is the biggest problem of the Serbian economy, FDI is perceived by the public as the best remedy for alleviating the consequences of the transition period and rapid privatisation. Convinced in the omnipotent effect of FDI on the economy of the host country, the Republic of Serbia has invested significant resources in their subsidising. This policy of attracting foreign direct investments was implemented through non-transparent measures, which resulted in the inflow of FDI whose main purpose was to obtain the share of the market or provide lower operating costs through privatisation. It was unclear whether the FDI inflow of over 20 billion euros contributed to the economic development of Serbia in the2001– 2013 period. The author attempted to provide an answer to this question by using correlation analysis, in order to determine whether there is a relation between FDI inflow and eleven selected indicators of economic development of Serbia...
https://scindeks-clanci.ceon.rs/data/pdf/0353-443X/2017/0353-443X1706381R.pdf
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