Foreign Direct
Investment
A Prerequisite to Economic
Growth?
“Comparative Examples”
vs.
“Set Thesis”
Foreign Direct Investment

Foreign investment that establishes a lasting interest in or
effective management control over an enterprise. Foreign
direct investment can include buying shares of an
enterprise in another country, reinvesting earnings of a
foreign- owned enterprise in the country where it is located,
and parent firms extending loans to their foreign affiliates.
International Monetary Fund (IMF) guidelines consider an
investment to be a foreign direct investment if it accounts
for at least 10 percent of the foreign firm's voting stock of
shares. However, many countries set a higher threshold
because 10 percent is often not enough to establish
effective management control of a company or demonstrate
an investor's lasting interest.
– http://www.worldbank.org/depweb/ english/beyond/global/glossary. html
Economic Growth

Quantitative change or expansion in a country's economy.
Economic growth is conventionally measured as the
percentage increase in gross domestic product (GDP) or
gross national product (GNP) during one year. Economic
growth comes in two forms: an economy can either grow
"extensively" by using more resources (such as physical,
human, or natural capital) or "intensively" by using the
same amount of resources more efficiently (productively).
When economic growth is achieved by using more labor, it
does not result in per capita income growth (see Chapter
4). But when economic growth is achieved through more
productive use of all resources, including labor, it results in
higher per capita income and improvement in people's
average standard of living. Intensive economic growth
requires economic development.
– http://www.worldbank.org/depweb/ english/beyond/global/glossary. html
Trends in FDI
Flow
and stock increased in the last 20
years
In spite of decline of trade barriers, FDI
has grown more rapidly than world trade
because
–Businesses fear protectionist pressures
–FDI is seen a a way of circumventing trade
barriers
–Dramatic political and economic changes
in many parts of the world
–Globalization of the world economy has raised
the vision of firms who now see the entire
world as their market
The Direction of FDI
Historically,
most FDI has been directed at the developed
nations of the world as firms based in advanced countries
invested in other markets
– The US has been the favorite target for FDI inflows
While
developed nations still account for the largest share
of FDI inflows, FDI into developing nations has increased
– Most recent inflows into developing nations have been targeted at
the emerging economies of South, East, and Southeast Asia
FDI Flow by Region
Does Fact = Theory?
 Gross
fixed capital formation summarizes the
total amount of capital invested in factories,
stores, office buildings, etc.
 SO…
– This makes FDI a crucial determinant factor
of increased future growth rate of an
economy
 …RIGHT???
Costs of FDI to Host Countries
 Adverse
effects on competition
 Adverse
effects on the balance of payments
– After the initial capital inflow there is normally a
subsequent outflow of earnings
– Foreign subsidiaries could import a substantial number of
inputs
 National
sovereignty and autonomy
– Some host governments worry that FDI is accompanied
by some loss of economic independence resulting in the
host country’s economy being controlled by a foreign
corporation
Political Ideology and FDI
Radical
View
Pragmatic
Nationalism
Free
Market
Political Ideology & FDI
The Radical View
Marxist
view: MNE’s exploit
less-developed host countries
–Extract profits
–Give nothing of value in exchange
–Instrument of domination, not
development
–Keep less-developed countries
relatively backward and dependent
on capitalist nations for investment,
jobs, and technology
The Radical View
By
the end of the 1980s radical
view was in retreat
–Collapse of communism
–Bad economic performance of countries
that embraced the radical view
–Strong economic performance of
countries who embraced capitalism
rather than the radical view
The Free Market View
Nations
specialize in goods and services
that they can produce most efficiently
Resource transfers benefit and strengthen
the host country
Positive changes in laws and growth of
bilateral agreements attest to strength of
free market view
All countries impose some restrictions on
FDI

Trinidad and Tobago, a recipient of
substantial FDI inflows in its natural gas
 http://ideas.repec.org/p/dgr/unuint/200307.html
 Lou
Anne A. Barclay
– FDI inflows in its natural gas industry for the last
decade
– FDI-assisted development only occurs when
governments in less-developed economies pursue
credible, selective intervention policies
Pragmatic Nationalism
FDI
has benefits and costs
Allow FDI if benefits outweigh
costs
–Block FDI that harms indigenous
industry
–Court FDI that is in national interest
 Tax
breaks
 Subsidies
REGIONAL DEVELOPMENT
IMPLICATIONS OF FDI
 Post
Communist Eastern Europe, e.g.
Czech Automotive Components

Foreign direct investment (FDI) has been accorded a central role
in the post-communist economic transformation of Central and
Eastern Europe.

Regional effects of FDI in Central Europe (Czech Republic,
Hungary, Poland and Slovakia) in the 1990s.

Defining FDI’s role in regional economic transformations
–
–
–
–
Intensification of Uneven Development
Development of a Dual Economy
Failure to Develop Linkages with Local and Regional Economies
Contributionto Increased Regional Economic Instability
– Petr Pavlínek
– http://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDIEconomic%20Development%22
Legal Institutions and FDI

Debate over relationship between legal
institutions and foreign investment flows
– Traditional/orthodox view: legal institutions play a
crucial role in the process of market-oriented
development
 by protecting private rights, especially the property
and contract rights of foreign investors
 By creating the legal foundations for market-oriented
reform
GOALS

:
Investor experience suggests that:

A conventional program of market-oriented legal reform is
NOT a prerequisite for foreign investment
– Try to Identify Why!

Legal institutions play a small, if any, role in determining
the initial decision to invest
– WHY???

The form and content of useful law, as well as the
significance of law generally, seem to depends on the
details of the project and the setting
– What are the constants that can be identified in
“Success stories?”