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 foreignforeign- 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, physical, human, human, or natural capital) or "intensively" by using the capital) 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 living. development. requires economic development.
http://www.worldbank.org/depweb/ english/beyond/global/glossary. html

Trends in FDI
and stock increased in the last 20 years In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
Flow

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  Adverse

effects on competition 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 countrys 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: MNEs exploit lessless-developed host countries

Extract profits Give nothing of value in exchange Instrument of domination, not development Keep less-developed countries lessrelatively 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 FDIgovernments in less-developed economies pursue lesscredible, selective intervention policies

Pragmatic Nationalism
has benefits and costs Allow FDI if benefits outweigh costs
FDI

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 postEastern Europe.

Regional effects of FDI in Central Europe (Czech Republic, Hungary, Poland and Slovakia) in the 1990s. Defining FDIs 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 Pavlnek
http://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDIhttp://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 marketdevelopment  by protecting private rights, especially the property and contract rights of foreign investors  By creating the legal foundations for market-oriented marketreform

GOALS


Investor experience suggests that:



A conventional program of market-oriented legal reform is marketNOT 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?