Transcript Foreign Direct Investment: Do the benefits “trickle down?”

Foreign Direct
Investment:
Do the benefits
“trickle down?”
Michelle Jurkovich
Economics 490
Winter 2008
The Question
• Does increasing foreign direct
investment lead to an increase in
standard of living? In other words,
who benefits from foreign direct
investment?
Summary of Findings
• The purpose of FDI is not (directly) to improve
standard of living
• You will find cases which suggest increases in
FDI lead to increases in standard of living.
You will find cases which suggest the opposite.
Any absolute causal relationships are likely
unfounded.
• The poorest countries will likely not attract
massive levels of FDI
• The root causes of inequality and poor
standards of living are what should be
examined
• The role of the government and the economic
policies it espouses are highly significant
Which Developing Countries Receive
the Most FDI?
Gallagher, K. & Zarsky, L. Searching for the Holy Grail? Making FDI work for sustainable development. In Allies or Antagonists: Investment,
What/Who attracts FDI?
• “There is a unanimity among
these studies that large and
growing economies with low
levels of inflation and debt (i.e.,
macroeconomic stability) are
key determinants of FDI in the
region [Latin America and the
Caribbean].”
>>>>Therefore it is acceptable to question what reasonable
role we expect FDI to play in struggling economies….
Source: Gallagher, K.P. & Porzecanski, R. (2007). Economic reform and foreign direct investment in Latin America: a critical assessment. Progress in
Development Studies, 7(3):218.
What potential benefits could FDI
bring to the average citizen?
 Foreign investment intended to market to
the host country (estimated 80%)
 Provide jobs (including “white collar” jobs)-Example: India’s “software and outsourcing
industry” (p.3)
 Wages equal to or better than domestic
wages
 Benefits
 Increased productivity=cheaper prices for
consumers
Source: Farrell, D., Remes, J.K., & Schulz, H. (2004). The truth about foreign direct investment in emerging markets. The McKinsey Quarterly
(1): 2-3.
Improving the
Environment
• Disputada and El Indio companies
(Chile) and foreign environmental
standards
Source: Gallagher, K. & Zarsky, L. Searching for the Holy Grail? Making FDI work for sustainable development. In Allies or Antagonists:
Investment, Sustainable Development and the WTO. (2003, August). Heinrich Boll Foundation North America:22-23.
Picture from: http://www.dscdredge.com/images/chile-dredge.jpg
Sharing Technology
• South Africa’s DaimlerChrysler
-Local production of sisal fibers
Gallagher, K. & Zarsky, L. Searching for the Holy Grail? Making FDI work for sustainable development. In Allies or Antagonists: Investment,
Sustainable Development and the WTO. (2003, August). Heinrich Boll Foundation North America:20-21.
South African Flag taken from: cache.virtualtourist.com/1986315-South_Africa...
Sisal photo taken from: www.edmunds.com/.../dcx.sisal.so.africa.500.jpg
The Case for Nigeria
• Reduced benefits of FDI in extractive oil
industry
Possible factors at play:
-Issue of technology transfer (less if capitalintensive)
-Barriers of economies of scale
-Fewer backwards/forwards linkages
• “The results show that foreign capital only has
positive impact on growth in Nigeria after a
considerable lag and it is not significant.” (p.
633).
Suggestions:
• Reduce capital flight and integrate the
economy
Source: Akinlo, A.E. (2004, May 25). Foreign direct investment and growth in Nigeria: An empirical investigation. Journal of Policy Modeling,
26:628, 633, & 637.
Can FDI Harm Standards
of Living?
• Flight to Urban Areas (ex.Mexico)
Problems with:
-Sewage
-Water Supply
-Air quality
-Lower wages
Gallagher, K. & Zarsky, L. Searching for the Holy Grail? Making FDI work for sustainable development. In Allies or Antagonists: Investment,
Sustainable Development and the WTO. (2003, August). Heinrich Boll Foundation North America:16-17.
Photo from: marxsite.com/MEX-MexicoCity-PBMeeli_Tamm1.jpg
The Statistics At A Glance
Select Cases
Brazil:
-Malnutrition rate down 33%
-FDI increase 1400% (as % of GDP)
Nicaragua:
-Malnutrition rate down 10%
-FDI increase 5400% (as % of GDP)
Guatemala:
-Malnutrition rate increase 44%
-No change in FDI%
Fiji:
-Malnutrition rate down 60%
-FDI decrease 106%
*Years: Undernourishment rates taken as average of years 1990&92
and 2001&03, FDI for years 1990 and 2004
Source: Human Development Report 2006 (%changes done on my own). Report can be found at:
http://78.136.31.142/en/reports/global/hdr2006/
Role of the Government
 Korea’s success tied to
government decisions*
 Role of corruption**
 The cyclical question:
Globalization-->More
stable economy
-->Better standard of
living
Or the other way
around?
Source: * Lieten, G.K (1999, Nov.-Dec.). Multinationals and development: Revisiting the debate. Social Scientist, 27(11/12):37. Author cites Amsden, A.
(1989). Asia’s next giant: South Korea and late industrialization. New York: Oxford University Press:130 for info on Korea (also references other authors)
**Article regarding corruption as a disincentive for FDI: Habib, M.& Zurawicki, L. (2002, 2nd Qtr.). Corruption and foreign direct investment. Journal of
International Business Studies, 33(2):291-292,303.
To Conclude
• The purpose of FDI is not (directly) to improve
standard of living
• You will find cases which suggest increases in
FDI lead to increases in standard of living.
You will find cases which suggest the opposite.
Any absolute causal relationships are
inappropriate.
• The poorest countries will likely not attract
massive levels of FDI
• The root causes of inequality and poor
standards are what should be examined
• The role of the government and the economic
policies it espouses are highly significant
Questions?