This document discusses foreign direct investment and its relationship to economic growth. It provides background definitions of foreign direct investment and economic growth. It then examines different perspectives on foreign direct investment including the radical view that sees MNCs as exploiting host countries, the free market view that sees benefits from specialization and resource transfers, and pragmatic nationalism that allows FDI if benefits outweigh costs. The document also discusses trends in FDI flows globally and by region as well as impacts of FDI such as on competition and balance of payments.

1. Foreign DirectForeign Direct
InvestmentInvestment
A Prerequisite to EconomicA Prerequisite to Economic
Growth?Growth?

2. ““Comparative Examples”Comparative Examples”
vs.vs.
“Set Thesis”“Set Thesis”

3. Foreign Direct InvestmentForeign Direct Investment
 Foreign investment that establishes a lasting interest in orForeign investment that establishes a lasting interest in or
effective management control over an enterprise. Foreigneffective management control over an enterprise. Foreign
direct investment can include buying shares of andirect investment can include buying shares of an
enterprise in another country, reinvesting earnings of aenterprise in another country, reinvesting earnings of a
foreign- owned enterprise in the country where it isforeign- owned enterprise in the country where it is
located, and parent firms extending loans to their foreignlocated, and parent firms extending loans to their foreign
affiliates. International Monetary Fund (IMF) guidelinesaffiliates. International Monetary Fund (IMF) guidelines
consider an investment to be a foreign direct investment ifconsider an investment to be a foreign direct investment if
it accounts for at least 10 percent of the foreign firm'sit accounts for at least 10 percent of the foreign firm's
voting stock of shares. However, many countries set avoting stock of shares. However, many countries set a
higher threshold because 10 percent is often not enough tohigher threshold because 10 percent is often not enough to
establish effective management control of a company orestablish effective management control of a company or
demonstrate an investor's lasting interest.demonstrate an investor's lasting interest.
– http://www.worldbank.org/depweb/ english/beyond/global/glossary. htmlhttp://www.worldbank.org/depweb/ english/beyond/global/glossary. html

4. Economic GrowthEconomic Growth
 Quantitative change or expansion in a country's economy.Quantitative change or expansion in a country's economy.
Economic growth is conventionally measured as theEconomic growth is conventionally measured as the
percentage increase in gross domestic product (GDP) orpercentage increase in gross domestic product (GDP) or
gross national product (GNP) during one year. Economicgross national product (GNP) during one year. Economic
growth comes in two forms: an economy can either growgrowth comes in two forms: an economy can either grow
"extensively" by using more resources (such as physical,"extensively" by using more resources (such as physical,
human, or natural capital) or "intensively" by using thehuman, or natural capital) or "intensively" by using the
same amount of resources more efficiently (productively).same amount of resources more efficiently (productively).
When economic growth is achieved by using more labor, itWhen economic growth is achieved by using more labor, it
does not result in per capita income growth (see Chapterdoes not result in per capita income growth (see Chapter
4). But when economic growth is achieved through more4). But when economic growth is achieved through more
productive use of all resources, including labor, it results inproductive use of all resources, including labor, it results in
higher per capita income and improvement in people'shigher per capita income and improvement in people's
average standard of living. Intensive economic growthaverage standard of living. Intensive economic growth
requires economic development.requires economic development.
– http://www.worldbank.org/depweb/ english/beyond/global/glossary. htmlhttp://www.worldbank.org/depweb/ english/beyond/global/glossary. html

5. Trends in FDITrends in FDI
Flow and stock increased in the last 20Flow and stock increased in the last 20
yearsyears
In spite of decline of trade barriers, FDIIn spite of decline of trade barriers, FDI
has grown more rapidly than world tradehas grown more rapidly than world trade
becausebecause
–Businesses fear protectionist pressuresBusinesses fear protectionist pressures
–FDI is seen a a way of circumventing tradeFDI is seen a a way of circumventing trade
barriersbarriers
–Dramatic political and economic changesDramatic political and economic changes
in many parts of the worldin many parts of the world
–Globalization of the world economy has raisedGlobalization of the world economy has raised
the vision of firms who now see the entirethe vision of firms who now see the entire
world as their marketworld as their market

6. The Direction of FDIThe Direction of FDI
Historically, most FDI has been directed at the developedHistorically, most FDI has been directed at the developed
nations of the world as firms based in advanced countriesnations of the world as firms based in advanced countries
invested in other marketsinvested in other markets
– The US has been the favorite target for FDI inflowsThe US has been the favorite target for FDI inflows
While developed nations still account for the largest shareWhile developed nations still account for the largest share
of FDI inflows, FDI into developing nations has increasedof FDI inflows, FDI into developing nations has increased
– Most recent inflows into developing nations have been targeted atMost recent inflows into developing nations have been targeted at
the emerging economies of South, East, and Southeast Asiathe emerging economies of South, East, and Southeast Asia

7. FDI Flow by RegionFDI Flow by Region

8. Does Fact = Theory?Does Fact = Theory?
 Gross fixed capital formationGross fixed capital formation summarizes thesummarizes the
total amount of capital invested in factories,total amount of capital invested in factories,
stores, office buildings, etc.stores, office buildings, etc.
 SO…SO…
– This makes FDI a crucial determinant factorThis makes FDI a crucial determinant factor
of increased future growth rate of anof increased future growth rate of an
economyeconomy
 ……RIGHT???RIGHT???

9. Costs of FDI to Host CountriesCosts of FDI to Host Countries
Adverse effects on competitionAdverse effects on competition
Adverse effects on the balance of paymentsAdverse effects on the balance of payments
– After the initial capital inflow there is normally aAfter the initial capital inflow there is normally a
subsequent outflow of earningssubsequent outflow of earnings
– Foreign subsidiaries could import a substantial number ofForeign subsidiaries could import a substantial number of
inputsinputs
National sovereignty and autonomyNational sovereignty and autonomy
– Some host governments worry that FDI is accompaniedSome host governments worry that FDI is accompanied
by some loss of economic independence resulting in theby some loss of economic independence resulting in the
host country’s economy being controlled by a foreignhost country’s economy being controlled by a foreign
corporationcorporation

10. Political Ideology and FDIPolitical Ideology and FDI
Radical
View
Pragmatic
Nationalism
Free
Market

11. Political Ideology & FDIPolitical Ideology & FDI

12. The Radical ViewThe Radical View
Marxist view: MNE’s exploitMarxist view: MNE’s exploit
less-developed host countriesless-developed host countries
–Extract profitsExtract profits
–Give nothing of value in exchangeGive nothing of value in exchange
–Instrument of domination, notInstrument of domination, not
developmentdevelopment
–Keep less-developed countriesKeep less-developed countries
relatively backward and dependentrelatively backward and dependent
on capitalist nations foron capitalist nations for
investment, jobs, and technologyinvestment, jobs, and technology

13. The Radical ViewThe Radical View
By the end of the 1980s radicalBy the end of the 1980s radical
view was in retreatview was in retreat
–Collapse of communismCollapse of communism
–Bad economic performance of countriesBad economic performance of countries
that embraced the radical viewthat embraced the radical view
–Strong economic performance ofStrong economic performance of
countries who embraced capitalismcountries who embraced capitalism
rather than the radical viewrather than the radical view

14. The Free Market ViewThe Free Market View
Nations specialize in goods and servicesNations specialize in goods and services
that they can produce most efficientlythat they can produce most efficiently
Resource transfers benefit and strengthenResource transfers benefit and strengthen
the host countrythe host country
Positive changes in laws and growth ofPositive changes in laws and growth of
bilateral agreements attest to strength ofbilateral agreements attest to strength of
free market viewfree market view
All countries impose some restrictions onAll countries impose some restrictions on
FDIFDI

15.  Trinidad and Tobago, a recipient ofTrinidad and Tobago, a recipient of
substantial FDI inflows in its natural gassubstantial FDI inflows in its natural gas
 http://ideas.repec.org/p/dgr/unuint/200307.htmlhttp://ideas.repec.org/p/dgr/unuint/200307.html
 Lou Anne A. BarclayLou Anne A. Barclay
– FDI inflows in its natural gas industry for the lastFDI inflows in its natural gas industry for the last
decadedecade
– FDI-assisted development only occurs whenFDI-assisted development only occurs when
governments in less-developed economies pursuegovernments in less-developed economies pursue
credible, selective intervention policiescredible, selective intervention policies

16. Pragmatic NationalismPragmatic Nationalism
FDI has benefits and costsFDI has benefits and costs
Allow FDI if benefits outweighAllow FDI if benefits outweigh
costscosts
–Block FDI that harms indigenousBlock FDI that harms indigenous
industryindustry
–Court FDI that is in national interestCourt FDI that is in national interest
Tax breaksTax breaks
SubsidiesSubsidies

17. REGIONAL DEVELOPMENTREGIONAL DEVELOPMENT
IMPLICATIONS OF FDIIMPLICATIONS OF FDI
 Post Communist Eastern Europe, e.g.Post Communist Eastern Europe, e.g.
Czech Automotive ComponentsCzech Automotive Components
 Foreign direct investment (FDI) has been accorded a central roleForeign direct investment (FDI) has been accorded a central role
in the post-communist economic transformation of Central andin the post-communist economic transformation of Central and
Eastern Europe.Eastern Europe.
 Regional effects of FDI in Central Europe (Czech Republic,Regional effects of FDI in Central Europe (Czech Republic,
Hungary, Poland and Slovakia) in the 1990s.Hungary, Poland and Slovakia) in the 1990s.
 Defining FDI’s role in regional economic transformationsDefining FDI’s role in regional economic transformations
– Intensification of Uneven DevelopmentIntensification of Uneven Development
– Development of a Dual EconomyDevelopment of a Dual Economy
– Failure to Develop Linkages with Local and Regional EconomiesFailure to Develop Linkages with Local and Regional Economies
– Contributionto Increased Regional Economic InstabilityContributionto Increased Regional Economic Instability
– Petr PavlínekPetr Pavlínek
– http://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDI-Economichttp://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDI-Economic
%20Development%22%20Development%22

18. Legal Institutions and FDILegal Institutions and FDI
 Debate over relationship between legalDebate over relationship between legal
institutions and foreign investment flowsinstitutions and foreign investment flows
– Traditional/orthodox view: legal institutions play aTraditional/orthodox view: legal institutions play a
crucial role in the process of market-orientedcrucial role in the process of market-oriented
developmentdevelopment
 by protecting private rights, especially the propertyby protecting private rights, especially the property
and contract rights of foreign investorsand contract rights of foreign investors
 By creating the legal foundations for market-orientedBy creating the legal foundations for market-oriented
reformreform

20. GOALSGOALS
 :: Investor experience suggests that:Investor experience suggests that:
 A conventional program of market-oriented legal reform isA conventional program of market-oriented legal reform is
NOT a prerequisite for foreign investmentNOT a prerequisite for foreign investment
– Try to Identify Why!Try to Identify Why!
 Legal institutions play a small, if any, role in determiningLegal institutions play a small, if any, role in determining
the initial decision to investthe initial decision to invest
– WHY???WHY???
 The form and content of useful law, as well as theThe form and content of useful law, as well as the
significance of law generally, seem to depends on thesignificance of law generally, seem to depends on the
details of the project and the settingdetails of the project and the setting
– What are the constants that can be identified inWhat are the constants that can be identified in
“Success stories?”“Success stories?”