Implementation of FDI policies  in developing countries. The role of incentives Andrés López Latin America Regional Semina...
The objectives of sustainable human development (SHD) <ul><li>Economic growth </li></ul><ul><li>Social equity </li></ul><u...
<ul><li>At present, both developed and developing countries compete for FDI </li></ul><ul><li>Can FDI contribute to SHD ob...
FDI potential contributions <ul><li>Access to foreign markets </li></ul><ul><li>Higher investment rates </li></ul><ul><li>...
FDI potential costs <ul><li>Crowding out of local competitors </li></ul><ul><li>Negative effects on domestic innovation ac...
The costs/benefits balance depends on: <ul><ul><li>TNCs strategies, investment sectors, modes of entry and type of linkage...
Can host countries make FDI more development-friendly? <ul><li>Passive open doors policies (Argentina): FDI is development...
<ul><li>Open doors policies do not allow host countries to take full advantage of the benefits that TNCs can bring   </li>...
Which is the role of incentives? <ul><li>Attracting FDI to: </li></ul><ul><ul><li>Underdeveloped or backward regions, or r...
Which is the role of incentives? (II) <ul><li>Fostering TNCs to: </li></ul><ul><ul><li>Establish regional headquarters </l...
FDI incentives may have costs <ul><li>“ Bidding wars” </li></ul><ul><li>Public funds are deviated from key areas (health, ...
FDI boom in MERCOSUR countries in the 90s <ul><li>Main features:  </li></ul><ul><ul><li>“ Open doors” policies except in  ...
FDI impact on MERCOSUR countries in the 90s <ul><li>Efficiency and productivity gains </li></ul><ul><li>Introduction of ne...
FDI impact on MERCOSUR countries in the 90s (II) <ul><li>Few investments in knowledge-intensive sectors (specially in Arge...
FDI incentives in MERCOSUR <ul><li>No disciplines were in force  </li></ul><ul><li>May have reinforced regional disparitie...
Some lessons (I) <ul><li>Pro-active policies may make FDI more development-friendly than open-doors policies </li></ul><ul...
Some lessons (II) <ul><li>Incentives work well only if other conditions are met: </li></ul><ul><ul><li>Human capital avail...
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Implementation of FDI policies in developing countries. The ...

  1. 1. Implementation of FDI policies in developing countries. The role of incentives Andrés López Latin America Regional Seminar on Investment for Development São Paulo-December 2002 CUTS-NEIT/UNICAMP
  2. 2. The objectives of sustainable human development (SHD) <ul><li>Economic growth </li></ul><ul><li>Social equity </li></ul><ul><li>Environmental sustainability </li></ul>
  3. 3. <ul><li>At present, both developed and developing countries compete for FDI </li></ul><ul><li>Can FDI contribute to SHD objectives? </li></ul>
  4. 4. FDI potential contributions <ul><li>Access to foreign markets </li></ul><ul><li>Higher investment rates </li></ul><ul><li>Crowding in effects on local firms investments </li></ul><ul><li>State of the art technologies and organizational capabilities </li></ul><ul><li>Improvements in environmental technologies and management </li></ul><ul><li>Technology, productivity, human capital and export positive spillovers </li></ul>
  5. 5. FDI potential costs <ul><li>Crowding out of local competitors </li></ul><ul><li>Negative effects on domestic innovation activities </li></ul><ul><li>Negative spillover effects </li></ul><ul><li>Increasing market concentration </li></ul><ul><li>Profit remittances, transfer prices, etc. </li></ul><ul><li>Races to the bottom in environmental and labor standards </li></ul>
  6. 6. The costs/benefits balance depends on: <ul><ul><li>TNCs strategies, investment sectors, modes of entry and type of linkages with the host economy </li></ul></ul><ul><ul><li>Macroeconomic and institutional conditions </li></ul></ul><ul><ul><li>Host country assets </li></ul></ul><ul><ul><li>Host country productive structure </li></ul></ul><ul><ul><li>FDI policies </li></ul></ul>Human capital Technological infrastructure and capabilities Financial systems and capital markets
  7. 7. Can host countries make FDI more development-friendly? <ul><li>Passive open doors policies (Argentina): FDI is development friendly per se </li></ul><ul><li>Selective policies (Japan, Korea): FDI is restricted and local entrepreneurial capabilities are promoted </li></ul><ul><li>Pro-active policies (Singapore, Ireland): FDI is guided towards those activities that most benefit local development </li></ul>
  8. 8. <ul><li>Open doors policies do not allow host countries to take full advantage of the benefits that TNCs can bring </li></ul><ul><li>Selective policies require strong State capabilities and competitive pressures </li></ul><ul><li>If the required skills, infrastructure and technological capabilities exist, pro-active policies may generate significant benefits for host countries, but only if an excessive dependence on FDI is avoided. </li></ul>
  9. 9. Which is the role of incentives? <ul><li>Attracting FDI to: </li></ul><ul><ul><li>Underdeveloped or backward regions, or regions that have high unemployment rates </li></ul></ul><ul><ul><li>Specific sectors </li></ul></ul><ul><ul><li>Export-oriented sectors </li></ul></ul><ul><ul><li>Specific activities that generate spillovers (R&D) or contribute to solve certain social problems (labor training, job creation) </li></ul></ul>High tech activities Infrastructure
  10. 10. Which is the role of incentives? (II) <ul><li>Fostering TNCs to: </li></ul><ul><ul><li>Establish regional headquarters </li></ul></ul><ul><ul><li>Assign world product mandates to their affiliates </li></ul></ul><ul><ul><li>Generate strong backward/forward linkages </li></ul></ul><ul><ul><li>Promote the diffusion of quality and environmental standards </li></ul></ul>
  11. 11. FDI incentives may have costs <ul><li>“ Bidding wars” </li></ul><ul><li>Public funds are deviated from key areas (health, education, etc.) </li></ul><ul><li>Discrimination against established firms </li></ul><ul><li>Rent seeking, bribery, etc. </li></ul><ul><li>Conflicts at the WTO </li></ul>
  12. 12. FDI boom in MERCOSUR countries in the 90s <ul><li>Main features: </li></ul><ul><ul><li>“ Open doors” policies except in </li></ul></ul><ul><ul><li>M&As </li></ul></ul><ul><ul><li>Market seeking </li></ul></ul><ul><ul><li>Services and infrastructure (plus oil and mining in Argentina) </li></ul></ul>Automobiles Electronics (Brazil)
  13. 13. FDI impact on MERCOSUR countries in the 90s <ul><li>Efficiency and productivity gains </li></ul><ul><li>Introduction of new product technologies, organizational techniques and quality standards </li></ul><ul><li>Improved environmental management (but “environmental islands?”) </li></ul>
  14. 14. FDI impact on MERCOSUR countries in the 90s (II) <ul><li>Few investments in knowledge-intensive sectors (specially in Argentina) </li></ul><ul><li>Decreasing backward linkages </li></ul><ul><li>Few technological spillovers </li></ul><ul><li>TNCs have not made significant contributions to export diversification </li></ul><ul><li>Increasing market concentration </li></ul><ul><li>Probably crowding out effects </li></ul>
  15. 15. FDI incentives in MERCOSUR <ul><li>No disciplines were in force </li></ul><ul><li>May have reinforced regional disparities </li></ul><ul><li>Seldom aimed at fostering spillovers or enhancing technological capabilities </li></ul><ul><li>Mainly motivated by political reasons and employment creation/trade balance objectives </li></ul><ul><li>Lack of transparency </li></ul><ul><li>Conflicts at the WTO </li></ul>Bidding wars
  16. 16. Some lessons (I) <ul><li>Pro-active policies may make FDI more development-friendly than open-doors policies </li></ul><ul><li>Incentives may be a useful part of pro-active policies if they aim at SHD objectives, are well designed and disciplines and enforcement mechanisms exist. </li></ul>
  17. 17. Some lessons (II) <ul><li>Incentives work well only if other conditions are met: </li></ul><ul><ul><li>Human capital availability </li></ul></ul><ul><ul><li>Technological infrastructure </li></ul></ul><ul><ul><li>Adequate institutional frameworks </li></ul></ul><ul><li>Spillovers only arise if domestic firms have access to: </li></ul><ul><ul><li>Credit </li></ul></ul><ul><ul><li>Technical assistance </li></ul></ul><ul><ul><li>Human resources </li></ul></ul><ul><ul><li>Information </li></ul></ul>Leveling the playing field for domestic firms

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