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

1. Foreign Direct Investment:Do the benefits “trickle down?” Michelle Jurkovich Economics 490 Winter 2008

2. The Question • Does increasing foreign direct investment lead to an increase in standard of living? In other words, who benefits from foreign direct investment?

3. 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

4. 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, Sustainable Development and the WTO. (2003, August). Heinrich Boll Foundation North America:9.

5. 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.

6. 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.

7. 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

8. 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

9. The Case for Nigeria • Reduced benefits of FDI in extractive oil industry Possible factors at play: -Issue of technology transfer (less if capital-intensive) -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.

10. 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

11. The Statistics At A Glance

12. 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/

13. 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.

14. 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

15. Questions?