Control on FDI (August 23th)

1. Concepts

·         Foreign Direct Investment (FDI): FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor (MIF, 1993.).  On the other hand, UNCTAD (2001) defined FDI as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor´s lasting interest in a foreign entity.

·         Control on FDI: It refers to the restrictions and implemented policies by the government of a country in order to protect ist national industries and interest against foreign companies within the country. As Asiedu and Lien  (2004) mentioned main controls are capital controls and the most important are: the existence of multiple exchange rates;  restrictions on capital account, and restrictions on the repatriation of export proceeds.

2. Question

Why does  a country implement a control on FDI? and Why  does the WTO claim for It?

In recent years FDI are becoming increasingly important because of Globalization context, especially for developing markets, and consequently many governments are interesting to attract it because FDI is considered as one of the most important factors of economic development. So, according to Stehrer and Woerz (2009):

The most frequently mentioned advantages of attracting foreign direct investment (FDI) are the increase in the capital stock in general and foreign capital in particular. The latter is assumed to be more productive, or more efficiently managed, and able to exploit economies of scale and scope, which is seen to be beneficial to the donor as well as the host country. Further, an increase in the stock of capital enables a country or region to employ more people and thus reduce unemployment, boost output growth, and so on Finally, FDI inflows are seen – from the point of view of a less developed host country – as a medium of technology transfer and thus as contributing to higher production efficiency and productivity not only to the foreign-owned firms but also, via spillovers, to locally owned firms and establishments. This increases the competitiveness of a particular industry, region or country, which again is of importance in industries facing global competitive pressures. In a broader sense FDI is also often seen as a remedy against unionization on the labour market side, characterized by high and rigid wages, and as a remedy against monopoly power on the product market side. A higher share of FDI is expected to increase wage flexibility and product market competition, which again raises competitiveness. Similar advantages also hold from the sending country’s or firm’s perspective, where FDI allows for outsourcing particular activities

for instance, labour-intensive activities can be performed more cheaply in other, for example, labour-abundant, countries), exploiting economies of scale and scope more efficiently or entering or penetrating a foreign market (market-seeking FDI). (p.95)

Last paragraph gives us an idea about the reason why poor countries want to attract FDI. This is the case of most of Latin American countries where governments have developed policies and laws to offer better conditions to foreign investors, such as reduction in taxes and improvement of security conditions (for example, in Colombia). But many scholars disagree with this approach because, as Stehrer and Woerz (2009) have also expressed, FDI doesn’t necessarily mean the increase of capital stock and in some cases FDI may drive out local firms and consequently it may have a negative effects on employment.

For these reasons, countries must implement policies that restrict FDI inflows within the country, not only to protect local companies but also to ensure that FDI is meeting proposed objectives, that is, FDI is improving economic and social conditions of people. So, countries, according to Economy Watch, use some strategies such as Incentives taxes or the lack of them for foreign companies, Subsidy scheme targeted at local businesses and, Government policies, which lend support to the phenomenon of industry nationalization.

On the other hand, World Trade Organizations (WTO) seeks to create conditions that guarantee benefits for all parties, because, according it, in many cases FDI may be associated with problems for recipient countries such as low-added value ( for example, investment in  mining sector in Colombia or in garment sector in Honduras), Weak linkages, erosion of local capacity, merger and acquisition and environmental  damages and displacement.

Besides, the WTO (2009) said that:

It is now widely recognized that, under the right conditions, FDI can be an important source of private capital for developing countries that can complement national and international development efforts. It can create jobs, stimulate domestic investment, generate positive ‘spill over’ effects, facilitate technology transfer, and expand access to global markets. However, realizing this potential requires more than liberalization and investor protection. Successful FDI strategies require effective regulatory and institutional provisions in host countries. (p.3)

Consequently, each country, with assistance of world organizations as WTO, must generate “the right conditions” mentioned by the WTO in order to reduce the negative aspects, and it must be a commitment from all parties (developing and developed countries).

3. Point of View.

I think it's impossible not to recognize the important role that has IDF today because currently, much of economic growth in many countries and regions is represented by the increase in FDI. But it is also true that in many cases FDI is not so benevolent with the host communities, an example is FDI in many African  and Latin American countries where high FDI flows are not reflected in the welfare of the poorest population, in large part by lack of commitment by foreign companies and by high indexes of government corruption.

So, I agree with WTO about the need to create and appropriate conditions that benefit both investors and recipient countries. I think that developing countries shouldn’t see FDI as the only solution to their problems while are sacrificing communities and local businesses welfare. Governments should seek not only economic growth but also economic development and better conditions for all population.

In short, I think that government must attract FDI but must do it  by developing responsible policies that promote the creation of added values for the country and not just capital flows. 

BIBLIOGRAPHY

Asiedu, E and Lien, D. (march, 2004). Capital controls and Foreign direct investment. World development, 32 (2). [Online]. Available at: http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VC6-4BHV89N-2&_user=506061&_coverDate=03/31/2004&_rdoc=1&_fmt=high&_orig=search&_origin=search&_sort=d&_docanchor=&view=c&_searchStrId=1444296444&_rerunOrigin=scholar.google&_acct=C000025027&_version=1&_urlVersion=0&_userid=506061&md5=85767d1f8da9a1cf059dfd3b536d7549&searchtype=a

International Monetary Fund (1993). Balance of Payments manual. [Online]. Available at: http://www.unctad.org/templates/Page.asp?intItemID=3146&lang=1

Steher and Woerz.(2009) ‘Attract FDI!’ — A universal golden rule? Empirical evidence for OECD

and selected non-OECD countries. European Journal of development research, 21-2. p-95-111. Retreived from EBSCOhost database: http://web.ebscohost.com/ehost/detail?vid=4&hid=104&sid=70d8e26a-6d68-4bde-8170-5fad01c702bd%40sessionmgr111&bdata=Jmxhbmc9ZXMmc2l0ZT1laG9zdC1saXZl#db=aph&AN=43290103#db=aph&AN=43290103#db=aph&AN=43290103 

UNCTAD.(2001). Foreign Direct Investment- press release. [Online]. available at: http://www.unctad.org/templates/webflyer.asp?docid=2709&intItemID=1465&lang=1

WTO. (2003). Foreign D irect Investment  and World Trade Organization: Myths and realities. [Online]. available at: www.prdatta.com/Documents/DBA/.../Articles/FDI%20and%20WTO.pdf

image: 

a construction worker in Philippines. Getty images (2009) [Online]: http://www.gettyimages.com/detail/85370945/AFP