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Foreign Direct Investment: Do the benefits trickle down?

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Title: Foreign Direct Investment: Do the benefits trickle down?


1
Foreign Direct InvestmentDo 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
America9.
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.

gtgtgtgtTherefore 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 Indias software and outsourcing
    industry (p.3)
  • Wages equal to or better than domestic wages
  • Benefits
  • Increased productivitycheaper 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
America22-23. Picture from http//www.dscdredge.
com/images/chile-dredge.jpg
8
Sharing Technology
  • South Africas 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
America20-21. South African Flag taken from
cache.virtualtourist.com/1986315-South_Africa... S
isal photo taken from www.edmunds.com/.../dcx.sis
al.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, 26628, 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
America16-17. Photo from marxsite.com/MEX-Mexico
City-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 199092 and 200103, 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
  • Koreas success tied to government decisions
  • Role of corruption
  • The cyclical question
  • Globalization--gtMore stable economy
  • --gtBetter 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). Asias next giant South
Korea and late industrialization. New York
Oxford University Press130 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?
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