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Foreign Direct Investment for Development:

Making Globalisation Work for the Poor

Presentation given at the International House of Japan, Tokyo,

18 October 2002

Hans Christiansen

Principal Economist, Division for International Investment and MultinationalEnterprises, OECD

[email protected]

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Developing countries share of global FDI inflows

0

5

10

15

20

25

30

35

40

45

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Africa

Asia

Latin America

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Largest developing country recipients of FDI

0 5 10 15 20 25 30 35 40 45 50

Chile

South Africa

Singapore

Poland

Brazil

Hong Kong

Mexico

China

bn. US$

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4

Inward FDI positions relative to GDP

0 5 10 15 20 25 30 35 40

World

Western Europe

North America

Africa

Latin America

South and East Asia (*)

(*) Excluding Japan

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Inward FDI positions of selected Asian countries

0 20 40 60 80 100 120

India

Korea

Thailand

China

Indonesia

Vietnam

Malaysia

Singapore

Per cent of GDP

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Japans outward FDI 1992-2001: by main regions

OECD area

69%

Latin America (*)11%

Asia (*)19%

Others

1%0%0%0%0%0%0%0%

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FDI from Japan to selected developing countries

050000

100000

150000

200000250000

300000

350000

400000

450000

500000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Million Yen

China

IndonesiaSingapore

Thailand

Brazil

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Does it matter if direct investment is foreign?Whats the difference?

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Some countries have insufficient domestic savings and little recourse to

foreign borrowing. Others have sufficient funds, but weak domesticcredit intermediation.

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Other countries have ample access to borrowed funds, but prefer torely on a degree of equity finance. FDI is a more stable source of

external finance than most.

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Comparing the volatility of FDI and portfolio investment(over the last decade)

0

2

4

6

8

10

12

Argentina Brazil Estonia Indonesia Mexico Morocco Pakistan Philippines Thailand Venezuela

CoefficientofV

ariation

FDI

Portfolio

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Does it matter if direct investment is foreign?

Whats the difference?



Other countries have ample access to borrowed funds, but prefer torely on a degree of equity finance. FDI is a more stable source of

external finance than most.

All countries can potentially benefit from foreign corporate presence intheir business sector. The benefits are both direct and indirect. They

occur via three separate channels.

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The Benefits (and Costs) of FDI for Development: Main Channels

Economic growth (and factor productivity):

Integration in international trade. The question is not trade OR

investment. The two reinforce each other.

Spillovers due to foreign corporate presence. This includes

technology diffusion and human capital development.

Direct impact on corporate efficiency. Competition may be

affected both positively and negatively by foreign entry. Theeffect on enterprise development and restructuring is

consistently positive.

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FDI and host country integration into international trade

Foreign trade and FDI are complementary. In the longer run, increasing

inward investment boosts exports as well as imports.

The benefits of FDI are therefore equivalent with the ones that arise from

increased openness to trade.

Countries may exploit this through reliance on special entities such as

export processing zones. However, this comes at a non-trivial cost.

Policies aimed at harnessing FDI as a tool for limiting imports or boosting

exports have not been generally successful.

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Openness to trade and FDI

0

1

2

3

4

5

6

7

8

9

0 10 20 30 40 50 60 70

Average of export and import relative to GDP (1995-2001)

Average

ofinward

and

outward

FDIrelative

to

G

DP(

1995-

2001

)

B.L.E.U.

Netherlands

Sweden

Canada

Korea

Switzerland

U.K.

Italy

Germany

Spain

France

AustraliaU.S.

Japan

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Foreign corporate presence and spillovers to the host economy

Technology may be transferred or emulated locally

Vertical linkages with suppliers

Horisontal linkages with competing or complementary companies

Migration of skilled labour

Internationalisation of R&D

but not all foreign technologies are equally relevant.

Human capital spillovers are common, but not often decisive

Foreign-owned enterprises offer more training, but the training if oftennot widely applicable.

Demonstration effects vis--vis local authorities.

Migration of managers.

Human capital and technology levels are interrelated

and they are both contingent upon the presence of certain minimum

thresholds in the host economy.

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FDI and efficiency gains: competition and enterprise restructuring

Market concentration has increased significantly in response to M&As

but this does not necessarily imply that competition suffers...

especially not where the appropriate (foreign trade, anti-trust) policies

are in place.

Foreign-orchestrated takeovers generally result in better management andcorporate governance practices

and efficiency gains more generally, especially in sectors with

economies of scale.

Foreign participation in privatisation has generally been successful, butoften also politically controversial.

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Environmental and social concerns

MNEs are well placed to apply environmentally sound practices, and they

generally obey host country laws and regulations

but they have little incentive to take the lead. Appropriate domestic

regulation is hence very important.

There is very little systematic evidence of pollution havens and race to

the bottom

whereas some anecdotal evidence remains subject to dispute.

FDI generally helps raising social standards in the host country

and there are signs of a positive correlation between FDI and core labour

standards

but some controversy continues to surround export processing zones.

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Poverty and inward FDI stock (in 60 developing countries)

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35 40 45 50

FDI stock as percentage of GDP, 1995

Share

ofpopulationlivi

ngbelow

1USD

perday

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Poverty and inward FDI stock (in 60 developing countries)

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35 40 45 50

FDI stock as percentage of GDP, 1995

Share

ofpopulationlivi

ngbelow

1USD

perday

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What may host countries do about it?

Overall: Every aspect of host countries economic and governance practicesaffects the investment climate. The following policy action toward

macroeconomic stability and institutional predictability should be priority:

Pursue sound macroeconomic policies geared to sustained high economicgrowth and employment, price stability and sustainable external accounts.

Promote medium-term fiscal discipline, efficient and socially just tax

systems and prudent public-sector debt management.

Strengthen domestic financial systems in order to make domestic financial

resources available to supplement and complement foreign investment.

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Investment climate: FDI is unlikely unless investors have a reasonableunderstanding of the environment in which they will be operating. Moreover,

foreign-owned enterprises need to be able to deal with domestic business

sector as well as related enterprises abroad in a fair and rational manner.

Authorities need to consider the following challenges:

Strengthen ongoing efforts to consolidate the rule of law and good

governance.

Work toward increased openness to foreign trade so that the domesticenterprise sector can participate fully in the global economy.

Enshrine the principle of non-discrimination in national legislation and

implement procedures to enforce it through all levels of government and

public administration.

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Attracting FDI: Relative Importance of Key Factors

Confidence in the rule of law

Quality of macroeconomic environment

Political stability

Quality and clarity of business legislation

Sector/industry specifics

Administrative burden

Social coherence and infrastructure

Local labour market conditions

Social network (e.g. for expatriates)

Business infrastructure

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Attracting FDI: Relative importance of key factors

Confidence in the rule of law

Quality of macroeconomic environment

Political stability

Quality and clarity of business legislation

Sector/industry specifics

Administrative burden

Social coherence and infrastructure

Local labour market conditions

Social network (e.g. for expatriates)

Business infrastructure

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Inward FDI and the quality of institutional governance

R2 = 0,4492

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

1,00

0 10 000 20 000 30 000 40 000 50 000 60 000

FDI inflows, 1995-2000 ($ million)

InstitutionalGovernance

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Investment climate: FDI is unlikely unless investors have a reasonableunderstanding of the environment in which they will be operating. Moreover,

foreign-owned enterprises need to be able to deal with domestic business

sector as well as related enterprises abroad in a fair and rational manner.

Authorities need to consider the following challenges:

Strengthen ongoing efforts to consolidate the rule of law and good

governance.

Work toward increased openness to foreign trade so that the domesticenterprise sector can participate fully in the global economy.

Enshrine the principle of non-discrimination in national legislation and

implement procedures to enforce it through all levels of government and

public administration.

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Encouraging spillovers: Domestic competences, technologies andinfrastructures need to be sufficiently well developed to allow nationals to

take full advantage of the spillovers foreign-owned generate. Hence, host

country authorities should consider undertaking certain measures:

Put in place, and raise the quality of, relevant physical and technological

infrastructure.

Raise the basic level of education of national workforces.

Implement internationally agreed standards in areas such as child labour,

workplace discrimination and impediments to collective bargaining.

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