FDI bad for developing countries?

Posted on July 4, 2006  /  0 Comments

Our colleagues from Latin America have drawn our attention to the following article, perhaps because they think that our TRE (telecom regulatory environment) work is premised on FDI being an unmitigated good.

We welcome the opportunity for a debate.

Kevin P. Gallagher and Lyuba Zarsky, “Rethinking Foreign Investment for Development”, Post-Autistic Economics Review, issue 37

“In the 1990s, foreign direct investment (FDI) came to be seen as a “miracle drug”—a jumpstart to economic growth and sustainable industrial development, especially in developing countries. Policies to attract FDI became the centerpiece of both national development strategies and supra-national investment agreements.

This paper examines case study and statistical evidence about the impacts of FDI in developing countries on economic growth, technology spillovers and environmental performance. Mirroring the heterogeneity of developing countries, we find that there is no consistent relationship: the impact of FDI on each variable has been found to be positive, neutral, or even negative. Key variables are domestic policies, capacities and institutions.

We conclude that the purported benefits of FDI are exaggerated and its centrality in development strategies misplaced. Rather than attract FDI per se, development policies should aim to promote endogenous local capacities for sustainable production. With the right national and global policy framework, FDI could help in that process.”

LIRNEasia’s position can be summarized as follows:
1. Investment (foreign or local) is necessary for extending telecom networks and providing connectivity.
2. In the face of many competing demands such as for water, roads, and hospitals, it seems that scarce government resources should be spent on things other than telecom. Furthermore, private investors are willing to invest in telecom, as opposed to water, hospitals, etc.
3. Therefore, conditions must be created for private investment.
4. A stable and non-expropriatory regulatory environment is an essential condition for investment (be it local for foreign).
5. The TRE is a measure of that environment.

Let the debate begin.

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