Concentration of FDI

meta-creation_date: 3 November, 2003 This abstract from “Yale Global”:http://yaleglobal.yale.edu/display.article?id=2704 poses the question: is research in sociology always this sloppy? Or are these guys just out of their depth? bq. It is high foreign investment concentration, not foreign investment itself, that hinders economic growth in countries like Honduras. There’s a wide-ranging, continuing debate on what the FDI/GDP growth data means. Try Googling “this”:http://www.google.com/search?q=relationship+fdi+gdp+developing. But there’s not much of the literature that concludes that FDI “hinders economic growth”. The consensus, if there is one in the current debate, is that in some cases GDP growth attracts (’causes&#8217)FDI but in other cases it works the other way around. The data is ambiguous; it appears that the direction of causality as well as the size of the impact of FDI depends on all the circumstances, particularly the openness of the host economy. The authors of this paper, however, have another explanation: one that has an unpleasant aroma of the the old “Raúl Prebisch”:http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_dependencia.html “dependencia” dogma. bq. High concentration levels allow foreign corporations – wittingly or not – to gain control over many economic, political, and social dynamics in a host country, thereby reducing the ability of the state and local elites to implement a national economic policy in their country’s own long-term interests. Poor countries with a high concentration of a particular foreign corporate interest, such as Honduras, generate a pattern of dependency referred to as a “banana republic”. States become weak and often corrupt, and dependence on export duties makes elites less willing to use demand-side stimuli to spur domestic economic growth. The first reality-test for all conspiracy theories should be: is the alleged degree of collaboration among the ‘conspriators’ credible? Do firms—who are the biggest source of equity investment—really collaborate among themselves to exercise some sort of intra-regional ‘dependency’? For what gain? Could foreign investors be accused of cultural clumsiness? Possibly. Cartelizing the market where they can? Very likely. But the creation of a ‘dependency’? What would lead firms to conspire together on that? Multinational firms really are multinational, after all. They are interested in only one empire: their own. Ignoring what appears to be a trend through a scatter plot of FDI/GDP ratios, the authors insist that there is no apparent correlation between FDI and growth rates; only the concentration of FDI matters. The first half of this claim is startling bq. For example, from 1990 to 1997 Singapore, Thailand, Argentina and the Dominican Republic – countries with the lowest level of foreign investment concentration – had the highest rates of economic growth. Kenya, Honduras, Malawi, Ghana, and Bolivia – countries with very high levels of foreign investment concentration – had the slowest per capita growth rates. Let’s apply Occams’ rule, here. Do we need to invoke the ‘concentration’ (conspiracy) explanation to explain this difference? Or could the differences in growth rates be more readily explained by the observation that Kenya, Honduras, Malawi etc simply had lower levels of FDI than Sinagpore, Argentina and Thailand and much less open economies.

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