2.5: Why is FDI so high on the development agenda?
As stated in the Introduction, developing countries actively compete with one another to attract foreign investment (Thomas, 2011; Alfaro and Johnson, 2013; Lipsey, 2003). Also as explored above in the political globalisation section (see section 2.2.2 and 2.2.3), there is outside influence from global institutions to liberalise economies and induce foreign investment. This pressure from global institutions relates to the structural power of business (Farnsworth, 2004; 2010; Fuchs, 2005) which will be explored in further detail in the next chapter. However, this influence or outside pressure from global institutions does not fully explain why developing countries clamour for FDI to the extent that they do. In trying to induce investment, countries often provide a wide array of incentives in the form of tax reductions or other types of inducements in the hopes of spurring foreign investment (Thomas, 2011; Alfaro and Johnson, 2013; Lipsey, 2003). This is evidence that most developing countries independently want FDI but the question remains as to why they do. This section will explore the change in attitude of developing country policy makers regarding the net benefits of FDI. The literature provides many different explanations and this section will explore some of those reasons including shifts in thinking in development discourse.
Developing countries have not always viewed FDI as an important development tool nor have they actively sought to attract it as they do today. Prior to the 1980s many developing countries were highly sceptical of FDI and critical of TNCs (Dunning, 2002, 2008; Chang, 2007, 2014; O’Brien and Williams, 2013). At this time, developing countries, including India, often embraced economic and political policies that nurtured and promoted domestic industries by restricting activities of foreign firms (Shah and Patnaik, 2013; O’Brien and Williams, 2007, 2013; Held et al, 1999; Hale et al, 2013). The bolstering of domestic capacity by restricting the activity of foreign firms is described by terms such as infant industry protection, import substitution industrialisation (ISI), and state led dirigisme (Chang, 2007, 2014; O’Brien and Williams, 2007, 2013). Prior to the 1980’s, many developing countries did not look to open markets and foreign investors to achieve their development endeavours; rather their national objectives were sought to be fulfilled by national political and economic factors (Gore, 2000; Hale et al, 2013). Starting in the 1980s, and onwards into the 1990s, policy makers in developing countries appeared to internalise the norms of what Gore (2000) terms the liberal international economic order (free markets and circumscribed role for governments) and looked outward to global markets to provide solutions for national development issues. The research literature provides several reasons as to why developing countries appeared to have a ‘change of heart’ regarding FDI. The propagation and internalisation of neoliberal ideology (Gore, 2000); the successful transition to ‘market friendly’ policies adopted by countries such as East Asia, China, and Ireland (Gore, 2000; Lipsey, 2003); a shift in orientation from import substitution to export oriented industrialisation (O’Brien and Williams, 2007, 2013; Chang, 2014), as well as the perception that FDI is a non-debt creating option for finance (Chang, 2007, 2014; Rao and Dhar, 2011a, 2011b) are a few such examples.
The widespread propagation and triumph of neoliberal ideology in the 1980s and 1990s is argued to have been as a causal factor for the change in attitude concerning the net benefit of FDI (O’Brien and Williams, 2007, 2013; Gore, 2000). During this time, several countries deregulated and liberalised their economies and privatised state owned industries (O’Brien and Williams, 2007, 2013). For some analysts such as John Williamson (1993) who coined the term Washington Consensus, this was a result of the proven superiority of neoliberal ideology while for others such as Gore (2000) it was the result of dissemination of the structural adjustment programmes as well as ideological propagation of the World Bank and IMF. Gore (2000) states the triumph of economic neoliberalism was more than a substantive swing from state led to market led development, it also served to usher in a deeper shift in how development problems were henceforth evaluated and framed by policymakers. The normative judgements of what development ‘should’ entail became framed in the rhetoric of globalisation. He explains (p.793):
Thus it is argued that in an increasingly globalized world economy, in which there is the globalization of production systems, increasing reliance on trade and increased availability of external financial flows, countries which do not follow Washington Consensus policies will be especially penalized, as they will be cut off and thus excluded from the intensifying (and implicitly beneficial) global field of flows. Concomitantly, those countries which do follow the right policies will be rewarded, as they can capture foreign direct investment which brings technology and market access, and they can also supplement national savings with international capital flows, thus reaping the benefits of the new external environment.
However, Gore (2000) points out that while the judgements about what development should entail became framed in the global reference, the evaluation of such efforts remained in a national frame of reference. Stiglitz (2006, p.16) makes a similar argument:
In the 1990s when the policies of liberalization failed to produce the promised result, the focus was on what the developing countries had failed to do.
Thus, the 1980s and 1990s are argued to be the decades when development internalised economic neoliberalism as Gore (2000, p. 795) succinctly captures:
Everything has been made subject to the rules and discipline of the market. The vision of the liberation of people and peoples, which animated development practice in the 1950s and 1960s, has thus been replaced by the vision of the liberalization of economies.
A second reason for the change in attitude towards FDI is due to the “the widespread tendency of governments to copy successful practice elsewhere” (Gore, 2000, p. 789). It was in the late 1970s and early 1980s that the growth of most developing countries, with the exception of East Asia, began to falter and the economic crisis that affected these countries supported arguments that mainstream development practice had failed (Kohli, 2012; Gore, 2000; O’Brien and Williams, 2007, 2013; Stiglitz, 2002, 2006). East Asia was the exception and its economic success was alleged by the World Bank and the IMF to be the result of a free market orientation and adoption of friendly foreign investment policies (Chang, 2004, 2014; Stiglitz, 2006; Fennel et al, 2013). However, this was not an accurate account of East Asia’s success as first noted by Alice Amsden (1989) who emphasised that countries such as South Korea actively intervened in the economy to steer development initiatives and were selective in how and when FDI entered their markets. Although the real secret to East Asia’s success is more commonly known, in the early 1980s this was not common knowledge and East Asia was advertised by the World Bank and IMF as an example of free market ideology (Chang, 2004; 2007, 2014; Stiglitz, 2002; 2006; O’Brien and Williams, 2013). In a similar line of reasoning, Lipsey and Sjoholm (2005) argues that the success of Ireland and China in achieving rapid economic growth after moving from a prohibitive stance to encouragement of FDI played a part in influencing other policy makers to change their approach to FDI.
A third argument maintains that economic globalisation and transnational production helped some developing countries to re-evaluate the costs and benefits of FDI (O’Brien and Williams, 2007, 2013). O’Brien and Williams (2013) explain that several countries replaced their development trajectories based on import substitution with export oriented policies based on TNCs systems of transnational production and distribution. Some countries realised they could utilise TNCs, their production capabilities and connections with global markets to help them become a manufacturing hub for global markets.
Finally, Chang (2007) argues that FDI became a preferred source of development financing for developing countries following the decrease in official development assistance and foreign bank loans in the 1990s. As many developing countries had amassed large debts from prior development assistance loans, FDI became increasingly viewed as a non-debt creating option to help finance development endeavours (Chang, 2007, 2014; Rao and Dhar, 2011a, 2011b). Chang (2007) and Rao and Dhar (2011b) explain that developing countries often opt for inviting FDI as it is associated with more autonomy in national decision making as opposed to accepting development assistance along with economic stipulations demanded by the provider.