The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment



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2.6: Chapter summary


Developing countries want FDI and compete with one another to entice it (Thomas, 2011). How developing countries compete with one another is explored in the proceeding chapter. The first part of this chapter explored FDI as situated within the context of economic and political globalisation. It was argued that economic globalisation has greatly increased the speed, volume, and ease with which FDI flows across national borders and around the world and into developing countries (Sklair, 2012; Held et al., 1999). The main conduit of FDI, the TNC, is one of the defining features of contemporary economic life in the global economy (Sklair, 2012; Held et al., 1999; O’Brien and Williams, 2007, 2013). TNCs are powerful and wealthy corporations that are accredited with globalisation’s ills—labour exploitation and monopolisation of markets — as well as its successes—state of the art technology, increased standards of living and improved goods and services (Stiglitz, 2006; Kalemi-Ozcan and Villegas-Sanchez, 2013). Increasingly, TNCs are conducting transnational production through global value chains (UNCTAD, 2013). The use GVCs results in numerous layers of subcontracting units (Nathan and Kalpana, 2007) whereby, often, the lower the position of the unit on the subcontracting chain, the increase in the chance of low wages and exploitative working conditions (UNCTAD, 2013).

Political globalisation is also directing FDI and the political decisions to liberalise national economies so that investment and trade can flow freely between countries (O’Brien and Williams, 2007, 2013; Alfaro and Johnson, 2013). Neoliberal economics is strongly promoted by IGOs such as the IMF, World Bank and WTO (Stiglitz, 2006; Chang, 2014). A key aspect of globalisation is the outside global influence of IGOs on national investment and economic policies of nation states (Weiss, 2013).

However, globalisation and outside pressure from global bodies does not entirely explain why developing countries actively seek to attract FDI and often provide incentives to ensure this happens (Thomas, 2011; Erdogan, 2012; Lipsey, 2003, Farnsworth, 2004). As countries go to great lengths to attract investment and this has implications for the host country’s citizens, it is critical to understand why developing countries such as India want FDI. It was argued that developing countries have not always looked to global markets and foreign investors to achieve development aims; in fact, many countries were highly sceptical of FDI and TNCs and protected domestic industries by restricting entry of TNCs to their markets (O’Brien and Williams, 2007, 2013). However, from the 1980s and, in particular, during the 1990s developing countries internalised the norms of the international economic order (Gore, 2000) and some changed their development model from import substitution to an export oriented one and many followed the successful practice of other developing countries who liberalised their economies (O’Brien and Williams, 2007, 2013; Lipsey, 2003; Gore, 2000).

One of the fundamental reasons why developing countries want FDI is because it is argued to drive economic growth and provide many development accomplishments (Alfaro and Johnson, 2013). However, such accomplishments are far from guaranteed (Lipsey, 2003). This chapter contained a review of the hypothetical arguments regarding the advantages and disadvantages to host countries as a result of inward FDI. Evidence from empirical studies regarding the impact on domestic industries, technology transfer, employment and economic growth and poverty were explored. The empirical and theoretical research is widely variable with no universal relationships apparent (Lipsey and Sjoholm, 2005).

This chapter largely focused on economics and the importance for developing countries to liberalise their economies and adopt investment policies to attract FDI. However, enticing investment is not just about economic policies. Social policies are also key to attracting investment and the social welfare of the host country is critical to attracting or repelling investment (Davies and Vadlamannati, 2013; Hecock and Jepsen, 2013; Farnsworth, 2010; Mkandawire, 2004). Just as global institutions such as IGOs and TNCs influence economic decisions, they equally influence social policy decision making (Davies and Vadlamannati, 2013; Farnsworth, 2004, 2010, 2012; Strange, 1996). The dynamics and interactions between FDI, the nation state and social policy is the subject of the next chapter.

Chapter Three: The business-social policy nexus in the context of development

3.1: Introduction


As explored in Chapter Two, developing countries seek to attract FDI in the hope that such investments will supply needed inputs for development goals (Alfaro and Johnson, 2013; OECD, 2002, 2008; Moran et al, 2005). In enticing investment, countries employ different strategies to try and make domestic environments conducive to the needs of business (Thomas, 2011; Farnsworth, 2010). Chapter Two focused more on the preferred economic environments and policies for TNCs such as open markets and free trade. However, the social environments, social policies and the overall social welfare of host country locations are very important to TNCs as well (Hecock and Jepsen, 2013; Davies and Vadlamannati, 2013; Gough, 2000; Farnsworth, 2010). Mkandawire (2004, p. 1) defines social policy in the context of development as:

…collective interventions in the economy to influence the access to and the incidence of adequate and secure livelihoods and income.

Social welfare is an ambiguous concept, but here refers to the final outcome for individuals or groups of individuals, typically within a state (Gough, 2000). Amaryta Sen (1999, p.10) conceptualised social welfare as the expansion of personal freedoms: political freedoms, economic facilities, social opportunities, transparency guarantees, and protective security.

There is also a deep interrelationship between economic and social realms within market based economies (Thelen, 2014; Evans, 1995; Fligstein, 2001; Yeates, 2001; Chang, 2003, 2014) whereby social policies assist with the needs of citizens, business and the economy (Hecock and Jepsen, 2013; Titmuss, 1976; Gough, 1979; Glasberg and Skidmore, 1997; Farnsworth, 2012). As the state has to provide environments conducive to the needs of both its citizens and business this has implications for welfare provisions and welfare outcomes within host economies (Thelen, 2014; O’Connor, 1973; Offe and Ronge, 1984; Gough, 1979; Farnsworth, 2004, 2010, 2012) and this is the focus of the chapter.

As explored in Chapter Two, TNCs have considerable economic and political clout. This power can be used to influence the policy decision making in host economies to best suit their needs and preferences (Thomas, 2011; Davies and Vadlamannati, 2013; Hirschman, 1970; Fisher, 1994; Fuchs, 2005; Farnsworth, 2004, 2010). That said, it can be argued that business has a privileged interest within capitalist nation states and access to the policy making arena that is not open to other social groups, however, its ability to dictate the policy outcomes is variable across time and space (Bell and Hindmoor, 2013; Pierson, 1995; Vogel, 1996; Hacker and Pierson, 2002 ). There are factors that serve to both propel and constrain the ability of business to influence social policy outcomes (Gough and Farnsworth, 2000; Farnsworth, 2004, 2010). The distinct institutional arrangements within the host country help underscore the variance of social welfare outcomes between states and the variation of business influence on policy making that exist between host countries (Thelen, 2014; Baccaro and Howell, 2011; Stephens, 1979; Korpi, 1983; Esping-Anderson, 1990; Farnsworth and Gough, 2000).

Of course it is not just business influence on social policy construction that determines the overall impact of TNCs on host countries, there are direct risks which include instances of corporate harm, costs and crime that need to be taken into account. There are two factors at play here. First there are general risks that can be brought from corporate investment and second there are risks that are specific to the type of firm investing in the host country (Forsgren, 2013; Madeley, 1999; Farnsworth, 2004, 2010). For example, a corporate investment involved in oil drilling will bring a different set of risks to a country in comparison to a textile manufacturing firm although both are capable of harm.

Although TNCs are both directly and indirectly involved in determining their impact on host countries, the state has a large role to play as well. As mentioned above, both citizens and businesses are dependent upon the state for needed provisions to function and thrive (Thelen, 2014; Gough, 1979; Glasberg and Skidmore, 1997; Farnsworth, 2012). While the needs of both business and citizens require a fair delivery of social and corporate support, there are political and ideological factors that can cause disproportionate provisions from the state (Acegomlu et al, 2012; Glasberg and Skidmore, 1997; Farnsworth, 2012). Although social welfare policies are helpful to business, economic growth and the competitiveness of state’s economies(Gough, 2000); mainstream development agendas prioritise the needs of business and economic growth over social welfare (Marques and Utting, 2010; Farnsworth, 2010; Ferretijans and Surrender, 2012) which is conceptualised as an ‘add on’ to future economic development (Mkandawire, 2004). Thus developing countries can be at risk of promoting corporate welfare to the detriment of social welfare and in doing so, may position itself in a policy framework that is harmful to both its citizens and the needs of business (Farnsworth, 2010; 2012; Thomas, 2011; Davies and Vadlamannati, 2013). Be that as it may, developing countries can still effectively implement social policies that extract potential benefits and mitigate possible disadvantages despite influence from corporate power, IGO development prescriptions, and competition between states to attract investment (Chang, 2007, 2014; Kwon, 2014).

In light of these debates, this chapter is divided into four sections. The first section will explore business power and its influence on social policy construction. The second section will explore variations of deleterious corporate behaviour: harm, cost, crime and risk. Following this, corporate social responsibility will be discussed. From here, the chapter will proceed to explore types of TNCs and the implications for social policy in the host country. The proceeding section will explore the welfare continuum, as utilised by Farnsworth (2012) which has both corporate and social welfare aspects to demonstrate the interrelationship between the needs of the state, business and citizens. It will briefly explore the history, policy legacies and ideologies of the role of welfare in development thinking. The final section will examine the role of the state and state power to construct policies that serve to increase or reduce the positive and negative social effects of FDI to its citizens.



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