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

Chapter Two: Globalisation, foreign direct investment and developing economies

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Chapter Two: Globalisation, foreign direct investment and developing economies

2.1: Introduction

One of the most significant aspects of our world today is the sprawling reach of transnational corporations (TNCs) and the rate, speed, and volume of foreign direct investment (FDI) that TNCs utilise to penetrate all corners of the globe (Moran et al. 2005; Moran and Oldenski, 2013, 2015; Richter, 2001; Dunning, 1997b; Lipsey, 2000; Lipsey and Sjoholm, 2011). Increasingly, TNCs are investing in developing countries to increase profit margins, seek new markets or access needed resources (Nunnenkamp and Spatz, 2004; Dunning, 1997b, 2002; Thomas, 2011; Herzer, 2012). While TNCs seek to invest in developing countries, developing countries seek investment from TNCs with equal vigour (Farnsworth, 2010; OECD, 2002, 2008; Thomas, 2011; Herzer, 2012). Developing countries often view foreign direct investment (FDI) as a conduit for achieving many development needs such as economic growth, employment, increase in human capital and technology transfer (OECD, 2002, 2008; OECD-ILO, 2008; Moran et al., 2005; Chang 2014; Thomas, 2011; Herzer, 2012; ). Thus, there is a reciprocal relationship between TNCs and developing countries as both want to extract and exploit the resources and opportunities that the other can provide (Nunnenkamp, 2002; OECD, 2002, 2008; Chang, 2003, 2014; Moran et al, 2005; Lipsey and Sjoholm, 2012). In fact in 2014, 54% of the world’s FDI was invested in developing countries and one third of the total global FDI was from developing countries (UNCTAD, 2015). Of the top ten FDI recipients in the world, five are developing economies (UNCTAD, 2015). This level of FDI to and from developing countries is unprecedented historically as in the past FDI was mainly invested by developed economies to other developed economies (Hirst and Thompson, 1996; Held et al, 1999; UNCTAD, 2013; O’Brien and Williams, 2007, 2013).

It is important to situate FDI to developing countries within the context of globalisation in order to provide insight into the complexities of the relationship and the dynamics of power between TNCs and developing countries. Aspects of globalisation, both economic and political are increasing the technological and physical capabilities of TNCs to conduct transnational production seamlessly around the world (Kobrin, 1997; Strange, 1991; Gilpin, 2001; Held et al, 1999). Other aspects of globalisation involve increasing political pressure upon developing countries to liberalise their national economies to allow for the free flow of foreign investment (Diehl, 1997; Newell, 2002; Farnsworth, 2010; Pierson, 1996; Chang and Grabel, 2004; Held et al, 1999). Interestingly, developing countries have not always looked to FDI as source of development and this too is interwoven into the complexities of globalisation (Gore, 2000; Khor, 2000; O’Brien and Williams, 2007, 2013; Chang, 2003, 2014; Chudnovsky and Lopez, 1999).

Developing countries are increasing their dependence on FDI (Stopford and Strange, 1991; Moran et al, 2005) and compete with one another for investment (Farnsworth, 2010; Gilpin, 2001; Newell, 2002; Thomas, 2011; Davies and Vadlamannati, 2013). The OECD and ILO (2008, p.14) argue:

The increasing number of potential destinations for FDI and the growing dependence of developing countries on FDI have intensified competition among countries to attract FDI.

The intense competition has resulted in developing countries going to great lengths to welcome FDI with the formation of liberal economic policies and the creation of economic inducements, including financial incentives such as tax concessions, subsidies and preferential loans that are provided to attract foreign investment (Thomas, 2011; Erdogan and Atakli, 2012; Blomstrom, 2002; Lipsey, 2003; Charlton 2003; Moran et al, 2005; OECD-ILO, 2008). However, developing countries are also making social policy concessions as inducements to attract investment (Farnsworth, 2004, 2010, 2012; Hecock and Jepsen, 2013; Davies and Vadlamannati, 2013). As will be explored in detail in the next chapter (section 3.6) social policies are helpful to business, economic growth and the competitiveness of a state’s economies (Gough, 2000); however, mainstream development agendas prioritise the needs of business and economic growth over social welfare (Marques and Utting, 2010; Utting et al, 2013; Farnsworth, 2010). Although the needs of business and citizens are not exclusive, their interests can compete and conflict with each other (Glasberg and Skidmore, 1997; Farnsworth, 2012). The pressure to prioritise economic growth and the needs of business, both real and perceived, can place downward pressure on nation states to construct social, labour and environmental policies with minimal regulation and protection (Davies and Vadlamannati, 2013; Thomas, 2011; Hecock and Jepsen, 2013; Farnsworth, 2004; Mishra, 1998; Yeates, 1999; Stryker, 1998; Strange, 1996; Deacon, 1997). The high presence of TNCs in developing countries has aroused controversy and raised social concern that these firms are exploiting low wages and weak labour and environmental standards that are often present in developing countries (Thomas, 2011; O’Brien and Williams, 2013; OECD-ILO, 2008; Korten, 1995; Richter, 2001; Bakan, 2004).

Making the situation more precarious is the fact that the benefits to developing countries from FDI are far from guaranteed and automatic (OECD, 2002, 2008; OECD-ILO, 2008; Moran et al, 2005; Moran and Oldenski, 2013; Nunnenkamp and Spatz, 2004; Dunning, 2002; Herzer, 2012). Chudnovsky and Lopez (1999) conclude that it is not clear whether FDI generates more benefits than costs for the host country and Nunnenkamp and Spatz (2004) argue that conclusive evidence supporting the widely held view that developing countries should draw on foreign direct investment to spur economic development is sparse. Nevertheless, as Lipsey and Sjoholm (2005, p. 23) highlight, policy makers appear to have made up their minds on the issue:

A substantial body of literature has grown around the question of how inward foreign direct investment (FDI) affects host countries. On almost every aspect of this question there is a wide range of empirical results in academic literature with little sign of convergence. At the same time, policy makers seem to have made their own judgements that inward FDI is valuable to their countries.

In sum, developing countries are going to great lengths to induce FDI, constructing policies that have direct impact to the wellbeing of their citizens in order to attract them and are doing so with only ambiguous evidence that FDI will bring the needed benefits and clear evidence that TNCs may bring corporate harm to the economy and citizens in their wake (Chang, 2003, 2014; Stiglitz, 2002, 2006; Farnsworth, 2010; Moran and Oldenski, 2013). Thus, exploring the question: what is the impact of FDI on developing countries becomes critical as the answer is necessary:

…for the lives of millions-if not billions- of workers, families, and communities in the developing world. The answer is crucial for the policymakers in developing and developed countries and in multilateral agencies. The answer is central to the debate about the costs and benefits of the globalization of industry across borders. (Moran et al., 2005, p. 1)

This chapter engages in these critical debates and will explore the impact of FDI on developing countries by examining the wider context of globalisation, FDI and developing countries. Section 2.2 will explore the dynamics of economic and political globalisation. Section 2.3 will deconstruct the definition of FDI and explore different types of investment that can have varying impacts on developing countries, communities, workers, and economies. Section 2.4 will investigate the risks and benefits of FDI to developing countries by discussing theoretical postulations and summarizing empirical evidence. Finally, section 2.5 will analyse why FDI, despite the given uncertainties, is high on the development agenda for countries.

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