Does Foreign Direct Investment Promote Development?

Author:Griffith, W.H.
Position::Book review

Does Foreign Direct Investment Promote Development? edited by Theodore H. Moran, Edward M. Graham and Magnus Blomstrom. Washington, DC: Institute for International Economics and the Center for Global Development. 2005. Paper: ISBN 0 881 32381 0, $29.95. 411 pages.

For decades analysts have been debating the advantages and disadvantages of foreign direct investment (FDI) and thus whether it is prudent for countries, especially less developed countries (LDCs), to try to attract FDI to help stimulate their growth and development. The debate, often bitter and intense, has for the most part been between nationalists and free traders, with nationalists arguing FDI stifled development and free traders arguing it promoted development. This collection of readings continues the discussion and, as in earlier times, its findings show that "a search for a 'universal result' of FDI on a developing-country economy is simply misguided [because] FDI can have dramatically differing impacts-both positive and negative" (p. 375). In short, there is no resolution to the debate over the consequences of FDI.

Countries try to attract FDI for various reasons, among which are the promotion of growth, the forging of backward and forward linkages and the transfer of technology. This collection of readings, however, shows that FDI will not automatically confer such benefits on host countries. Whether FDI brings the expected benefits depends on several elements. Is the subsidiary part of a global integrative network? Is it organized to trade intrafirm? Does the foreign firm have a significant technological advantage over local firms? Does the host economy have the scientific talent? Does it have laws to safeguard against the theft of intellectual property? Responses to these and other questions will determine whether FDI will transmit benefits to the host economy.

Although they did not conclude that FDI plays a small role in the long-run growth of a country, Maria Carkovic and Ross Levine did not find a robust causal link running from FDI to economic growth (p. 197). Theodore H. Moran argued that backward linkages are strongest when subsidiaries are integrated into global or regional sourcing networks of the parent company. Susan E. Feinberg and Michael P. Keane contended that multinational corporation (MNC) affiliates organized to trade intrafirm experience higher growth in real property, plant and equipment and have higher real wages than affiliates of MNCs with no...

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