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Optimising FDI Benefits

Understanding FDI Assisted Economic Development edited by Rajneesh Narula and Sanjaya Lall; Routledge, London and New York, 2006; N S SIDDHARTHAN This book is dedicated to Sanjaya Lall (1940-2005) and was published soon after his death. The book was earlier published as a special issue of The European Journal of Development Research. Sanjaya Lall was professor of development economics at the University of Oxford and a leading scholar in the areas of foreign direct investment (FDI), multinational enterprises (MNEs), technology transfer and technological capability. His phenomenal productivity resulted in the publication of more than 33 books and about 75 papers in refereed professional journals. He was the course director for MSc in economics for development at Oxford university. He also acted as an advisor or consultant to a large number of international organisations that included the World Bank, IFC, UNCTAD, ILO, UNIDO, FAO, ADB, ESCAP and EC. I had the privilege of collaborating with him in the early 1980s that resulted in the publication of two papers

Optimising FDI Benefits

Understanding FDI Assisted Economic Development

edited by Rajneesh Narula and Sanjaya Lall; Routledge, London and New York, 2006; pp 198, £ 65.

N S SIDDHARTHAN

T
his book is dedicated to Sanjaya Lall (1940-2005) and was published soon after his death. The book was earlier published as a special issue of The European Journal of Development Research. Sanjaya Lall was professor of development economics at the University of Oxford and a leading scholar in the areas of foreign direct investment (FDI), multinational enterprises (MNEs), technology transfer and technological capability. His phenomenal productivity resulted in the publication of more than 33 books and about 75 papers in refereed professional journals. He was the course director for MSc in economics for development at Oxford university. He also acted as an advisor or consultant to a large number of international organisations that included the World Bank, IFC, UNCTAD, ILO, UNIDO, FAO, ADB, ESCAP and EC. I had the privilege of collaborating with him in the early 1980s that resulted in the publication of two papers – one each in the Economic Journal and Oxford Bulletin of Economics and Statistics.

Studies included in this edited volume mainly aim at understanding the factors that lead to an optimisation of the benefits from FDI for the host economy. The book has 10 chapters, including the introductory chapter. The chapters cover a wide range of topics across a cross section of countries and sectors – South African automobile industry, FDI and Latin American experience covering Mexico and Costa Rica, linkage formation and supplier development in Thailand, electronics industry in Malaysia, Philippines and Thailand, and spillovers from FDI in Argentina. In addition, some of the case studies also cover Trinidad and Tobago. There is also a chapter each on the regulation of FDI in historical perspective and the impact of trade and investment on human development.

Despite the diversity of countries covered, and the methodology used the chapters in the volume point to a basic paradox: “With weak local capabilities, industrialisation has to be more dependent on FDI. However, FDI cannot drive industrial growth without local capabilities” (p 11). Furthermore, all the contributors are unanimous in their scepticism of the Washington consensus. Given the paradoxical findings, the studies, do not support the view that FDI is a sine qua non for economic development. They unmistakably show that market forces cannot substitute for the role of governments and argue in favour of a proactive industrial policy. As aptly summed up by the editors, “FDI per se does not provide growth opportunities unless a domestic industrial sector exists which has the necessary technological capacity to profit from the externalities from MNE activity” (p 15). It is important for the economic policy makers in developing countries to take note of these findings based on studies of a cross section of countries belonging to different continents.

A wide variety of papers in an edited volume could be an advantage. However, it could also become a drawback if the quality of the papers included in the volume is uneven. This volume contains a heterogeneous collection of papers - while some are research studies using appropriate statistical tools, certain others are narrative and anecdotal in nature. Certain other chapters read like official reports and have very little research content. I am not sure whether it is a good idea to combine all these assorted and diverse pieces in a single volume. Such a collection could be unfair to authors who have taken the trouble of producing good research pieces.

The chapter by Lorentzen and Barnes examines the technological trajectory of a handful of South African automotive firms to understand the process of technological upgradation and innovation. The study suggests that FDI alone will not promote technological innovation. The national innovation systems and in particular, education and training sub-systems are more important. In this context the chapter by Mortimore and Vergara contrast the Mexican and Costa Rican experiences with regard to FDI inflows. In their view, the huge export success of Mexico has not been reflected in the value added in the manufacturing sector and the export platform did not evolve into a manufacturing cluster. In addition, the intense competition to export to the US led to a “race to the bottom” in terms of competitive devaluation, wage repression and reduced social security benefits. In contrast, Costa Rica, instead of following competitive devaluation and repressed wages, went in for a new development strategy based on attracting FDI to upgrade into more technologically sophisticated activities.

Rasiah’s chapter compares the export incidence and technological capabilities of foreign and local electronic firms in Malaysia, Philippines and Thailand. This is an econometric work where the author specifies a model to estimate the statistical determinants of export capability. Furthermore, the determinants of three important firm level capabilities – human resource capability, process technology capability

Economic and Political Weekly April 1, 2006 and R&D – were estimated using tobit regressions. The results show a strong statistical link between exports and process technology capability and network cohesion. Process technology in turn was related to human resources and R&D. Furthermore, wages enjoyed a positive relationship with exports. This could indicate that more than cheap labour, a better paid and skilled workforce contribute to export competitiveness. Therefore, to increase exports the government should increase the skill content of the population and create an infrastructure to increase networking capabilities.

Scott-Kennel’s chapter on FDI and local firm development in New Zealand shows that FDI has a positive impact on local industry, where MNE affiliates engage in linkages with local firms. The linkages could be collaborative, involving transfer of technologies, R&D and distribution systems. There are also spillovers involving the transfer of human resources, skill, training, experience and expertise. However, spillovers are not unidirectional. As shown by Bell and Martin’s chapter on Argentina, spillovers are complex and could run in both directions. The common perception that FDI delivers spillovers of superior knowledge via a one-way pipeline to technologically backward domestic firms is not correct.

Chang’s chapter on regulations of FDI from a historical perspective reveals much useful information that could be relevant for the current debate in this area. The paper shows that the developed countries that argue against regulations of FDI systematically discriminated against FDI during their initial stages of development. They also deployed several regulatory instruments and only after becoming developed countries did they discontinue the regulations. On the basis of this historical perspective, the chapter argues that the proposed multilateral investment agreement at the WTO would harm the developing countries. Even in Asia countries like Japan and Korea have been less dependent on FDI for their technological and industrial development.

In sum, despite the uneven quality of the chapters, this volume of collected papers contains several useful pieces that help in understanding the role of FDI in knowledge spillovers, technological upgradation of local firms, exports and economic development. The volume also contributes to the current debate on the need for regulating FDI.

EPW

Email: nss@iegindia.org

Economic and Political Weekly April 1, 2006

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