Harnessing Foreign Direct Investment: Policies for Developed and Developing Countries

January 12, 2007
"Ted Moran's penetrating yet subtle analysis exposes both the pitfalls and the potential of FDI. This study should be read and heeded by all concerned with how global engagement can promote economic development."

-Robert Z. Lawrence, Albert L. Williams Professor of International Trade and Investment, John F. Kennedy School of Government, Harvard University

"Provides an easy-to-use guide for policymakers and analysts covering a wide spectrum of developing country experiences with FDI."

-Callisto Emas Madavo, former World Bank vice president for Africa

Foreign direct investment (FDI) has long been controversial. Is it an important channel through which capital and know-how are transferred to developing countries? Or does it distort host economies and polities, bringing corruption and abuse of global labor standards? Harnessing Foreign Direct Investment by CGD non-resident fellow Theodore H. Moran shows that FDI can make a contribution to development significantly more powerful and more varied than conventional measurements indicate. But it can also distort host economies and polities with consequences substantially more adverse than critics and cynics have imagined.

For manufacturing and assembly, Moran shows how FDI undertaken as part of the parent corporation's strategy to enhance the firm's competitive position in world markets has been a potent force in transforming the productive capabilities within developing country economies--those with appropriate domestic policies. On the other hand, FDI directed to protected domestic markets, and burdened with domestic content and joint venture requirements, detracts from host country welfare and leaves host industries well behind the competitive frontier in international markets. The key policy reforms needed are, happily, politically feasible and do not require lowering labor standards or acquiescing in poor worker treatment.

But FDI's effect on extractive industries and infrastructure in this volume brings unpleasant new discoveries. Research introduced here for the first time shows multinational investors in infrastructure providing payoffs and "deferred gifts" to family members and associates of host country political leaders to win concessions and secure favorable treatment--without putting the investors in jeopardy of prosecution! Moran's analysis points to the need for a fundamental change in the international definition of corrupt payments, along with enhanced transparency and enforcement--before G-8, OECD, World Bank and other anti-corruption initiatives can become effective.

Does FDI to the developing world come at the expense of jobs and economic activity in the developed world? Moran's penetrating yet subtle analysis shows that outward investment strengthens the competitiveness of home country firms, improves the distribution of relatively high wage-high benefit jobs within the labor market, and enhances the stability of communities in the developed home economy. Where the globalization of trade and investment creates losers as well as winners on both sides of developed-developing country borders, Moran identifies the adjustment, training, and retraining policies that countries can take to cushion the impact of globalization on their citizens.

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