FDI AND EXPORT COMPETITIVENESS: Bad News, Good News,

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• FDI AND EXPORT COMPETITIVENESS Bad News, Good
  News,
• Surprising News
• Policies Issues for Developed, Developing
  Countries,
• and Multilateral Lending Institutions
• Theodore H. MoranMarcus Wallenberg Professor
• of International Business and FinanceSchool of
  Foreign ServiceGeorgetown University

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Foreign direct investment comes in three
perhaps four -- distinct forms
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• FDI in manufacturing and assembly

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• FDI in extractive industries (oil, gas, and
  mining)

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• FDI in infrastructure (power generation,
  electrical utilities, water and sewerage, toll
  roads, airports, telecommunications) and

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• FDI in services (usually included within the
  category of FDI in manufacturing and assembly)

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Manufacturing FDI takes two distinct forms.
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• The major distinction is between FDI that is
  oriented toward domestic markets (often protected
  domestic markets), and

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• FDI that is oriented toward export markets (in
  particular destined to be an integral part of the
  parent MNCs global supply chain).

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The Bad News

• As part of the disillusionment with efforts at
  import substitution, the evidence from FDI that
  was used by host authorities within protected
  host markets began to show quite dismal results
  in the 1980s and 1990s.

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Performance Requirements

• A prominent feature of the import-substitution-via
  -FDI strategy was to impose what were called
  performance requirements on the foreign
  investors as a condition of their being granted
  access to the domestic economy

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• the most frequent performance requirements were
• domestic content requirements,
• joint venture requirements,
• and other technology sharing requirements.

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• Cost-benefit analyzes of individual FDI projects
  oriented toward protected domestic markets
  valuing all inputs and outputs at world prices
  showed that the great majority subtracted from
  host economic welfare, and retarded the prospects
  for broader development.

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The Good News

• The alternative strategy using FDI in
  manufacturing and assembly to bolster
  export-led growth held pleasant surprises.

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• The evidence of the 1990s and early 2000s showed
  a pattern that was much more intimate than a
  search for inexpensive parts.

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• The international parent exercises what has come
  to be characterized with the phrase parental
  supervision over all stages and supply
  relationships, with real-time upgrading of
  technology and management.

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• Multinational corporate investment in the
  developing world is conventionally pictured as
  flowing into least-skilled sweatshop-type jobs.

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But the data show that the flow of foreign direct
investment to medium-skilled industrial sectors
in developing countries
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• such as electrical equipment,
• electronics,
• semiconductors,
• autos and auto parts,
• industrial machinery,
• chemicals and chemical products

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• is more than ten times larger each year than the
  flow to low-skill, labor-intensive operations,
  and speeding up over time.

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Here multinational investors pay their workers

• two to three times as much for basic production
  jobs,
• and perhaps ten times as much for more technical
  and supervisor positions,
• in comparison to what is earned by employees in
  comparable positions in lower-skilled MNE
  operations.

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The Surprising News

• Many development strategists had feared the
  using-FDI-for-export-led-growth approach would
  leave the host countries taking part only in the
  most simple assembly operations, with little
  value added and no backward linkages.

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• But the data, over time, have indicated otherwise.

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• Evidence from the past two decades has shown

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Contract Manufacturing

• that the most powerful mechanism for backward
  linkages from foreign multinationals to local
  firms has been the phenomenon of contract
  manufacturing of the latter for the former.

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As part of this process, many local firms become
certified as Original Equipment Manufacturers
(OEM), qualifying them to supply the MNC parent
anyplace in the world.
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Well Constructed Econometric Studies

• Garrick Blalock and Paul J. Gertler. Welfare
  gains from foreign direct investment through
  technology transfer to local suppliers. Journal
  of International Economics. Forthcoming.
• Javorcik, Beata Smarzynska Does FDI increase the
  productivity of domestic firms? In search of
  spillovers through backward linkages. American
  Economic Review 94(3). 2004.

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• Latest generation of econometric studies show
  abundant externalities in the vertical direction.

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• financing and advance payment
• training of employees
• help with quality control
• lending/leasing equipment
• supplying production technology
• and organizing production lines initiation to
  exporting.

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Policy Implications for Developing Countries
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• In the Hong Kong Ministerial, developing
  countries have now been empowered to demand that
  foreign investors meet old and new kinds of
  performance requirements for no less than seven
  more years, and possibly until 2020.

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• Governments that actually pursue this strategy
  are sorely misguided about how foreign direct
  investment can best contribute to host country
  growth and welfare.

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Policy Implications for Multilateral Lending
Institutions
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• Information market failures and FDI promotion
• Genuine business climate reform with champions,
  policy advocacy.

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• Policy Implications for Developed Countries

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• Outward FDI and the Great Sucking Sound?
• Or, outward FDI as a win-win process for
  developed and developing countries?