FDI and economic reforms

1
FDI and economic reforms

• What is the role of FDI in structural adjustment
  and other economic reforms?
• Evidence from case studies

2
The optimal policy environment for FDI

• Liberal and well developed market economy
• high degree of local competence and competition
  create significant spillovers
• But few developing countries qualify
• instead, many exhibit high trade barriers and
  limited competition, as well as weak labor skills
• How will MNC affiliates react to reforms? If they
  entered because of tariffs, will they leave when
  tariffs are reduced?

3
Evidence from case studies

• Blomström and Lipsey (1994) FDI after the Latin
  American debt crisis
• Globerman, Kokko et al (1996) FDI in India after
  the reforms
• Kokko et al (1999) Trade regimes and FDI in
  Uruguay
• Johansson (1997) and Strauss (1999) FDI and
  structural adjustment programs
• Thailand right now

4
Latin American debt crisis

• How did foreign investors react to the debt
  crisis and the reforms that followed?
• Large increases in export intensity. Initially
  redirection of products from domestic to foreign
  markets, later expansion in both foreign and
  domestic markets
• Point to note most MNCs were in LA because of
  tariff protection

5
Reforms and FDI in India in the early 1990s

• Total inflows of FDI increased, but what happened
  with those MNCs that were already there before
  the reforms?
• Significant restructuring. Higher K/L, more
  technology, higher output, and higher
  productivity
• Not much increase in employment and exports. Why?

6
Trade regimes in Uruguay

• Clear shift in Uruguayan trade orientation around
  1980 import substitution gt export orientation
• Any differences in spillovers?
• More productivity spillovers from import
  substituting MNCs (but distorted resource
  allocation). Important market access spillovers
  from export oriented FDI MNCs

7
FDI and structural adjustment programs

• Structural adjustment changes the competitive
  environment. How do foreign MCNs react?
• Evidence from 50 countries foreign MNCs invest
  earlier than local firms do. Expectations
  sufficient motive for MNCs to move in (while
  local firms are slower and wait to see the
  results of the reforms).

8
FDI after the Thai crisis

• Severe collapse of the Thai economy in mid-1997
  (Tom yam effect)
• Large devaluation, capacity utilization below
  50, NPLs around 50
• Financial sector and domestic blue chips saved by
  FDI.
• FDI inflow during 18 months after crisis nearly
  as large as total inflow preceding 5 years
• SMEs still a trouble area. Too small to be of any
  interest to foreign investors

9
Summary FDI and economic reforms

• MNCs adapt their operations to the existing
  policy environment, for good or for bad
• MNCs react faster than local firms do, and may
  demonstrate feasible strategies
• Most MNCs benefit from economic reforms and their
  behavior is likely to strengthen reforms. But
  they may obstruct the political process leading
  to reform

10
Mini-seminar Finland as a host country

• Describe Finland as a host country
• What industries? Why?
• Who? Why?
• Development over time? Why?
• Discuss policy issues
• What do Finns worry about? Why? (Alternatively,
  what is discussed in your home country?)