FOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENT

AND DEVELOPMENT:AND DEVELOPMENT:

LAUNCHING A SECONDLAUNCHING A SECOND

GENERATIONGENERATION

OF POLICY RESEARCHOF POLICY RESEARCH

Theodore H. MoranPeterson Institute for International Economics

June 1, 2011

Foreign Direct InvestmentForeign Direct Investment (FDI)(FDI)

Comes in Four Forms

FDI in Extractive Industries

FDI i I f t tFDI in Infrastructure

FDI in Manufacturing and A blAssembly

FDI in Services

Each Brings gSuch Distinctive Benefits,

Th tThreatens Such Distinctive Harms, ,

Poses S h Di i i P li Ch llSuch Distinctive Policy Challenges

ThatThat Each must be l d iAnalyzed on its Own.

Using Data StreamsUsing Data Streams that Combine

all Four FDI Flows To try to find y

One Relationshipbet een FDI andbetween FDI and

Host Welfare, or TFP, or Growth Rate

Makes No Logical SenseMakes No Logical Sense.

It is like askingIt is like askingthe Common Relationship p

Between the Impact of FDIi th Oil I d t f Ni iin the Oil Industry of Nigeria Where the Outcome dependsp

upon Policies related t th R Cto the Resource Curse

and Dutch Diseaseand Dutch Disease

The impact of FDI in the Electrical Power Industryin the Electrical Power Industry

of Indonesia h th O t d dwhere the Outcome depends upon

Polices related to the Mismatch between

Foreign Currency ObligationsForeign Currency Obligationsand Revenues in Local Currency.

The impact of FDI in the Electronics Industry

of Malaysia where the Outcomeof Malaysia where the Outcome depends upon

Policies related to Backward Linkages and Vertical Spilloversa d Ve t ca Sp ove s

The impact of FDI by Wal Martby Wal-Mart

in the Retail Service Sectorof Mexico

Where the Outcome dependsWhere the Outcome dependsupon Policies R l d hRelated to the

Crowd-in/Crowd-out Investment debate

This is not just ja Methodological point.Mi i FDI fl dMixing FDI flows data

leads toleads to Inaccurate Substantive

Conclusions, dand

Misguided Policy ImplicationsMisguided Policy Implications.

I.I.FDI in Extractive Sector

and the Challenge of Creating aCreating a

Level Anti-Corruption pPlaying Field for Investors

of All Nationalitiesof All Nationalities

II.II.Using FDIg

in Manufacturing to Upgrade and Diversify

h P d ithe Production and Export Baseand Export Base of Host Countryof Host Country

III.New AgendaNew Agenda

for Corporate Social Responsibility

andand Sustainable Development

NGO ipro-poor NGO community

IVIV.FDI in Extractive Sector

and the Challenge of Creating aCreating a

Level Anti-CorruptionPlaying Field

forfor Investors of All Nationalities

Dodd-Frank offersDodd-Frank offers First Genuine Opportunity

to Level Anti Corruption Playing FieldAnti-Corruption Playing Field

between OECD and Chinese,

RussianRussian, Indian investors

From the Resource Curse Correlation of

J ff S h d A d WJeff Sachs and Andrew WarnerThrough the Extractive IndustryThrough the Extractive Industry

Transparency Initiative

O t f FDIOutcome from FDIin Extractive Sector

depends upon ifi fcase-specific pressures for

Transparency and AccountabilityTransparency and Accountabilityin which WBG, NGOs, d I h land Investors themselves

have Crucial Roles to Playhave Crucial Roles to Play.

Dodd-Frank and EU TransparencyDodd Frank and EU Transparency Directive Requirement

f i i d ifor extractive industry companies to Publish what Payments They make to y y

Governments will have great positive impact inwill have great positive impact in

advancing Transparency and Accountability.

But a Gap remains between OECD investors and Chinese, Russian,

and Indian companies.pOf the sixteen largest Chinese mining companies with overseas operationscompanies with overseas operations,

eleven do not have listingsoutside of Chinaoutside of China.

T f h h lTwo of the three largest Indian oil companies

are not listed in the United States.

Next step is fordeveloped and developing

country governmentscountry governments,World Bank Group, and NGOs p

to make Host Government P blication of In estor B In estorPublication of Investor-By-Investor

Payments mandatory y yfor EITI compliance.

Mining InvestorsMining Investors Get This

(it is in their interest),

Oil C i d tOil Companies do not.

Using FDI in Manufacturing d d i ifto Upgrade and Diversify

Prod ctionProduction and Export Baseand Export Baseof Host Countryof Host Country

Sweatshop issues remainSweatshop issues remainHighly Important.

Low-skill Intensive Operations like production oflike production of

Garments and Footwear d NOT tit tdo NOT constitute

the predominant thrust of pFDI in Manufacturing and

Assembly todayAssembly today.

The flow of Manufacturing FDI to Medium-Skilled activities

such as Industrial Machinery,such as Industrial Machinery, Electronics, Auto Parts,

d M di l D i iand Medical Devices is FOURTEEN TIMES LARGER

each year than the flow to low-skilled labor-than the flow to low-skilled, labor-

intensive operations.

WHATWHAT YOU

EXPORTEXPORT MATTERS!MATTERS!

Countries that Diversify andCountries that Diversify and Upgrade their export base

th th l ti frather than merely exporting more of the Same Kinds of Goods and Services

enjoy more rapid Growth Rates, more advanced levels of Productivitymore advanced levels of Productivity,

greater Domestic Welfare, and higher Standards of Living

than countries that do not.than countries that do not.

FDIin more

sophisticated man fact ringsophisticated manufacturing Offers

greater opportunities ffor

Backward Linkages c w d gesand

i di S l Ch iindigenous Supply Chains.

Using FDIUsing FDIto Upgrade and pg

Diversify Exportsdoes not come

E il N llEasily or Naturally. Important MarketImportant Market

Failures and ImpedimentsFailures and Impediments.

This is the New Frontier for FDI in Manufacturing.

Ho to p t togetherHow to put together Reform Packages g

that includeI t t P tiInvestment Promotion,

Infrastructure Development, s uc u e eve op e ,Skilled Worker Training, L b M k Fl ibili ?Labor Market Flexibility?

World Bank GroupWorld Bank Group

(IFC and MIGA)

K Plare Key Players.

USG Agencies are NOTUSG Agencies are NOT.

IVIV.

New Agenda for CSR,

S t i bl D l tSustainable-Development

pro-poor NGOsp p

CSR agenda is vast and varied, but Predominant Thrustbut Predominant Thrust

is pressure to “Give Back” more to Communities -- Form Public-

Private partnershipsPrivate partnerships to surround FDI plants

with Schools and Clinics.

Corporate Social Responsibility and Sustainable Development advocatesSustainable Development advocates

will discover that they can C t ib t M tContribute More to

Broad-based Host Welfareif they reshape their agenda

around the Main-Line Core activitiesaround the Main-Line Core activitiesof multinational corporations

Refashion Codesand Indexes: Does yourDoes your

Extractive Company p ysupport

Investor-By-Investor Publication ofPublication of

Revenue Payments?y

Does your ManufacturingDoes your Manufacturing Company have a

designated Talent-Scoutt tto spot

Local Suppliers,Local Suppliers, or a

Vender-Development Program t t B k d Li k ?to promote Backward Linkages?

Is your Company engaged in lobbying Congress and the Administration

to energizeto energize MCC, OPIC, TDA, US AID

t h l b ildto help build Industrial Parks and

attract middle-skill FDI for Manufacturingfor Manufacturing

and Agricultural Exports from Africa and Central America?

Is your Company engagedy p y g gin lobbying Congress

and the Administrationand the Administration to direct OPIC

to shift to a Net-Benefits TestNet Benefits Test

from a N t O Si l US J b Di l d t tNot-One-Single-US-Job-Displaced test

in providing p gpolitical risk insurance?

THE TWELVE PRINCIPAL CHANNELS FOR FOREIGN 

DIRECT INVESTMENT’S IMPACT ON “DEVELOPMENT”DIRECT INVESTMENT’S IMPACT ON “DEVELOPMENT” 

Channel 1.  FDI in extractive sector: Resource rents to 

fund host country economic and social expenditures.  

E i t l d t liti ( itiEnvironmental and governance externalities (positive or 

negative).

Channel 2. FDI in infrastructure: Cheaper, more reliable, 

expanded access to electricity water sewage telecomexpanded access to electricity, water, sewage, telecom, 

transport.  Environmental and governance externalities 

(positive or negative).

Channel 3. FDI in manufacturing and assembly : More or less efficient use of host country resources andor less efficient use of host country resources and greater or lesser real income generated in the host economy (as measured by economic or social y ( ycost/benefit analysis of individual projects). 

Channel 4. FDI in manufacturing and assembly: horizontal spillovers and externalities. 

Channel 5. FDI in manufacturing and assembly: vertical spillovers and externalities.spillovers and externalities.

Channel 6. FDI in manufacturing and assembly: horizontal and vertical export externalities. 

Channel 7. FDI in manufacturing and assembly: compensation premia and training premiacompensation premia and training premia.

Channel 8. FDI in manufacturing and assembly: g ylabor market externalities. Labor institution externalities. 

Channel 9. FDI in manufacturing and assembly: Diversification of the production and export baseDiversification of the production and export base. Expansion along the extensive frontier.  Entrepreneurship externalities, “ideas” (PaulEntrepreneurship externalities,  ideas  (Paul Romer), “self‐discovery” (Ricardo Hausmann, DaniRodrik), contribution to “what you export matters”.

Channel 10. FDI in manufacturing and assembly: U di f th d ti d t b f lUpgrading of the production and export base from low‐skill intensive to higher‐skill intensive activities.  . Expansion along the extensive frontierExpansion along the extensive frontier.  Entrepreneurship externalities, “ideas” (Paul Romer), “self‐discovery” (Ricardo Hausmann, Dani Rodrik), y ( , ),contribution to “what you export matters”.

Channel 11: FDI in services: improve the productivity of specific service sectors.  Horizontal and vertical spillovers and externalitiesspillovers and externalities.

Channel 12. FDI and higher or lower host economicChannel 12. FDI and higher or lower host economic growth rates.