FDI and growth

Jan 14, 2013 Editorial

For two decades, in our quest for growth, we followed the triple commandments of the ‘Washington Consensus –”stabilize, liberalize, and privatise” – in order to attract Foreign Direct Investments (FDI). The results, while steady, have not been exactly stellar.
From our perspective as a developing country, FDI is of significance only if it creates employment as well as provides capital for development. However, since Trans-National Corporations (TNC’s) prefer to invest in the modern sectors of the economy, which demands relatively more skilled personnel than we have at present, our employment needs go unfulfilled. As regards capital, FDI makes only marginal contribution in capital formation. Actually, in the equation of growth and investment, growth is a crucial determinant of FDI itself. The question therefore, is whether developing countries commercially grow as a result of the contribution of FDI or they grow first in order to attract FDI?
The evidence of FDI so far attracted by developing countries shows that FDI tends to gravitate towards countries that are stable and have efficient infrastructure – neither of which we are blessed with. Economic growth, on the other hand, seems to increase with greater trade openness instead of Foreign Direct Investment inflows. The mission ahead lies in making strategic use of investment for our development needs. So far, the evidence indicates that there are difficulties in deriving macro-economic benefits from most FDI as well as to get them into our area of comparative advantage – agriculture.
Our FDI is highly concentrated in three sectors: telecommunications, financial services and mining. Our land, labour and capital are not fully developed for the advanced sector investment. Therefore technology transfer as well as employment generation has proven to be a myth. In addition, these companies charge high management and services cost in the name of technological transfer but actually they use it to lower their taxes and enhance their profits. In fact these FDI’s have no commitment for technology transfer to the host country.
The ultimate goal of domestic growth will be achieved only if the investment is not volatile. The investment in infrastructure, agriculture and manufacturing sectors will support export-led growth. That is the reason why, neither the countries which developed in the 19th century like, Germany, US or Japan nor the countries that developed in 19th and 20th century, like Russia, China and Korea placed FDI investment as central to their development strategy because benefits and costs are unevenly distributed between the sender and receiver of these investment.
Though, one can point to the success of the East Asian “tigers” as due to the attraction of foreign investment, what must be appreciated is that Malaysia, South Korea, China and Japan have made technology transfer as a performance requirement, along with strong regulations of the markets. In addition to maintaining macro-economic stability, all high-growth countries capitalised the foreign investment benefit by having protectionist measures, to attract foreign investment and to spur export oriented growth at the same time.
Nevertheless, this does not suggest that we take a regressive trade policy, but rather, to take advantage of the opportunity of economic globalization. Our government has rightfully identified our agriculture sector as the fulcrum of growth in the near term and has embarked on an ambitious diversification program in this area – especially into non-traditional crops. As we pointed out before we cannot lose in this area but we cannot wait on FDI. We maintain this position even in the face of the T&T interest in this area.
We predict, in line with our observation above, that when growth is demonstrated here, the FDI will arrive. But we will have to ensure that they follow our development strategy. In conclusion, it is suggested that for us, in the long run, foreign capital is no panacea for sustainable development and growth given our industrial, institutional and human resource constraints and will have no ultimate correlation with economic growth, unless we are able to capitalize the FDI for competitive advantages and export led growth. To believe otherwise will only ensure that we end up simply as a facilitator for other players.

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FDI and growth

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