Implementation of FDI policies Implementation of FDI policies in developing countries. The role in developing countries. The role
of incentivesof incentives
Andrés LópezAndrés López
Latin America Regional Seminar on Latin America Regional Seminar on Investment for DevelopmentInvestment for Development
SãoSão Paulo-December 2002 Paulo-December 2002
CUTS-NEIT/UNICAMPCUTS-NEIT/UNICAMP
The objectives of sustainable The objectives of sustainable human development (SHD)human development (SHD)
Economic growthEconomic growth
Social equitySocial equity
Environmental sustainabilityEnvironmental sustainability
At present, both developed and At present, both developed and developing countries compete for FDIdeveloping countries compete for FDI
Can FDI contribute to SHD objectives?Can FDI contribute to SHD objectives?
FDI potential contributionsFDI potential contributions
Access to foreign marketsAccess to foreign markets
Higher investment ratesHigher investment rates
Crowding in effects on local firms investments Crowding in effects on local firms investments
State of the art technologies and organizational State of the art technologies and organizational capabilitiescapabilities
Improvements in environmental technologies and Improvements in environmental technologies and managementmanagement
Technology, productivity, human capital and Technology, productivity, human capital and export positive spilloversexport positive spillovers
FDI potential costsFDI potential costs Crowding out of local competitorsCrowding out of local competitors
Negative effects on domestic innovation activitiesNegative effects on domestic innovation activities
Negative spillover effectsNegative spillover effects
Increasing market concentrationIncreasing market concentration
Profit remittances, transfer prices, etc.Profit remittances, transfer prices, etc.
Races to the bottom in environmental and labor Races to the bottom in environmental and labor standardsstandards
The costs/benefits balance depends on:The costs/benefits balance depends on:
TNCs strategies, investment sectors, modes of TNCs strategies, investment sectors, modes of entry and type of linkages with the host economyentry and type of linkages with the host economy
Macroeconomic and institutional conditionsMacroeconomic and institutional conditions
Host country assetsHost country assets
Host country productive structureHost country productive structure
FDI policiesFDI policies
Human capitalHuman capital
Technological infrastructure and Technological infrastructure and capabilitiescapabilities
Financial systems and capital marketsFinancial systems and capital markets
Can host countries make FDI more Can host countries make FDI more development-friendly?development-friendly?
Passive open doors policies (Argentina): FDI is Passive open doors policies (Argentina): FDI is
development friendly development friendly per seper se
Selective policies (Japan, Korea): FDI is restricted Selective policies (Japan, Korea): FDI is restricted
and local entrepreneurial capabilities are promotedand local entrepreneurial capabilities are promoted
Pro-active policies (Singapore, Ireland): FDI is Pro-active policies (Singapore, Ireland): FDI is
guided towards those activities that most benefit guided towards those activities that most benefit
local developmentlocal development
Open doors policies do not allow host Open doors policies do not allow host countries to take full advantage of the countries to take full advantage of the benefits that TNCs can bringbenefits that TNCs can bring
Selective policies require strong State Selective policies require strong State capabilities and competitive pressurescapabilities and competitive pressures
If the required skills, infrastructure and If the required skills, infrastructure and technological capabilities exist, pro-active technological capabilities exist, pro-active policies may generate significant benefits for policies may generate significant benefits for host countries, but only if an excessive host countries, but only if an excessive dependence on FDI is avoided.dependence on FDI is avoided.
Which is the role of incentives?Which is the role of incentives? Attracting FDI to:Attracting FDI to:
Underdeveloped or backward regions, or regions that Underdeveloped or backward regions, or regions that have high unemployment rateshave high unemployment rates
Specific sectors Specific sectors
Export-oriented sectorsExport-oriented sectors
Specific activities that generate spillovers (R&D) or Specific activities that generate spillovers (R&D) or contribute to solve certain social problems (labor contribute to solve certain social problems (labor training, job creation)training, job creation)
High tech activities
Infrastructure
Which is the role of incentives? (II)Which is the role of incentives? (II) Fostering TNCs to:Fostering TNCs to:
Establish regional headquartersEstablish regional headquarters
Assign world product mandates to their affiliates Assign world product mandates to their affiliates
Generate strong backward/forward linkagesGenerate strong backward/forward linkages
Promote the diffusion of quality and Promote the diffusion of quality and environmental standardsenvironmental standards
FDI incentives may have costsFDI incentives may have costs
““Bidding wars”Bidding wars”
Public funds are deviated from key areas Public funds are deviated from key areas (health, education, etc.)(health, education, etc.)
Discrimination against established firmsDiscrimination against established firms
Rent seeking, bribery, etc.Rent seeking, bribery, etc.
Conflicts at the WTOConflicts at the WTO
FDI boom in MERCOSUR countries in the 90sFDI boom in MERCOSUR countries in the 90s
Main features: Main features:
““Open doors” policies except in Open doors” policies except in
M&AsM&As
Market seekingMarket seeking
Services and infrastructure (plus oil and mining in Services and infrastructure (plus oil and mining in Argentina)Argentina)
Automobiles
Electronics (Brazil)
FDI impact on MERCOSUR countries in the 90sFDI impact on MERCOSUR countries in the 90s
Efficiency and productivity gainsEfficiency and productivity gains
Introduction of new product technologies, Introduction of new product technologies,
organizational techniques and quality standardsorganizational techniques and quality standards
Improved environmental management (but Improved environmental management (but
“environmental islands?”)“environmental islands?”)
FDI impact on MERCOSUR countries in the FDI impact on MERCOSUR countries in the 90s (II)90s (II)
Few investments in knowledge-intensive sectors Few investments in knowledge-intensive sectors
(specially in Argentina)(specially in Argentina)
Decreasing backward linkagesDecreasing backward linkages
Few technological spilloversFew technological spillovers
TNCs have not made significant contributions to TNCs have not made significant contributions to
export diversificationexport diversification
Increasing market concentrationIncreasing market concentration
Probably crowding out effectsProbably crowding out effects
FDI incentives in MERCOSURFDI incentives in MERCOSUR No disciplines were in force No disciplines were in force
May have reinforced regional disparitiesMay have reinforced regional disparities
Seldom aimed at fostering spillovers or enhancing Seldom aimed at fostering spillovers or enhancing technological capabilitiestechnological capabilities
Mainly motivated by political reasons and Mainly motivated by political reasons and employment creation/trade balance objectivesemployment creation/trade balance objectives
Lack of transparencyLack of transparency
Conflicts at the WTOConflicts at the WTO
Bidding warsBidding wars
Some lessons (I)Some lessons (I)
Pro-active policies may make FDI more Pro-active policies may make FDI more
development-friendly than open-doors policiesdevelopment-friendly than open-doors policies
Incentives may be a useful part of pro-active Incentives may be a useful part of pro-active
policies if they aim at SHD objectives, are well policies if they aim at SHD objectives, are well
designed and disciplines and enforcement designed and disciplines and enforcement
mechanisms exist.mechanisms exist.
Some lessons (II)Some lessons (II)
Incentives work well only if other conditions are met:Incentives work well only if other conditions are met: Human capital availabilityHuman capital availability Technological infrastructureTechnological infrastructure Adequate institutional frameworksAdequate institutional frameworks
Spillovers only arise if domestic firms have access to:Spillovers only arise if domestic firms have access to: CreditCredit Technical assistanceTechnical assistance Human resourcesHuman resources InformationInformation
Leveling the playing field for domestic firms
