Does Foreign Direct Investment Benefit Emerging Countries?
16 de abril de 2020

Over the past few days, we have heard that multiple analysts (mainly economic and geopolitics analysts) are blaming globalization for the current health crisis and the rapid spread of the virus. This criticism, though unfounded (as Steven Pinker made clear a few weeks ago), implied that the shortage of medical equipment and preventive resources in emerging countries is one of the sins of globalization, contextualized by the supposed effects of corporate relocation from the West to certain regions of Africa or Latin America. This article will deny the hypothetically negative effects of foreign direct investment (FDI) on emerging countries, and will instead highlight how it has actually contributed to the development and inclusion of poorer countries into global markets.

Firstly, we must highlight a capital asset that is intangible, and that can often be scarce in certain business environments in emerging countries (but which business expansion has helped to increase greatly). This asset is knowledge, or more specifically, “know-how.” We assume from the get-go that the structuring and implementation of an FDI program would be very expensive for medium-sized companies if they have to develop it from scratch (which would in many cases make international expansion impossible). But, as theorists like Luintel et al. [1] have pointed out, it is at this point when multinationals play a very important role. They do this through heavy investments in research, innovation, development, or more directly in the payment of fixed capital expenses. These multinational companies act as knowledge-generating entities in emerging countries. This knowledge also creates indirect effects, which are used by smaller businesses to develop their projects in developing nations at lower entry cost. This process is currently at its zenith. The United Nations Conference on Trade and Development (UNCTAD) [2] data for 2018 shows that the world’s 100 largest companies invested more than $350 billion in R+D in emerging countries, more than a third of the total amount worldwide.

Likewise, another one of the most relevant factors of the role of multinationals in the flow of FDI is the transfer of previously created knowledge, which is carried out through the global operations of these large companies. In a paper by Arnold et al., [3] which focused on the case of Indonesia, the productivity of its domestically owned manufacturing plants is examined in contrast to the factories acquired and run by Western multinationals.

The study concludes that those that were owned by a Western parent company and directed by executives who were transferred there had a total annual productivity that was 13.5% higher than the domestically owned national factories. As explained by the authors, this differential is mainly due to the transfers of technology, equipment, and intangible capital that are made from the parent company to the subsidiary. But the conclusions of Arnold and Javorcik do not end there, but also affirm according to the data, that the privatization of local businesses in emerging countries by multinationals experience a greater increase in productivity than when they are carried out by national companies. This shows that the leadership and management of companies in emerging countries by multinational parent companies who are also present in those countries represent an almost automatic increase in levels of productivity and efficiency.

As mentioned before, knowledge transfers to emerging countries in combination with greater capital investments have a clear impact on the total productivity of the companies involved. If we turn to the specialized literature again, authors such as Blalock or Gertler [4] show that such growth generates clear positive externalities towards local businesses, which in turn benefit intra-industry development and strengthen the local business fabric of emerging countries. On the other hand, it should also be noted that FDI facilitates the integration of global value chains, by promoting the exports of local companies.

Not surprisingly, it provides them with a path of expansion into foreign markets through the sale of specialized goods and services, which in turn will generate previously nonexistent newer and complete markets. An analysis carried out by Harding et al. [5] analyzed the role of FDI as an incentive for new exports and the commercial internationalization of local companies in emerging countries. They observed that, in 77 of those cases, between 1984 and 2006, the volume of their own goods and services sold abroad increased exponentially, as reflected in the difference-in-difference econometric models used by the authors in multiple studies.

Likewise, FDI has clear positive consequences on the labor market in emerging countries. At this point, we are not only talking about the creating of new employment, but about a marked qualitative leap forward in the working conditions and wages of those jobs that are already available.

According to World Bank data [6], subsidiaries of Western multinationals pay local workers in emerging countries between 10% and 70% more than the salary they would earn in a similar, but locally-owned company. Along these same lines, it should be noted that multinationals in these countries offer, on average, numerous more opportunities for education, training, and skill-development. Specifically (based on different studies, such as those by Filer et al.), it is observed that they dedicate 4.6x more amount of time on average to the skill development of local workers than the local companies do.

In conclusion, FDI constitutes one of the main engines of the development of emerging countries. International private investment in them guarantees the correct allocation of resources and deploys a wide network of incentives and positive externalities that affect workers, institutions, and even previously established local companies by increasing the average level of productivity and efficiency on all fronts. FDI is a unique and unparalleled opportunity to open up the world market to these companies and also for their socioeconomic development. In times of difficulty, international cooperation should prevail the most: We cannot be carried away by siren songs of protectionism and we must defend global free trade.

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