June 1, 2011
WASHINGTON—A new book published by the Peterson Institute for International Economics (PIIE), Foreign Direct Investment and Development: Launching a Second Generation of Policy Research: Avoiding the Mistakes of the First, Reevaluating Policies for Developed and Developing Countries, argues that Foreign Direct Investment (FDI), effectively deployed across a number of sectors—infrastructure, manufacturing, and services—helps promote broad-based economic and social welfare and increased growth rates in the host countries.
The author, Theodore H. Moran, non-resident senior fellow at PIIE, who holds the Marcus Wallenberg Chair in International Business and Finance at the School of Foreign Service at Georgetown University, says that while FDI is not a panacea for development, the greatest contributions from foreign investors derive from their well-structured, well-regulated core activities. Roughly one-third of world trade takes place as intra-firm trade (i.e., trade among various sections of the same corporate networks), he notes. In addition, he finds, the bulk of technology transfers are within integrated international production systems. As a result, foreign direct investment and the operations of multinational corporations (MNCs) have become central to the world economy.
To avoid "resource curse" outcomes from FDI in the extractive sector (the sector that relies on extracting natural resources from the earth), Moran suggests revising and reforming anticorruption regulations, as well as those of Organization for Economic Cooperation and Development (OECD) as compared with Chinese, Russian, and Indian investors. He would redesign investor-State arbitration procedures, creating a new generation of infrastructure agreements. To combat sweatshops, Moran shows how international supply chains could transfer premium prices for consumers into decent wages for the lowest-skilled workers.
Most FDI in manufacturing and assembly does not flow to lowest-skilled operations, however, according to Moran. The vast majority of manufacturing FDI flows to medium-skilled industrial sectors—transportation equipment, industrial machinery, electronics and electrical products, medical devices—rather than garments, footwear, and toys. This weighting toward more skill-intensive FDI activities is accelerating significantly. The ratio of FDI in higher to lower skill-intensive activities was roughly five-to-one in the period 1989–91 and approximately fourteen-to-one in the period 2005–07. Moran identifies using FDI to upgrade and diversify the production-and-export base as the new frontier for developing countries, accompanied by backward linkages and supplier relationships deep into the host economy.
Finally, Moran urges the nongovernmental organization and corporate social responsibility communities to refocus their agendas toward enhancing how multinational corporations conduct their mainline operations, rather than merely urging them to increase philanthropic contributions.
Foreign Direct Investment and Development: Launching a Second Generation of Policy Research
Avoiding the Mistakes of the First, Reevaluating Policies for Developed and Developing Countries
Theodore H. Moran
ISBN paper 978-0-88132-600-0
April 2011 • 170 pp. • $27.95
About the Author
Senior Fellow Theodore H. Moran has been associated with the Peterson Institute since 1998. He holds the Marcus Wallenberg Chair at the School of Foreign Service in Georgetown University. His books include China’s Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities (2010) and Three Threats: An Analytical Framework for the CFIUS Process (2009). In 2007 he was invited to join the Director of National Intelligence Advisory Panel on International Business Practices.
About the Institute
The Peter G. Peterson Institute for International Economics is a private, nonprofit, nonpartisan research institution devoted to the study of international economic policy. Since 1981 the Institute has provided timely and objective analysis of, and concrete solutions to, a wide range of international economic problems. It is one of the very few economics think tanks that are widely regarded as "nonpartisan" by the press and "neutral" by the US Congress, its research staff is cited by the quality media more than that of any other such institution. Support is provided by a wide range of charitable foundations, private corporations and individual donors, and from earnings on the Institute’s publications and capital fund. It moved into its award-winning new building in 2001, and celebrated its 25th anniversary in 2006 and adopted its new name at that time, having previously been the Institute for International Economics.