May 13, 2003
|Contact:||Theodore H. Moranemail@example.com|
Washington, DCA new appraisal of the Overseas Private Investment Corporation (OPIC) by the Institute for International Economics concludes that OPIC has an indispensable role to play in overcoming market failures that limit the flow of foreign direct investment (FDI) to poor countries and thus their development. The private sector cannot replicate this role on its own. OPIC needs new and expanded statutory authority from Congress, however, to realize its full potential to contribute to both the growth of developing countries and the health of the US economy.
In particular, OPIC needs to:
The mission of OPIC is "to mobilize and facilitate the participation of United States private capital and skills in the economic and social development of less developed countries and areas, and countries in transition from nonmarket to market economies, thereby complementing the development assistance objectives of the United States." OPIC pursues this mission by insuring US investors against political risks that include expropriation, currency inconvertibility, and political violence; by financing US investors overseas through loans and loan guarantees; and by providing credits to private investment funds that make equity investments in businesses in underdeveloped countries and regions.
Over the Corporation's 34-year history, OPIC has supported $145 billion worth of investments that have helped developing countries generate over $11 billion in host-government revenues and create over 680,000 host-country jobs. OPIC projects have generated $65 billion in US exports and created more than 254,000 American jobs. During the past five years, OPIC's loan and insurance programs have encompassed an average of 45 projects per year with a value of $2.5 billion in approximately 70 countries.
With the advent of George W. Bush's administration, the new leadership at OPIC has refocused the Corporation on its original mission of facilitating economic development, with a determination to complement rather than compete with the private sector. That new leadership also asked the Institute for International Economics to undertake a thorough independent review of the rationale for OPIC's existence, a rigorous examination of recurrent criticisms that it is merely duplicating activities that can be better handled by the private sector, and a review of changes needed in both OPIC's own operations and its governing legislation to enable it to enhance its contribution to development.
Author Theodore H. Moran, Marcus Wallenberg Professor of International Business and Finance at Georgetown University and Visiting Fellow at the Institute, concluded that, under constraints now in place, many of the foreign investment projects that can have the largest catalytic effect on host-country developmentin particular, manufacturing investments tightly linked into the global supply networks of the parent companiesare ineligible for OPIC coverage. But foreign investors potentially can bring "packages" of technology, quality control mechanisms, and management and marketing techniques that allow host-economy actors to undertake entirely new activities as well as carry out existing activities more efficiently. These packages may have economic spillovers and externalities for the host society that extend well beyond purely economic effects. New estimates of the economic benefits from such foreign investment packages are 10 to 20 times larger than the measurement categories OPIC now employs would suggest.
These potentially positive effects on emerging-market countries need not come at the expense of economic activity in the United States itself. In the aggregate, the evidence consistently shows that there is a win-win relationship between outward investment and beneficial consequences for the US economy. Outward investment leads to higher export levels by the firms undertaking the investment than by firms of similar characteristics in similar industries that stay at home. The firms that undertake outward investment are more competitive, more productive, utilize more advanced technologies and quality control procedures, have more export-related jobs (paying wages 9 to 23 percent higher and offering benefits 11 to 40 percent higher), enjoy lower levels of bankruptcy, and are less likely to suffer overall job loss than counterpart firms that do not engage in outward investment.
In identifying whether individual outward investments benefit the home country of the investor, the specification of the counterfactual is crucial: what would happen in the home economy if the foreign investment did not take place, or did not take place as extensively, as actually occurred? The rigorous answer is that in the great majority of cases the home economy would be less vibrant, the industrial base of companies would be less competitive, and the number and distribution of high-productivity jobs paying favorable wages and benefits would be smaller. OPIC must review each case against these criteria, however, to make sure that the win-win proposition is validated in practice.
In addition, OPIC's statutes should be changed to permit support for foreign-owned firms with a "significant US presence." This will allow such firms to use US workers and suppliers in their external operations rather than having to turn elsewhere for support. This principle is already established in the US Government Advocacy Guidelines, which deem support for foreign-owned, US-incorporated firms to be in the US national interest to the extent that these firms use US materials and equipment, employ US labor, contribute to the US technology base, and/or repatriate profits to the US economy. The Export-Import Bank already recognizes the benefits of assisting non-US firms to move into international markets using resources from within the US economy.
Finally, OPIC should provide greater transparency about workers' rights and environmental practices of the investors the Corporation supports. OPIC's practice has been to treat workers' rights cases as "business confidential," avoiding all publicity and requiring its auditors to sign and respect confidentiality agreements, in the hope that this will depoliticize such actions. But the penalty has been a remarkable lack of transparency in OPIC projects. OPIC should bring itself into conformity with the best practices of the international business communityat the very least-in ensuring accountability to independent, external observers.
Similarly, OPIC needs to devote more of its resources to informing local populations about environmentally sensitive project proposals, soliciting input from them and using its Web site to allow external parties to track assessments. To complement this push for greater transparency, OPIC must make its environmental rejection process more explicit. OPIC now renders private informal assessments of whether proposed projects meet its environmental standards before the formal application process so as to avoid public disclosures that might jeopardize external funding for the projects that fail. But if a project does not meet OPIC's standardsand its sponsors cannot or will not bring it up to OPIC's requirementsthis should not be deliberately concealed.
Reforming OPIC for the 21st Century thus points to a small but crucial number of reforms and midcourse corrections that can prepare OPIC to make a substantially greater contribution to the growth of developing countries while simultaneously enhancing its contribution to US development (and thus broad foreign policy and humanitarian) goals. These changes will also enhance OPIC's positive impact on workers, firms, and communities in the US home economy. The new OPIC will be able to play a much largerand more transparentrole in ensuring that fundamental workers' rights, environmental standards, and anticorruption provisions are observed and strengthened throughout emerging markets.
About the Author
Theodore H. Moran holds the Marcus Wallenberg Chair at the School of Foreign Service in Georgetown University. He is the founder of the Landegger Program in International Business Diplomacy at the university and serves as director there. He is on the executive council of the McDonough School of Business at the university. His most recent books include Beyond Sweatshops: Foreign Direct Investment, Globalization, and Developing Countries (Brookings Institution, 2002), Parental Supervision: The New Paradigm for Foreign Direct Investment and Development (2001), and Foreign Investment and Development (1998). In 1993-94, he was senior adviser for economics on the Policy Planning Staff of the Department of State. He is a consultant to the United Nations, governments in Asia and Latin America, and international business and financial communities. In 2000, he was appointed counselor to the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group. In 2002, he was chairman of the Committee on Monitoring International Labor Standards of the National Academy of Sciences.
About the Institute
The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. Its staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regionsespecially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.