Public Eye on Davos 2004
Foreign Direct Investment (FDI) (02.12.02)
Foreign Direct Investment (FDI)
For some years now, foreign direct investment has been hailed by corporations and governments as the golden road to development for poor countries. Foreign direct investment, they argue, will:
This line of argument – which is also an essential part of IMF/World Bank structural adjustment programs – rests on the assumption that all involved share the same interest: “what is good for the investor is also good for the host country”. Guided by this logic many countries struck down barriers and restrictions on foreign direct investment.
In the process, an important distinction is overlooked: transnational corporations want to gain access to new markets in order to make profits. The primary responsibility of governments, on the other hand, is to look out for the well-being of their population and, more specifically, improve the lot of their poorest citizens.
Uneven distribution of investments
The largest proportion of all investments – about two thirds – flow between the three major industrialized blocs (USA, Europe, Japan). Investment in developing countries is limited to a small number of nations with large markets and high growth rates. China is by far the most popular destination in this group, followed by countries like Hong Kong, Korea, Brazil and Mexico. Africa attracts only a small fraction of all foreign direct investment and most of this goes to the primary sector (agriculture and mining) and to the production of raw materials. Thirty years of experience show that the export of raw materials does little to eliminate poverty. Joseph Stieglitz, the former chief economist of the World Bank, points out that many key areas of development – rural access roads, public health and education for poor people – do not attract investors.
In Latin America but also in South-East Asia after the currency crisis foreign capital was primarily used to acquire existing companies (mergers and acquisitions) and buy stakes in state-owned companies that were being privatized. By contrast, foreign direct investment generated only a limited amount of new production capacities (Greenfield Investments).
Few people get a job
Foreign direct investment has not helped to reduce high unemployment in poorer countries. Transnational corporations typically favor capital-intensive investments that have a limited effect on employment. Today they employ a work force of about 19 million in countries of the global south.
By contrast, 700 million people are unemployed or underemployed and each year another 38 million young people enter the job market. Even an enormous (and unrealistic) growth of foreign direct investment would contribute very little toward solving the global employment crisis.
Women as cheap labor
While women rarely make important investment decisions they are overwhelmingly affected by them as producers, workers, consumers and heads of families. In many countries of the global south and particularly in labor-intensive sectors such as textiles, leather and electronics, so-called export production zones offer special privileges to foreign investors. The great majority of workers in these zones are women. Working conditions, more often than not, are dismal: unhealthy and unprotected workplaces , extremely long hours, minimal salaries and no trade union rights.
Capital outflow puts a strain on balance of payments
Foreign direct investment in poorer countries lead to a net outflow of capital because most profits are taken out of the country. In 1998, profit repatriation and dividends added a burden of 7.7 billion dollars to Brazil’s balance of payments and accounted for one fourth of its payment deficit.
Competition for local businesses
Business conditions and economic possibilities are far more favorable for transnational corporations than for local companies. The power of transnationals jeopardizes sensible development strategies aimed at strengthening domestic industry and domestic markets. Local and regional suppliers are largely ignored by foreign corporations. Technological development and know-how are monopolized instead of being transferred to local companies. During down cycles in the economy or if profits fail to materialize for other reasons, foreign investors simply pull out.
Investment incentives
Governments are coming under increased pressure to attract investors by offering them special incentives. While preferential tax rates, eased import restrictions and full tax exemptions in free export zones are more or less standard today, special promotional packages are negotiated for extraordinary investments (e.g. Ford in Rio Grande do Sul). As a result, important public development programs, say, for small farmers or small businesses, are abandoned for lack of resources.
Exemptions from existing laws or a general lowering of environmental standards and labor law requirements are a particularly damaging form of investor incentive.
Tax relief, low concession fees and other privileges in the mining of mineral and other natural resources lead to overexploitation and a squandering of resources.
Rio Grande do Sul: investment incentives for Ford
The government of the southern Brazilian state Rio Grande do Sul offered US-car maker Ford a whole package of incentives in return for the construction of a Ford production facility in the state., The package included, among other things, a 300-million dollar loan non-repayable for five years, the construction of various 4-lane access roads, telephone lines, electricity, gas, and water mains, and the construction of a new seaport. Also, the state of Rio Grand do Sul exempted Ford from paying 5.4 billion Swiss francs in value added taxes.
After elections brought about a change in leadership, the new state government wanted reduce the concessions its predecessor had granted the Ford Motor Company. Instead, the federal government stepped in with a special promotional package for the Brazilian northeast. Ford did not hesitate, moved to invest in Bahia and was granted even greater privileges than in Rio Grande do Sul.
Numbers about FDI: UNCTAD World Investment Report
Critical information about the WTO Investment Agreement: www.investmentwatch.org
 | spur growth |
| | create new jobs |
| | promote the transfer of technology and know how to host countries |
| | increase competition and thus lead to more efficient production and lower prices |
| | increase exports and lead to an even balance of payments. |
This line of argument – which is also an essential part of IMF/World Bank structural adjustment programs – rests on the assumption that all involved share the same interest: “what is good for the investor is also good for the host country”. Guided by this logic many countries struck down barriers and restrictions on foreign direct investment.
In the process, an important distinction is overlooked: transnational corporations want to gain access to new markets in order to make profits. The primary responsibility of governments, on the other hand, is to look out for the well-being of their population and, more specifically, improve the lot of their poorest citizens.
Uneven distribution of investments
The largest proportion of all investments – about two thirds – flow between the three major industrialized blocs (USA, Europe, Japan). Investment in developing countries is limited to a small number of nations with large markets and high growth rates. China is by far the most popular destination in this group, followed by countries like Hong Kong, Korea, Brazil and Mexico. Africa attracts only a small fraction of all foreign direct investment and most of this goes to the primary sector (agriculture and mining) and to the production of raw materials. Thirty years of experience show that the export of raw materials does little to eliminate poverty. Joseph Stieglitz, the former chief economist of the World Bank, points out that many key areas of development – rural access roads, public health and education for poor people – do not attract investors.
In Latin America but also in South-East Asia after the currency crisis foreign capital was primarily used to acquire existing companies (mergers and acquisitions) and buy stakes in state-owned companies that were being privatized. By contrast, foreign direct investment generated only a limited amount of new production capacities (Greenfield Investments).
Few people get a job
Foreign direct investment has not helped to reduce high unemployment in poorer countries. Transnational corporations typically favor capital-intensive investments that have a limited effect on employment. Today they employ a work force of about 19 million in countries of the global south.
By contrast, 700 million people are unemployed or underemployed and each year another 38 million young people enter the job market. Even an enormous (and unrealistic) growth of foreign direct investment would contribute very little toward solving the global employment crisis.
Women as cheap labor
While women rarely make important investment decisions they are overwhelmingly affected by them as producers, workers, consumers and heads of families. In many countries of the global south and particularly in labor-intensive sectors such as textiles, leather and electronics, so-called export production zones offer special privileges to foreign investors. The great majority of workers in these zones are women. Working conditions, more often than not, are dismal: unhealthy and unprotected workplaces , extremely long hours, minimal salaries and no trade union rights.
Capital outflow puts a strain on balance of payments
Foreign direct investment in poorer countries lead to a net outflow of capital because most profits are taken out of the country. In 1998, profit repatriation and dividends added a burden of 7.7 billion dollars to Brazil’s balance of payments and accounted for one fourth of its payment deficit.
Competition for local businesses
Business conditions and economic possibilities are far more favorable for transnational corporations than for local companies. The power of transnationals jeopardizes sensible development strategies aimed at strengthening domestic industry and domestic markets. Local and regional suppliers are largely ignored by foreign corporations. Technological development and know-how are monopolized instead of being transferred to local companies. During down cycles in the economy or if profits fail to materialize for other reasons, foreign investors simply pull out.
Investment incentives
Governments are coming under increased pressure to attract investors by offering them special incentives. While preferential tax rates, eased import restrictions and full tax exemptions in free export zones are more or less standard today, special promotional packages are negotiated for extraordinary investments (e.g. Ford in Rio Grande do Sul). As a result, important public development programs, say, for small farmers or small businesses, are abandoned for lack of resources.
Exemptions from existing laws or a general lowering of environmental standards and labor law requirements are a particularly damaging form of investor incentive.
Tax relief, low concession fees and other privileges in the mining of mineral and other natural resources lead to overexploitation and a squandering of resources.
Rio Grande do Sul: investment incentives for Ford
The government of the southern Brazilian state Rio Grande do Sul offered US-car maker Ford a whole package of incentives in return for the construction of a Ford production facility in the state., The package included, among other things, a 300-million dollar loan non-repayable for five years, the construction of various 4-lane access roads, telephone lines, electricity, gas, and water mains, and the construction of a new seaport. Also, the state of Rio Grand do Sul exempted Ford from paying 5.4 billion Swiss francs in value added taxes.
After elections brought about a change in leadership, the new state government wanted reduce the concessions its predecessor had granted the Ford Motor Company. Instead, the federal government stepped in with a special promotional package for the Brazilian northeast. Ford did not hesitate, moved to invest in Bahia and was granted even greater privileges than in Rio Grande do Sul.
Numbers about FDI: UNCTAD World Investment Report
Critical information about the WTO Investment Agreement: www.investmentwatch.org
