FDI: A Race to the Bottom?...Or a Race to the Top?

I would like to respond to Thursday's debate on Foreign Direct Investment and its effects on developing countries. When asked the question, from the perspective of a developing country, whether I would want to resort to increasing foreign direct investment or to taking out foreign loans from the IMF; I would undoubtedly say increase FDI. After personal research, I found that extensive amounts of foreign direct investment in both China and Ireland have led directly to economic growth. I must say that I was very happy to read Wolf's article this week because he offers excellent argumentation supporting the positive role that FDI plays in developing countries. Wolf critiques fundamental criticisms of FDI and offers analytical and empirical data proving these criticisms to be partly if not entirely incorrect.


*An Argument against FDI that Wolf addresses include:
- "Foreign direct investment impoverishes recipient countries, particularly poor ones, and their workers. It does so partly by accelerating the race to the bottom in regulation of the environment and workers' rights." (Chapter 11)

First of all, critics say that FD investors "exploit" and "focus on" poor developing countries (232). Wolf argues that this accusation is wrong. According to UNCTAD in 2001, 39% of the world's stock was contained by the EU, 19% by the US, and only 0.6% by the least developed countries (or the most poor). Therefore, "We may conclude then that the EU must be in a dire state, given the damage FDI is supposed to do. The US, too and Asian developing countries appear to be in trouble, while Africans live happily unexploited" (233). This proves a good point; the investors are not focusing on the poor and vulnerable but rather the successful. Also, according to the World Bank, "the more advanced the rule of law, the higher the direct foreign investment" will be (233). Therefore, in order to better attract FDI, a country is encouraged to stabilize politically. A push towards political stability and success seems to be much more of a race to the top than a race to the bottom. Developed nations are looking at the top, not the bottom as potentials for increased investment.


In certain circumstances, such as with natural resources, investment happens in a country no matter what its conditions purely because the resource is located there. But, unless there is an important resource, economic success, political stability, and openness to trade are crucial to attracting substantial amounts of FDI. In terms of developing countries, China is a perfect example of how foreign direct investment has helped to make it "the most economically successful developing economy since 1980" containing 26% of the net stock in developing countries in 2001 (234). This can be compared to 5.3% in sub-Saharan Africa and 2.6% in the least developed countries. Therefore, in the words of Wolf, "The world's least developed countries are not exploited by transnationals, but ignored by them, except when they have particularly valuable resources" (234).


According to Wolf, foreign investors not only pay higher wages, but treat their employees better than domestic employers. An example of this is how wages are higher along the Mexico-US border because US-owned companies are more highly concentrated there than the rest of Mexico. Also, when foreign investors pay more to their employees, competition for labor encourages domestic companies to raise their wages as well. Basically, the conditions in US domestic factories may be better than those in US owned factories in India, but conditions are still much better than they would have been without foreign investment. Therefore, if conditions are improving as a whole, why would this be considered a race to the bottom??


Another charge that Wolf critiques is that developing countries are racing to the bottom in order to better attract FDI in terms of environmental and labor regulations. Wolf offers evidence that workers' rights had not worsened and had even improved. He argues rather that there is a race to the top with incentives such as tax reductions, tax holidays, duty drawbacks and other fiscal incentives, as well as overall improvements in the financial market. The presence of EPZ's in countries, (Ireland for example has SEZ's which are Special Economic Zones with much lower tax rates and other incentives to investors), is controversial. In some countries (such as Ireland) they have proved successful but they can also cause problems because they do dodge certain obstacles and are not always backed by "good infrastructure, educated labor and an ability to obtain competitively priced local outputs" (241). I agree that EPZ's are not always the right tool but have some positive characteristics that should be used in creating a successful integration policy.


In conclusion, foreign direct investment is not only a good idea, its a race to the top. I agree with Wolf that it does not target poor and vulnerable countries but rather invests in successful and somewhat stable countries. Foreign direct investment in developing countries does not worsen the wages or conditions of employees but rather improves them. Developing countries are being pushed up the ladder rather than down the ladder in order to make them selves more attractive to foreign direct investment. Although all the tools (such as EPZ's are not flawless), the overall goal of integration into the world economy, openness, stability, and cooperation with foreign investors is right on track to international development and economic growth.