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Is there a way to sustainable investment?

Private capital - potentials and conditions for development at the beginning of the 21st century

Diplomarbeit 2005 103 Seiten

BWL - Wirtschaftspolitik

Leseprobe

Table of Contents

List of Abbreviations and Acronyms

List of Tables and Figures

1. Introduction

2. Conceptual Framework
2.1 A global actor in various guises
2.2 Definition and forms of foreign direct investment
2.3 Sustainable development and its implications

3. Theoretical Framework
3.1 Multinational corporations as capital providers
3.2 Multinational corporations as foes
3.3 Multinational corporations under state influence
3.4 Interim conclusion

4. Foreign Direct Investment in real terms
4.1 The quantity dimension of FDI
4.2 The quality dimension of FDI
4.2.1 Asset exploiting versus asset developing
4.2.2 Economic qualities of FDI
4.2.3 Social qualities of FDI
4.2.4 Environmental qualities of FDI
4.3 Interim conclusion

5. Sustainable investment calling for new roles
5.1 Changing frameworks
5.2 The state as strategic player
5.2.1 Preconditions for effective state influence
5.2.2 Know, upgrade and have your assets upgraded
5.3 The role of MNCs – The business case
5.4 NGOs – From enemy to partner
5.5 Interim conclusion: Progressing with co-operation

6. Conclusion
6.1 A quantitative or qualitative challenge?
6.2 Outstanding questions

Bibliography

Frequently visited websites:

Deutsche Zusammenfassung

Eidesstattliche Erklärung

List of Abbreviations and Acronyms

illustration not visible in this excerpt

List of Tables and Figures

Figure 1: Three-dimensional model of sustainable development

Figure 2: Economic growth and environmental outcomes

Figure 3: Net long term resource flows to all developing countries

Figure 4: Four-dimensional model of sustainable investment

Table 1: Exports of manufactured goods

Table 2: FDI inward stock as percentage of GDP

Table 3: FDI inflows total and shares 1991-2001

Mais pourquoi tous ces gens-là logent-ils
dans ces cabanes à lapins? demanda-t-il soudain.

Parce qu’ils n’ont pas d’autre maison, évidemment;
c’est une question stupide, répondit Monsieur Trounadisse.

Et pourquoi n’ont–ils pas de maison?

Parce qu’ils n’ont pas de travail.

Pourquoi n’ont-ils pas de travail?

Parce qu’ils n’ont pas de chance.

Alors, ils n’ont rien du tout?

C’est cela, Tistou, la misère.

Maurice Druon (1992:53): Tistou les pouces vertes, Stuttgart: Reclam

1. Introduction

The issue of foreign direct investment (FDI) as one of the key features of globalisation, continues to attract widespread attention, particularly since its rapid increase in the last decade. While some see FDI as a panacea for overcoming poverty, others point precisely to the opposite and recall the negative image often connected to multinational corporations (MNCs) embodied in child labour, environmental catastrophes, and exploitation of cheap work force. Opinions on the benefits of FDI for development differ considerably, but so does the observed reality. In some countries FDI has, in fact, contributed to economic progress and fallen poverty rates. Other countries by contrast, have not been able to reap the repeatedly praised fruits of investment flows such as job creation and technological spillovers, or did not even attract significant amounts of FDI.

But in the highly inter-dependent and inter-connected world that we live in now, extreme views cannot and should not set the tone for future debates. Neither the retreat into isolated and protectionist patterns nor the advocacy of a downright neo-liberal credo seem to be viable options. For one thing, FDI has outstripped official development aid in numbers and no single country has lifted itself out of poverty in the last 50 years without integrating into the world market (Brown 2003). For another, simple liberalisation measures have not always increased FDI flows into host developing countries and where they did, FDI flows have not automatically brought with them the desired benefits for development. The term development should be understood in a sustainable sense and thus, goes far beyond the rise of the gross national product per capita. It means, according to the frequently quoted Brundtland report, “development that meets the needs of the present without comprising the ability of future generations to meet their own needs” (World Commission on Environment and Development 1987: 43). Without neglecting the importance of raising income levels, it puts special emphasis on enhancing the skills and competencies of people who should harness and shape their ecological, economic and social environment in sustainable ways. Crucial with this understanding of development is on one hand, its long-term perspective, and on the other, the interplay between the economic, social and environmental dimension, both making any action oriented towards development a highly complex matter. As a consequence, the presumption that all kinds of investment flows and activities of multinational corporations in developing countries lead per se to development is rather simplistic. While the buzz-word ‘sustainable development’ has penetrated books, business reports, advertisement, government statements, newspaper articles and conferences all over the world, it still has not been sufficiently integrated into policy approaches on FDI. But given the interconnection of the three dimensions mentioned before, it is clear that international businesses are important for and do significantly determine the sustainability of future development.

Embedded in this line of reasoning, the overarching question of this paper is how foreign direct investment can be made more relevant in terms of sustainable development. Investigations into the effects and implications of FDI have undoubtedly been on the agenda for a long period of time and past findings remain relevant. However, there have been important paradigm shifts influencing the debate about approaches to FDI-led development. First of all, research on the impacts of foreign direct investment tend to increasingly focus on differences between the various forms of investment and the characteristics and strategies of MNCs. As a consequence, the quantity of FDI looses its standing as ‘sufficient condition for development’ and the quality of FDI moves into the centre of attention. The concept of quality here refers to sustainable development and will be further examined in the fourth part of the paper under the hypothesis that future development will depend to a large extent on the quality of FDI and not primarily on the quantity. A further paradigm shift concerns the number and relationships of the actors involved. In contrast to development approaches of the past that have been too narrowly focused either on the role of the state or the role of international businesses, more recent approaches take into account both actors as being crucial for development and draw special attention to their interplay. This shift of paradigms can be attributed to failures of past development strategies such as import-substitution, the latest political developments such as the collapse of states followed by humanitarian emergencies (e.g. Rwanda, Sudan) as well as to economic success stories such as those of Singapore and Malaysia where FDI has played a major role, or of South Korea where the state has been the decisive actor pushing for developmental progress. The state and MNCs alike are no longer seen as obstacles but rather as facilitators for economic growth, provided that they act in a complementary way. It has been recognised that both market and governmental failures have to be taken into account when defining what governments and international businesses should do and how the should it, in order to spur sustainable development.

However, if future development strategies are to bring real progress, the number of actors cannot be reduced to governments and international businesses for the following reasons. Governments as well as multinational enterprises are currently facing a crisis of public trust. The Strategy One survey for Edelmann Global Communications, conducted in June 2000, serves as a good illustration. “[I]nterviewees were asked who could best be trusted on key issues such as environment, human rights and health” (Davies 2003: 309). Only 15 percent of the interviewees trusted governments on these issues and even a lesser percent replied in the affirmative for corporations. This result is not surprising given the continuing exposure of business scandals, disclosures of corruption and the fiscal crisis of the western welfare state. Interestingly, the majority of the interviewees (50-60 percent) granted their trust to non-governmental organisations (NGOs), despite their critical lack of legitimacy and accountability. NGOs have mushroomed in the last years picking up various issues people are concerned about. More and more E-enabled NGOs integrate at the international level and establish networks in order to give their concerns a voice in global debates on developmental and other issues. They sometimes even effectively influence politics in the international arena as it was the case with the trade talks at Cancun where thousands of anti-globalisations activists and several NGOs supported some developing countries in bringing negotiations to a halt without any agreement in September 2003.

Whether the outcomes of NGO activities are desirable or not, their impact on global affairs cannot and should not be ignored. New technologies have enabled them to form national and transnational coalitions, and future innovations will provide them with even more refined tools of communication. Against this background, it is clear that development strategies will have to acknowledge the role and capabilities of NGOs, resulting them to a beneficial actor in the field. But what exactly is this (new) role that NGOs are to take on in the realm of sustainable investment? What could their responsibilities be and how can they be matched up to the tasks of governments and strategies of MNCs, in order to make investment more sustainable?

These questions will be approached in chapter 5, framed in a discussion on changing conditions and emerging opportunities in the 21st century. It will become apparent that the state is key actor for enabling NGOs and MNCs to contribute to national development plans that are geared to sustainability. While the roles of governments, NGOs and MNCs alike remain clearly defined and distinguished, their interplay is losing the rigidity, which past development strategies attributed to it. Pioneering collaborative approaches are surfacing. Some of them will be presented, in order to give the reader an idea of what is possible and where future strategies could be resumed.

For a better understanding of the current debate, chapter 3 will explore theories that have had a major influence on development strategies in relation to FDI and will put them in perspective with more recent theoretical approaches. While neo-liberal, modernisation theorists saw FDI as the engine of growth being hindered to fully accelerate due to dirigiste state interventions, dependency theorists considered FDI to be a form of neo-colonial exploitation. Since the middle of the 1980s, a more sceptical position has evolved which neither blames the state nor large international enterprises for underdevelopment. It takes on a more balanced view, although it is still more an ongoing research-programme than a fully matured theory (Herkenrath 2003). Thus, it leaves various questions open and gives room to new practical and theoretical considerations, for example in relation to NGOs’ capabilities, government tasks and responsibilities of MNCs.

In order to give the discussion a clear framework, the succeeding chapter will define in greater detail the relevant terms and concepts.

2. Conceptual Framework

A complex background

2.1 A global actor in various guises

About 61,000 multinational corporations (MNCs) with over 920,000 affiliates (UNCTAD 2004b) abroad are now active in the global economy. Over one third of the top 100 economies of the world are corporations and the world’s top 200 corporations “are bigger than the combined economies of all but the 10 richest countries” (Oliviero/ Simmons 2002: 8). MNCs not only control the major part of the world’s most advanced technologies but also foster new innovations through research and development (R&D), thus contributing to the simplification of global communication and transportation systems. As a consequence, MNCs and their activities belong to the main features as well as to the main drivers of globalisation[1].

Albeit the term globalisation has only started to penetrate public debates since the beginning of the 1990s, MNCs have existed for a very long time with, for example, the Dutch East India Company being the first multinational corporation established in 1602. In comparison to the pioneers of corporate overseas expansion, today’s MNCs are more modest. They do not command armies and fleets, they do not have their own foreign policy and they do not control large territories, all of which were characteristics of their forerunners (Gilpin 2001).

Furthermore, the activities of contemporary MNCs are more diversified than those of the earlier transnational firms, which mainly aimed at extracting resources in distant parts of the world. Besides the quest for natural resources, today’s MNCs search for new markets, aim to make existing foreign production more efficient or seek new strategic assets (Lall/ Narula 2004, Zhou/ Lall 2005). Resource-seeking activities are typically export-oriented and targeted towards countries that possess particular natural resources such as oil, bauxite or copper. Market-seeking MNCs try to gain access and expand in domestic and regional markets of the host economy, i.e. the target country of investment. Depending on the market size, growth potential and specific consumer preferences of the host economy, market-seeking activities are mainly driven by intentions such as the reduction of transaction costs or the circumvention of trade barriers. The purpose behind efficiency-seeking activities is to make use of differences in the costs of factor endowments of the host country or to take advantage of the economies of scale and scope (Dunning 2002, Rojec 2000). MNCs that strategically strive for the enhancement or protection of existing assets through the acquisition of new or more specialised resources (e.g. new technologies and skills) act under the asset-seeking motive. In accordance with the prevailing motive, established affiliates will have different impacts on the host country and, hence, offer different opportunities for development.

Another distinction that needs to be made relates to the strategies of MNCs. They organise the foreign production of their affiliates in an either horizontal or vertical way[2]. Horizontal or multi-domestic strategies imply the “duplication of the entire production process, except for the headquarters’ activities, in several countries” (Rojec 2000: 132). These “stand-alone affiliates” (UNCTAD 1993) produce primarily for the host market and often replace former trading activities of the parent firm. However, as trade barriers fall and global communication and transportation improve, MNCs increasingly opt for more complex or vertical strategies. By splitting up the value-chain, parts of the production process are carried out by several affiliates in different countries with the objectives of cost-effectiveness and specialisation. These new strategies “have led firms to locate a wider range of their value-adding activities abroad” (ibid.:13) contributing to a further integration of the world economy.

Given their various activities, it is not surprising that neither one single term nor a precise definition for multinational businesses has evolved. Herkenrath (2003: 20) proposes a differentiation between multinational corporations and transnational or global corporations on the grounds that affiliates of the former still have strong organisational ties to the parent company and pursue only parallel production or single parts of the value-adding operations, while the latter sell one and the same product all over the globe with an integrated marketing strategy. Others prefer the term transnational to the term multinational corporation because it puts special emphasis on the ‘cross-border activities’ of MNCs (Gilpin 2001: 285-286). A further and more comprehensive term that goes beyond the definition of multinational corporations, has been introduced by Bird (2003). In his essay on the value-added approach of multinational corporations in developing areas, he refers to international businesses including all large multinational enterprises, “small and medium foreign-owned enterprises operating in developing countries as well as firms that have been developed indigenously in the areas and that are selling on international markets” (ibid.: 149).

In the terminology of this paper, no distinction will be made between a transnational firm or multinational corporation, since most of the available literature uses both terms with similarly broad definitions[3] which suffice for this discussion. Accordingly, multinational (or transnational) corporations can be understood as profit-oriented organisations comprising of a parent enterprise and foreign affiliates with the former exercising effective control of other entities in countries other than its home country (Gilpin 2001, Herkenrath 2003, Kelley 2001, UNCTAD 2004b). They are generally regarded as big actors with many roles in the world economy, which possess particular assets such as product technology or management skills that can be rendered profitable in the foreign affiliates. The term “home”, in connection with state, country or economy, refers to the location of the parent company or the MNC’s headquarters, and the term “host” refers to the location of the foreign affiliate or target country of the investment project. The term “international businesses” will be used in the sense proposed by Bird when the logic of the argumentation demands so. Less controversial in its definition is the term “foreign direct investment” (FDI), but it nevertheless requires a more detailed explanation.

2.2 Definition and forms of foreign direct investment

Foreign direct investment is one type of private capital flows aside from portfolio investments and loans, and occurs “when an investor based in one country acquires an asset in another country with the intent to manage that asset” (WTO 1996). ‘Manage’ is the decisive word in this definition implying a long-term control motive of the parent company over the foreign affiliate and thus, distinguishes FDI from volatile portfolio investments with the latter involving only the provision of financial capital on a shorter-term basis[4]. For the management intent on becoming effective, the MNC investor needs to acquire or own at least ten per cent of the domestic firm in the host country (Hersel/ von Eichborn 2004, Stocker 2000, UNCTAD 2004b). Published data on FDI usually comprise equity capital, i.e. the foreign direct investor’s purchase of shares of an enterprise in the host country, reinvested earnings, i.e. retained profits by affiliates that are assumed to be reinvested, and intra-company loans, i.e. the short or long-term borrowing and lending of funds between MNCs and their affiliates (Stocker 2000, UNCTAD 2004b).

FDI flows can cross the border into a host country in three different forms, as Greenfield investments, as mergers and acquisitions (M&As) and as joint ventures, each of which affecting the domestic economy in a particular way (Bhaumik/ Gelb 2004). If a MNC enters the host country with a Greenfield project, it has to set up a new firm (e.g. a new factory or plant) over which it exerts complete control. It requires the MNC to put together all necessary resources and to develop new business relationships in the relevant markets. Also joint venture projects involve the creation of new assets or facilities but they are undertaken in partnership with a local firm. As a consequence, the MNC only partially controls the decision-making process. It benefits, on the other hand, from already established business relationships through the local partner and has access to information about the domestic market and institu­tions. Both FDI forms directly augment the capital base of the host country, which is generally regarded as “a key prerequisite for development” (UNCTAD 1999: 101), as it lowers interest rates and hence, facilitates the financing of domestic investment projects (financial crowding in). Yet, as Herkenrath (2003: 132) correctly points out, this will only occur if the MNC finances its investment project primarily by borrowing from abroad and not in the host country.

The third form of FDI, entry via M&As, does not intrinsically lead to an increase in the net contribution to domestic investment in the host econ­omy. Instead of adding new capacities, M&As merely restructure existing ones with the MNC “acquiring a controlling stake in a local firm” (CUTS 2003: 15). Akin to Greenfield investments and joint ventures, M&As can be financed either from domestic or international capital markets. In the latter case, an indirect positive effect on the overall domestic investment is more likely as financial resources of former owners are freed up which, in turn, could be reinvested in the local economy.

However, analysing the vices, virtues and vagaries of the different FDI forms is undoubtedly a complex task and should take into account the views of the different actors. At this point, it should suffice to conclude this chapter with some general statements about the impacts of the different modes of entry of FDI on the host economy. Generally, Greenfield investments are considered to be more beneficial to the host country development as they not only add to the capital stock, but also generate new employment opportunities and infrastructure development (Cluse 1999). On the other hand, M&As may have stronger links with domestic suppliers causing them to produce more efficiently or to even expand their capacities, which could stimulate further domestic investment in the long term. Joint ventures indicate both a direct contribution to the host country’s capital base as well as linkages to the domestic market. Furthermore, they are often connected with technology and skill transfers to the local firm, whether intended or not, and in this way contribute to the knowledge base of the host economy. Yet, due to agency problems, it is exactly the latter which often “results in dissolution of most JVs [joint ventures] within a relatively short period of time” (Bhaumik/ Gelb 2004: 4). Short-termism, in turn, does not fit well into the concept of sustainable development, which will be elaborated upon in the next paragraphs, in order to embed the discussion in a narrower framework.

2.3 Sustainable development and its implications

Since its introduction into the realm of international politics, no common and precise understanding of the term sustainable development has evolved, nor do standardised indicators exist, which could be used to measure it. The definition provided by the report of the World Commission on Environment and Development in 1987 (see introduction) puts emphasis on intergenerational responsibilities but it does not determine what exactly these responsibilities are or how they can be realised. Also the concept of needs and resulting implications have been left to one’s own interpretation (Streeten 2004, Zarsky 2000, World Bank 2003).

These shortcomings triggered an open dialogue in the 1990s, which bred a three-dimensional model[5] making the term sustainable development more comprehensible. Following this model, sustainable development can be understood as a long-term process which not only includes raising and maintaining income-levels but also social capacities while protecting the environment (see figure 1).

Figure 1: Three-dimensional model of sustainable development

illustration not visible in this excerpt

source: http://www.are.admin.ch/are/en/nachhaltig/definition/ (adapted)

Reducing development to the economic dimension alone, would imply to follow exclusively a neo-liberal path. Accordingly, any developmental action would aim at augmenting the overall level of economic activity without taking into account social and environmental issues such as social inequalities or the exhaustion of natural resources. In the long run, such an approach is not sustainable in itself. Nevertheless, in the process of development, great importance needs to be attached to economic growth, given that today “about half the world’s population is still living on less than US $2 per day” (Nunnenkamp 2002: 1). It does not take much to understand that these people care first and foremostly about raising their income, be it in a sustainable way or not. In view of that, international businesses are important agents of development for they provide more than 90 per cent of jobs that are indispensable for reducing poverty (Salmon 2005, World Bank 2005). Furthermore, they supply people with goods and services needed to sustain and improve life, contribute to tax revenues necessary for financing social schemes, educational institutions, physical infrastructure and other state services, and are the main drivers of innovations in various fields. Against this background, should not all energy be dedicated to international businesses, in order to make them flourish for the well-being of present and future generations? The answer resembles a two-edged sword: On one hand, there will not be development without economic growth, thus placing international businesses “at the heart of the development process” (World Bank 2005: 1). On the other hand, no long-term economic growth will occur without the availability of resources, including environmental as well as social capital.

The World Bank embraced this idea in its capital stock model (Mauch/Stokar 2001), according to which the capital for sustainable development consists of the sum of economic, environmental and social capital. Major discussions related to this model focus on the substitutability among the different capital types, arguing that sustainable development is still possible if individual assets[6] of one capital are substituted by individual assets of another but only within certain limits (World Bank 2003). One could even go a step further by reasoning that substitution is necessary in order to spur development, because if the concept of sustainability demanded, for instance, the preservation and conservation of the present total stock of environmental and natural resources for future generations, “[m]ankind would then quickly die out, while oil and iron ore would survive” (Streeten 2004). It is not the intent of the author to reinitiate the discussion on the substitutability among the three capital assets as this is done elsewhere in detailed and sophisticated ways[7]. Instead, this study tries to look at the capital stock model from a somewhat different perspective: Assuming that only economic capital has the potential to lift people out of poverty by providing them access to jobs and raising their income levels, is the decline of social and environmental capital a necessary consequence? Or is it possible that the augmentation of social capital and the responsible use, preservation or renewal of environmental assets might not have a negative, but rather a positive effect on the economic capital? In order to answer these questions, a brief excursus into the characteristics of environmental and social capital seems desirable.

Environmental assets serve as direct and indirect inputs into production processes of international businesses – useable land, accessible minerals, potable water, fisheries, forests and other natural resources. These inputs are, on the other hand, also affected by the production process itself, by the outputs of production and by the consumption of products, in the form of air and water pollution, waste or overuse (World Bank 2003). Hence, it should generally be in the interest of international businesses to keep input needs and operational outputs in such a balance so that production and related profits are guaranteed. This assumption however, is oversimplifying the issue at hand due to the following reasons: Firstly, not all impacts of production processes on environmental assets become immediately perceptible or are difficult to quantify (e.g. ozone layer). This does not imply to leave it to chance whether, when and how the world’s environmental capital is affected, but requires a particularly sensible use of resources. Secondly, many environmental assets tend to have characteristics of public goods that are difficult to manage because of free-rider problems. Thirdly, there is a trade-off between short-term profit-maximising interests and long-term ‘market-share-maintaining’ motives of international businesses. While the latter does not necessarily contradict the simple assumption mentioned above, the former has often been connected with cost-minimisation strategies that ostensibly leave no room for environmental considerations. In the worst case scenario, international businesses have ravaged landscapes, polluted waters and extracted resources sometimes in ways that are neither environmentally nor economically sustainable. Following the capital stock model, too large an amount of environmental capital has been sacrificed, in order to increase the economic capital, at least in the short term.

However, as recent surveys show, cost-minimisation does not have to lead automatically to a rampant decline of natural assets. Exemplary cases can be found in the Developing Value survey conducted by SustainAbility, the International Finance Corporation and Ethos Institute (2002). A small business in Tanzania, for instance, that produces laundry soaps in a process using steam from a diesel-powered boiler, overhauled its production system by replacing a few parts and making it more efficient. The diesel use could be halved with the result that $188.000 could annually be saved and the initial investment of $830 was basically paid back after 1.6 days (ibid.). As a consequence, both environmental capital as well as economic capital could be augmented at the same time[8].

Unfortunately, win-win situations as such are not always so easy to achieve, because business activities aimed at improving the environmental performance might pay off only after a longer period of time. In other cases, the effort of more than just one business may be vital for both, the augmentation of the environmental as well as the economic capital. In yet other cases, effective regulations coupled with fees or incentives might be crucial to raise the awareness for environmental problems that are not easily visible and attributable to individual actors (e.g. air pollution in a big city).

A more general illustration of the fact that higher economic growth is not inevitably connected with the worsening of environmental outcomes of a country is provided in the 2003 World Development Report (World Bank 2003: 31). It shows that countries with the same economic growth rate rank differently on the environmental performance scale, or countries with relatively low growth rates sometimes perform worse than countries with higher growth rates (see figure 2).

Figure 2: Economic growth and environmental outcomes

illustration not visible in this excerpt

Percentage and annual change in environmental index

Abbildung in dieser Leseprobe nicht enthalten

Percentage GDP growth per year

Note: The environmental index is constructed by giving equal weights to annual rates of deforestation, water pollution proxied by emissions of organic water pollutants in per capita metric tons, and the increase in CO2 emissions per capita metric tons between 1987 and 1995.

Source: World Bank (2003)

Refraining from a further elaboration on the issue, three aspects should have become clear. Firstly, the destruction of environmental capital is not inevitably a general consequence of economic growth and in some cases win-win situations are possible even in the short run. Secondly, access to natural resources is an essential precondition for business operations and thus, for a country to become richer (Rademacher 2005). It follows, thirdly, that governments, international businesses as well as other stakeholders should be concerned with the availability of natural resources in the near and distant future and should therefore, search for ways that make this possible. It will not be an easy task, given the difficulties in perceiving, measuring and managing environmental impacts.

Similar, albeit more intricate arguments can be put forward in relation to social capital[9]. Just as environmental resources constitute social assets, such as a skilled workforce, knowledge or interpersonal networks important determinants in business operations and therefore, make international firms dependent on their availability. Well-educated employees are, for example, vital for the development and adoption of new technologies, which in turn represent a central driving force of economic growth (Narula 2002:16). A healthy labour force secures productivity over time, whereas poor health reduces people’s ability to work and makes doing business more expensive, “especially when […] the supply of healthy alternative workers is limited” (The Economist 2004b). Interpersonal networks can raise trust levels, contribute to informal knowledge acquisition and learning what can have an impact on how effectively people work together (Agosin et al. 2000).

More theoretical examples of how the augmentation of social capital positively affects the economic capital could be quoted. Yet, there are also several cases where international businesses have weakened social assets in order to pursue their own individual economic interests. Acting under a short-sighted cost minimisation strategy, they “underpaid and overworked their employees, operated with unsafe or unhealthy working conditions” (Bird 2003: 154) and did not provide training opportunities useful for increasing the productivity of workers. However, with time, increasing numbers of firms realise that ignoring the importance of social capital often results in higher costs in the mid- and long-term due to labour unrests (Moran 2002), sickness related absences, underperformance, work-related accidents or unused potentials.

To close the circle, environmental and social capital also have an influence on each other: scarcity of potable water or air pollution may, for example, lead to poor health, which in turn decreases the productivity of workers. On the other hand, a highly-skilled workforce might be able to develop new technologies that render production processes more efficient with regard to natural resources.

This excursus could only draw a limited picture of the complex relationships in which social, environmental, and economic capital are intricately bound. Nevertheless, it has sufficiently shown that any developmental action targeted on just one dimension is likely to have an effect on the others, whether positive or negative. This insight provides the background for the succeeding chapters, in which the role and activities of multinational corporations will be examined vis-à-vis their impacts on development. MNCs have never operated in a vacuum but have always been under the influence of prevailing development theories and resulting strategies. These strategies, in turn, have had a bearing on the outcomes of MNCs’ activities in developing countries and therefore need to be taken into account when fleshing out new development approaches in relation to FDI.

3. Theoretical Framework

FDI – poison or remedy?

3.1 Multinational corporations as capital providers

Views on foreign direct investment have alternated tremendously ever since the interest in the economics of development began to emerge with the end of colonial rule in the middle of last century. Early theories on development described underdevelopment as a circulus vitiosus, in which a low per capita income presents the main symptom as well as the main cause of poverty. Because income is low, most of the available capital is spent on food and simple consumer goods leaving hardly any capital for savings and consequently, investments. The latter results in a consistently feeble capital endowment of a country and prevents the modernisation of production processes owing to which labour productivity cannot be enhanced and incomes remain low (Nuschler 1995). Following this line of reasoning, many pioneers of the early development theories regarded an acceleration of capital formation as a necessary and sufficient condition for overcoming poverty, which was to be achieved inter alia through capital imports in the form of private investments. Based on the credos of neoclassical economic theories, these so-called modernisation approaches expected foreign direct investment to supplement domestic investment and to inject the so urgently needed capital necessary for the economy to take-off[10] (Herkenrath 2003, McMillan 1999, de Soysa 2003). The inflow of capital would change the quantity as well as the quality of the developing country’s capital formation, because the financial plus ensured that not all capital is used up for consumption but could be redirected for other purposes.

Here, the MNC plays not only the role of a capital provider but also of a “tutor” in several respects (Said 2002: 10). By investing in a developing country, the MNC modernises production processes as it brings with it technology and skills from abroad that are superior to the ones of the host economy. As a result, labour becomes more productive and hence, income levels rise. This again, releases capital for savings and potential investments as now a relatively smaller part of the financial resources available is spent on consumption. The demand for labour will be pushed up due to the reinvestment of profits or additional domestic investments triggered by an easing of financial constraints.

It was further argued that foreign investment would entail an upgrading of infrastructure facilities either by or for the foreign investors, which would positively affect the overall economic activity, since a well-developed infrastructure is one of the bedrocks of development (ibid.).

Moreover, as proponents of the modernisation approach deemed the development path of the West as the role model for development, MNCs were to diffuse western values and ideas in the developing world in order to shift traditional mindsets and behaviour patterns into a more modern direction. The foreign manager thus became a ‘social innovator’ (Herkenrath 2003: 49) who was to put in train the process of modernisation.

By virtue of these benefits, foreign direct investment was to be preferred to borrowing foreign money as the latter merely bridges the lack of capital and does not bring packaged along with it other developmental remedies. Consequently, modernisation theorists propagandised that the path out of poverty goes across the world market by attracting foreign investors who would cure one of the main causes of underdevelopment – insufficient financial resources. The more MNCs entered the developing country, the greater the likelihood that the circulus vitiosus would be broken (ibid.).

However, by the mid-1960s, when modernisation strategies had not delivered the awaited take-off in most of the developing world, the open arms attitude towards FDI started to turn into more sceptical, if not hostile directions. The point of origin of the new perspectives, which would later be subsumed under the term dependencia, was Latin America, where scholars became dissatisfied with the incapacity of the modernisation theory to elucidate the continued underdevelopment in that region (McMillan 1999: 4). Due to the diversity of the dependency literature, the discussion in the next section will primarily focus on the relevant issues related to foreign capital and transnational corporations and factors out interesting controversies among the various strands of the dependency theories[11].

3.2 Multinational corporations as foes

Proponents of the dependencia school of thought set the tone for development strategies in the late 1960s and 1970s by turning hitherto existing explanations for underdevelopment topsy-turvy: What had previously been reckoned the solution for catching up, was now the cause of backwardness. They argued that developing countries do not suffer from an insufficient integration in the modern world but are, on the contrary, efficiently weaved into a world economy that is dominated by the capitalist developed countries. “Multinational corporations, and the direct investments they bring with them, [were] seen as instruments in maintaining the system of dominance” (McMillan 1999: 4). A notion that has been coined “neo-colonialism” by Ghana’s first post-independence president Kwame Nkrumah in 1965.

Backgrounds to dependency theories can be found in the Marxist tradition as well as in the Latin American structuralist debates on development. One of the chief features of both strands is that developing countries were no longer regarded as detached units that needed to catch up with the North but as integral parts of the international system, in which the economies of particular countries are conditioned by the development and expansion of the economies of other countries (dos Santos 1972: 243). There was, however, no agreement among the advocates of the dependency school whether and how development in the periphery (developing countries) was possible under the existing conditions. Scholars of the more Marxist oriented theory strand considered the disassociation of the periphery from the world market as the only way out of dependency and underdevelopment, because as long as the periphery is linked to the centre (developed countries), it will have to transfer its surplus to the centre, which otherwise could be used for developmental purposes (Said 2002). Disassociation from the world market would, in their view, demand a social revolution.

While the structuralist variant of the dependencia school also favoured a change of the international economic structure, it additionally argued for a “development from within” (Prebisch cited in Ocampo 2001: 24), i.e. the transformation of internal factors in the developing economies such as the traditional and the modern sector. In this context, MNCs were conceived as foes, because they draw on domestic funds to partially finance their investment projects but repatriate their entire profits[12]. This would not only erode the capital base of the developing country but also crowd out domestic investments (Moran 1999: 20). MNCs were said to destruct potentials for national technological development as domestic research and development institutions would not be able to put up with the pressure technologically superior MNCs would expose them to (Altenburg 2000). The spread of inadequate consumption patterns through advertising campaigns and the use of local resources disregarding local needs depicted additional problems that the activities of foreign investors in developing countries would entail (Herkenrath 2003, Said 2002).

Furthermore, FDI was accused of generating income inequalities and co-opting the local elite into economic strategies counterproductive to national development, which in turn, could lead to political and social upheaval (McMillan 1999, de Soysa 2003). Deriving from this, FDI constituted in the eyes of the dependency theorists a threat to national sovereignty, which retarded the development process relative to the growth potential of countries in the periphery. Later versions of the dependency approach acknowledged that external economic ties cannot simply be cut and even conceded that some developmental gains (e.g. technology transfer) may be obtainable through FDI, but admittedly with a high likelihood that economic growth would be distorted (McMillan 1999).

Development strategies embracing the ideas of the dependency school recommended import substitution as the major instrument, whereby developing countries would (temporarily) delink from the world market and in this way, fully harness their domestic economical potential in order to industrialise from within. Import substituting industrialisation (ISI) aimed at the reduction of trade and capital flows and an upgrading of domestic competitiveness. With the help of protectionist measures such as tariffs, exchange rate manipulation, quotas, exchange controls and extensive restrictions on FDI, imports were to be substituted through locally produced goods satisfying local needs (Cluse 1999). The development of the domestic economy was to be supported by turn-key projects as well as the provision of technical experts from the North in order to derive the know-how complementary to national growth potentials. While the theoretical argumentation was markedly hostile towards transnational firms, in praxis many of the peripheral countries did allow a heavily restricted inflow of foreign capital “with the intention of supplying local markets” (Narula 2002: 9). Apart from the doctrine of gaining economic independence from the North, exports were to be discouraged on the grounds that they would lead to overvalued exchange rates when combined with low imports and because neighbouring countries mostly implemented their own import substituting policies.

ISI schemes comprised different modes of regulation on FDI, with some countries granting investment permission to foreign investors only if their projects fulfilled a number of criteria, such as desirability for host country development, contribution to import substitution and the creation of employment opportunities. In other countries, ownership restrictions were imposed on the foreign investor giving priority to domestic investors, or in cases where hundred per cent foreign ownership was allowed, arrangements were stipulated, which ensured the transfer of majority ownership to local entities after a certain period of time. In nearly all developing countries, stringent infant industry protection was high on the agenda, prohibiting FDI in areas or activities where the host country believed domestic entrepreneurship and capability to be adequate or developable (Cluse 1999, Said 2002). By and large, FDI played a rather limited role in the ISI period, at least in most parts of the periphery.

Even though import-substituting policies generally led to some economic growth in most of the developing countries, the success rates varied considerably due to several practical problems and methodological errors. Rigorous, centrally planned interventions in the economy often resulted in price distortions and led to inefficient resource allocation, because resources were channelled into protected sectors without the basis for higher productivity. Furthermore, due to protectionist policies and inward-oriented manufacturing, production processes of local firms were possibly not as efficient as they could have been since they were not exposed to a high pressure of competition (Cluse 1999) and could not reap the benefits of economies of scale on relatively small local markets. A pernicious side effect was corruption to which closed and economically distorted systems are often highly susceptible. However, the chief error of the import-substitution strategy was its disregard for local histories, local resource endowment and initial economic specialisation (Narula 2002, Said 2002). It was assumed that industries could simply be duplicated, thus making the import of intermediate and capital goods unnecessary.

“Countries as varied as Argentina and Peru, for instance, attempted to build up domestic expertise in automobiles and chemicals, despite it being the case that less developed countries have – in addition to a lower income level lower technological capabilities and an economic structure that favors resource-intensive and primary sector activities” (Narula 2002: 10).

Hence, it is not surprising that ISI schemes did not lead to the desired outcomes. Imports of manufactured goods remained significant in most of the developing world, even though it was one of the primary goals of ISI to reduce them. As late as 1985, over 50 per cent of all imports accounted for manufactured goods in the majority of the developing world implying, against the odds of the dependency theorists, that internal isolated industrialisation does not function as smoothly as initially assumed. The picture looks different for manufactured exports as some countries, primarily in Asia, adopted features of an export-oriented approach alongside building up domestic capacities. As a consequence, exports rates of manufactured goods grew steadily in developing Asia and were much higher than in strongly ISI-focused African and Latin American countries (see table 1). Albeit dependency theorists regarded the reliance on exports as likely to be “self-defeating” (The Economist 2001), in reality development strategies never tended to be so straightforward. While many developing countries in fact adopted an inward-looking approach discouraging foreign ownership and trade wherever possible, South-East Asian countries gradually modified their ISI-schemes with greater, yet targeted openness towards FDI and transnational corporations. The first countries to adopt this more mixed approach around 1960 were Taiwan and South-Korea, both of which became part of the East-Asian miracle, “much to the chagrin of most dependency theorists” (Ray 1998: 276). The dependencia school failed to explain how these and later other countries could successfully integrate into the world’s economic system by increasing and diversifying their manufactured exports.

[...]


[1] A simple but sound economic definition of globalisation is provided by Soubbotina (2000: 66): “Globalization refers to the growing interdependence of countries resulting from the increasing integration of trade, finance, people and ideas in one global market place. International trade and cross-border investment flows are the main elements of this integration.“

[2] In reality this dichotomy is not so clear-cut as sometimes also hybrid forms exist.

[3] see UNCTAD World Investment Report 1993 for a more precise definition.

[4] see Stocker (2000: 117) for more details

[5] Sometimes referred to as the three pillars of sustainable development. The author of this paper prefers the dimensional model since it better illustrates the overlapping of the three dimensions.

[6] Individual assets are for example: land, water, and minerals contained in environmental capital; GDP per capita, quality of infrastructure and competitiveness contained in economic capital; and education, freedom and solidarity contained in social capital.

[7] see, for example, World Bank (2003), esp. Chapter 2, Bromely (1999)

[8] The objection that environmental assets still have been used or diminished in absolute terms does not hold in this line of reasoning. Resources cannot be preserved in today’s total stock as no development would be the consequence and the term sustainable development would become lapsed.

[9] ‘Social capital’ is still a hotly debated term as to whether the word ‘capital’ should be used in this context, whether it can be precisely defined and if so, which aspects would have to be included. The literature sometimes differentiates between human and social capital but the author of this paper is not convinced that human and social capital are clearly detachable from each other. It has, however, been introduced to shift the focus from the individual to its relationship with others. For the argumentation of this paper, it suffices to refer to social capital including assets such as educational attainment and knowledge, networks, culture and similar assets. For a detailed discussion of the term see, for instance, Quibria (2003).

[10] The take-off stage is the third stage of development according to W.W. Rostow’s classic work “The Stages of Growth”, see for more details Seligson, Mitchell A. and Passé-Smith, (eds.) (1998), chapter 2.

[11] see for an overview Nohlen (1998: 173)

[12] “According to some studies, foreign investors in developing countries repatriate twice as much capital and profit as the capital they brought in” (Said 2002: 20).

Details

Seiten
103
Erscheinungsform
Originalausgabe
Jahr
2005
ISBN (eBook)
9783836615778
Dateigröße
1.1 MB
Sprache
Englisch
Katalognummer
v225938
Institution / Hochschule
Universität Potsdam – Wirtschafts- und Sozialwissenschaftliche Fakultät, Internationale Politik
Note
1,5
Schlagworte
investment environment develoment sustainability

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Titel: Is there a way to sustainable investment?