Seminar Essay by Bradley E. Faber
‘Law of Nationbuilding’
Submitted: December 21, 2006
Economic Growth of Developing
Countries: Is Foreign Direct Investment Really Necessary?
Probably no other topic of
international economics sparks such a strong disagreement between
industrialized and developing worlds on the one hand, and businessmen and
environmentalists on the other, as that of international investment regulation.[4]
The problems of direct investment in the
global setting reflect all controversies, irregularities and even antagonisms
inherent in the highly diverse modern world with an increasing gap between the
planet's richest and poorest countries.[5]
The dispute
on international investment is a “dispute between two worlds over the issues of
economic dominance and political sovereignty” as well as a
debate on the limits of human expansion into natural life on the earth.[6]
Many poor countries lack
resources to recover from stagnation and thus view foreign investment as the
only major source of financing.[7]
Additionally, world
development organizations, many of which are largely controlled by developed
nations, heavily promote developing countries to pursue investment
relationships more developed nations.[8]
From the western perspective, expanding markets bring benefits to both developed and developing countries.[9] The idea of comparative advantage indicates that the overall gain of any country improves by utilizing a means of free trade with other nations.[10] Developed countries are generally able to share their advantages in technology and capital in exchange for raw materials and natural resources (oftentimes consisting of labor intensive products) that are more affordably produced in developing countries.[11]
For much of the past century, economic theorists have focused on free or less restrictive trade between international states as a means to facilitate this idea of comparative advantage and increase wealth in the world by outward extending the global production possibility frontier.[12] Developed countries benefit as more countries provide their natural resources to the world market.[13] This increase of supply causes the global price of these resources to become less costly.[14] Furthermore, specialization begins to take place as nations focus on producing only those products which they are most efficient in creating, thus maximizing their potential at doing what they do best.[15] Products previously produced domestically but relatively inefficiently, are purchased on the world market.
Trade access for both developed and developing countries has seen substantial growth since the signing of the General Agreement on Tariffs and Trade in 1947.[16] Additional conventions and regional negotiations as well as the advent of global and regional institutions such as the World Trade Organization have helped to facilitate greater trade access between nations in recent years.[17] The gradual reduction of trade barriers has resulted in more predictable pricing for both governmental and private market entities.[18] This added transparency in the overall world market has resulted in greater consumer confidence worldwide, ever increasing global market participation, and greater world development.[19]
But is foreign investment really a necessity for a developing country to obtain? And what factors encourage international investors to contribute foreign direct investment (“FDI”) to a developing country? Must a developing country accept globalization and the dilution of cultural values that accompanies globalization in order to facilitate economic growth? And how can a developing country best protect itself from the concern of domestic market suppression followed by capital flight?
This paper will focus on these questions by analyzing in more detail modern ideas of economic development theory and capitalism and then focusing on several present day stories to contrast methods developing countries have utilized to improve in the category of Gross Domestic Product (“GDP”).
The
David Ricardo built upon the foundation which Smith had established. While Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists.[23] Ricardo saw a conflict between landowners on the one hand and labor and capital on the other. He suggested that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.[24]
Thomas Robert Malthus used the idea of diminishing returns to explain low living standards.[25] Population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically.[26] The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor.[27] The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.[28]
Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much.[29]
Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system.[30] Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income.[31] The market might be efficient in allocating resources but not in distributing income, making it necessary for society to intervene.
Following the “Classical” theory of economics is what is described as the “Marginalist” theory. Classical economists theorized that prices are determined by the costs of production. Marginalist economists emphasized that prices also depend upon the level of demand, which in turn depends upon the amount of consumer satisfaction provided by individual goods and services.[32]
Marginalists provided modern macroeconomics with the basic analytic tools of demand and supply, consumer utility, and a mathematical framework for using those tools.[33] Marginalists also showed that in a free market economy, the factors of production -- land, labor, and capital -- receive returns equal to their contributions to production.[34] This principle was sometimes used to justify the existing distribution of income: that people earned exactly what they or their property contributed to production.[35]
Macro-level theory of FDI builds off of the neo-liberal economic theory developed over the last three centuries. This theory indicates that industries in capital-intensive countries will invest in capital-poor, but labor-intensive countries in order to maximize profits.[36] This theory has been criticized for being too general, as it does not account for the anomalies which are associated with a bird’s eye view of a situation; details cannot be seen and are thus not accounted for.[37] The traditional classical macroeconomic theory of FDI hypothesizes that the rate of profit has a tendency to drop in industrialized countries, often due to domestic competition, which creates the propensity for firms to engage in FDI in underdeveloped countries.[38] The neo-classical approach states that, due to the shortage of and relatively high expense of labor in affluent countries, they tend to transfer production facilities to poorer, labor-intensive countries.[39] In both cases, capital flows from capital-intensive countries to capital-poor countries, as firms strive to increase overall profits.
A useful definition refers to FDI as an “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of an investor, the investor’s purpose being to have an effective choice in the management of the enterprise.”[40] FDI is usually a fundamental policy decision for a domestic business entity that may affect its identity for the future.[41] FDI usually entails a major long-term commitment of capital and other resources.[42] Multi-national enterprises (“MNE’s”) can invest hundreds of millions or even billions of dollars to establish successful FDI projects.[43]
Hymer introduced a microeconomic theory of the firm, focusing on international production rather than trade to analyze and explain the “what” and “how” of FDI.[44] This view considered the key requirements for an individual firm in a given industry to invest overseas and thus become a multi-national enterprise “(MNE”), including tradable ownership advantages and the removal of competition.[45] This theory was derived from studying the firm itself in relation to international activities, and discussing the efficient allocation of assets to dispersed locations.[46]
Over time, a micro-level theory of FDI has been created to deal with several noted flaws of the macro-level theory. Hymer noted four discrepancies: (1) the older theory suggested that flow of capital was one directional, from developed to underdeveloped countries, whereas in reality, in the post-war years, FDI was two-way between developed countries; (2) a country was supposed to either engage in outward FDI or receive inward FDI only.[47] Hymer observed that MNEs, in fact moved in both directions across national boundaries in industrialized countries, meaning countries simultaneously received inward and engaged in outward FDI; (3) the level of outward FDI was found to vary between industries, meaning that if capital availability was the driver of FDI, then there should be no variation, as all industries would be equally able and motivated to invest abroad; (4) as foreign subsidiaries were financed locally, it did not fit that capital moved from one country to another.
However, there seemed to be another element driving firms overseas. [48] The macro-level theory was based on the concept of a perfectly competitive market, where the increase in demand and subsequent super-normal profits gained in an industry in one country would cause profits to eventually drop with the flooding of the market with new entrants. If a foreign firm entered the market, the extra costs of being foreign would drive them out of business when prices decreased, meaning that they would have to have something which offset the disadvantages of being foreign.[49]
The suggestion was that MNEs can only exist in an imperfect market, where firms have non-financial ownership advantages vis a vis other firms in the same industry, meaning that the driver for the MNE lies with the individual firms, rather than the country’s capital availability.[50] Another result of structural market failure is the removal of conflict between firms within a given industry.[51] Hymer discusses the nature of the “market power” approach of firms and their “oligopolistic” interdependence, as they focus on the domination of the market, the raising of entry barriers and the removal of conflict, all by collusive agreements. [52] Firms, in theory then invest abroad in order to dominate more markets, raise profits and create more conflict-removing oligopolies.[53] Thus, only the largest of firms, such as those in an oligopoly, could sufficiently offset the costs of being foreign with their strong ownership advantages.
Critics like Straker point out that this theory focuses too much on the market-power approach and all but completely ignores transaction costs.[54] Cognitive market failures such as that seen in the Asian financial crisis of the late 1990’s, require transaction-specific assets to minimize these costs, but Hymer only includes tradable advantages, such as scale economies and technologies.[55] While Hymer discussed the theory behind why and how firms invest abroad, he did not focus on how firms operate efficiently in other countries, including its use of advantages.
Firms do not simply react to structural market failures, but are in fact proactive in their use of advantages.[56] While past economists have concluded that instead of actively employing and developing assets, and thus improving their internal efficiency, firms’ main goals are to gain profits through expansion.[57] However, today a wide variety of firms are investing overseas. No longer are oligopolist firms the only firms investing abroad. This suggests that the scale (or market power)-as-endgame strategy is unnecessary and that ownership advantages are key to the creation of successful MNEs.
Dunning offers another critique of the macro-level theory of FDI considers the exploitation of assets, categorized as ownership, location and internalization advantages, which encompass elements of both the macroeconomic theory of FDI and the microeconomic theory of the MNE.[58] This critique specifically looks to country-specific assets, or location advantages, such as labor costs, societal infrastructure, and governmental control. Dunning combines this with an expansion of Hymer’s ownership advantages, which he differentiates from location advantages through their mobility, offering extensive ways for how a firm may effectively co-ordinate its assets in different countries.[59] It is as if Dunning has taken Hymer’s work one step further and made ownership advantages the most important aspect of his framework. Not only that, the paradigm revolves around competition and innovation, rather than the collusion of Hymer’s oligopolies, based on the assumption that a firm’s success overseas depends not only on its possession of an asset, but on how it is able to co-ordinate it to gain a competitive edge over indigenous firms
Unlike Hymer, Dunning includes an exploration of transaction costs, as the list of assets and their relationship to the firm and location advantages is such that he split them into two interdependent categories: possession of assets and those advantages which are specifically designed to reduce transaction costs.[60] He refers to these as “Oa” and “Ot” respectively.[61] Oa include tangible and intangible assets, such as technologies and skill sets, while Ot includes factors which are generally intangible, such as the ability to communicate effectively with others within and between firms. Oa and Ot are combined in MNE activities, becoming “collective” assets and thus making many ownership advantages nearly impossible to sell, as they are closely tied to the infrastructure and culture of the firm itself, as well as the locality in which the firm operates or markets to.[62] This is contrary to Hymer’s assumption that all assets are tradable.
Dunning also considers another factor previously ignored by his predecessors: time.[63] He observes that ownership advantages are not static creatures and that firms invest abroad to improve upon them.[64] Assets can deteriorate, which can cause firms to divest.[65]
Dunning further explains that ownership advantages need to be protected and developed within a firm, rather than sold or licensed.[66] A business entity that is attracted by the potential of a foreign market may not be satisfied with the limited returns available through licensing fees and sharing the market.[67] Transactional market failures can include the risk of potential dishonesty and misunderstanding of foreign markets, meaning that the transaction-specific asset (Ot) like the ability to communicate effectively with other cultures, maybe better than relying on an outside source to do the work.
These economic theories still leave holes when applied to the modern day world. The theories do not account for irrational and unpredictable human behavior and seem to assume that information is free of cost and perfectly symmetrical.[68] As FDI continues to develop from externalized to internalized assets, it is also important to look at what the future developments may be. “Alliance capitalism” where firms ‘revert’ back to a situation of creating alliances to protect and develop ownership advantages, rather than for market power is one possibility, and certainly a concern, especially in developing countries.[69] This suggests a sort of ‘joint-internalization’ venture, but whether economic theory will move towards this inclination or another remains unclear.[70]
Economic Growth Defined
There are a number of ways that different economists, scholars and policy makers define the term and “economic growth.” This paper is not to serve as a critique as to which definition is most proper, but rather utilize one definition of “economic growth” and examine how it is or is not affected by FDI.
Economic growth is a positive change in the level of production of goods and services by a country over a certain period of time.[71] Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation.[72] Economic growth is usually brought about by technological innovation and positive external forces.[73]
“Economic Growth Rate” is the pace at which economic growth increases during a given interval.[74] The quantities most commonly used to measure economic growth rate are Gross National Product (“GNP”) and Gross Domestic Product (“GDP”).[75] The growth in GDP is the single most useful number when describing the size and growth of a country's economy.[76] However in an economy for which earnings from overseas are substantial in relation to GDP, it may be useful (or even better) to look at GNP.[77] Because this paper is primarily concerned with analyzing developing countries, many of which do not have substantial earnings from overseas relative to their GDP, a focus will be on GDP as the primary indicator of economic growth and overall strength of an economy.
GDP is most commonly calculated as the sum of expenditures in the economy.[78] The equation for GDP is written as: Y = C + I + G + NX.[79]
Y, in this equation captures every segment of the national economy.[80] Thus, Y represents both GDP and the national income.[81] This because when money changes hands, it is expenditure for one party and income for the other, and Y, capturing all these values, thus represents the net of the entire economy.[82] This paper will assume Y = GDP and will consider this equation as GDP = C+ I + G + NX.
C, Consumer spending, is the sum of expenditures by households on durable goods, nondurable goods, and services.[83] Examples include clothing, food, and health care.
Investment, I, is the sum of expenditures on capital equipment, inventories, and structures.[84] Examples include machinery, unsold products, and housing.
Government spending, G, is the sum of expenditures by all government bodies on goods and services.[85] Examples include naval ships and salaries to government employees.
Net exports, NX, equals the difference between spending on domestic goods by foreigners and spending on foreign goods by domestic residents.[86] In other words, net exports describes the difference between exports and imports.
Important to consider, is how GDP is connected with standard of living. After all, to the citizens of a country, the economy itself is less important than the standard of living that it provides. GDP per capita (GDP divided by the size of the population) measures the average amount of GDP that each individual receives[87] and thereby provides “an excellent measure of standard of living within an economy.”[88]
Because GDP is equal to national income, the value of GDP per capita is therefore the income of a representative individual.[89] In general, the higher GDP per capita in a country, the higher the standard of living.[90] GDP per capita is a more useful measure than GDP for determining standard of living because of differences in population across countries.[91] If a country has a large GDP and a very large population, each person in the country may have a low income and thus may live in poor conditions.[92] On the other hand, a country may have a moderate GDP but a very small population and thus a high individual income.[93] Using the GDP per capita measure to compare standard of living across countries avoids the problem of division of GDP among the inhabitants of a country.
In order to deal with the ambiguity inherent in the growth rate of GDP, macroeconomists have created two different types of GDP, nominal GDP and real GDP.[94] Nominal GDP is the sum value of all produced goods and services at current prices.[95] Real GDP is the sum value of all produced goods and services at constant prices.[96] To compute real GDP, prices are taken from a specific base year.[97] By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services.[98] In this way, real GDP frees year-to-year comparisons of output from the effects of changes in the price level.
Economic growth in a particular year is measured by the "rate of growth" of real GDP.[99] This is the growth in a particular year as a proportion of the production at the beginning of that year.[100]
Oftentimes, economic growth is considered a sustained increase in real GDP per capita.[101] There is something hidden in the definition of economic growth as a "sustained" increase in GDP per capita.[102] Because the increase is "sustained," its impact is cumulative over time.[103] Accumulation over time is what gives economic growth its power to transform societies.[104]
In all modern economies, many different kinds of products and services are produced.[105] Economic growth can be visualized as an outward shift in the Production Possibility Frontier.[106] If the production possibility frontier shifts outward, the society can produce more of both (or rather many different) kinds of goods and services.[107] It is this increase in production possibilities that underlies an increase in real GDP per capita, and, in turn, the real GDP statistics are designed to measure economic growth.
Effects of FDI on GDP
While many sources set forth a the supposition that FDI has a
direct effect on economic growth, little evidence exists as far as
comprehensive scientific studies on this matter.[108] Economists generally agree that investment
(as the term is generally used and not FDI specifically), through various
mechanisms, increases the rate of economic growth.[109] A significant study on the sensitivity of
cross-country growth regressions, even identifies it as the only variable that
is robustly correlated with growth.[110] However, several recent analyses have
supplemented these studies revealing a strong positive correlation exists
between FDI and growth of GDP per capita.[111] Specifically not only was FDI found to be
significant and positively correlated to growth but it had a relatively high
coefficient, especially in comparison to the investment variable.[112] This means that for a 1% increase in the
ratio of foreign investment to GDP, the growth rate of the economy tended to
increase by 0.37 percent.[113] In comparison, an increase in the ratio of
domestic investment to GDP by 1 percent showed to increase GDP growth rate by
only 0.1 percent.[114]
This may suggest that foreign investment is more productive than
domestic investment, which seems plausible due to the unique characteristics of
foreign investment, which include access to more advanced and productive
technology.
Even though assumptions are made for the purpose of these studies
that independent variables are exogenous, many of them are not.[115] The problem of reverse causality in this case
is that countries that are fast growers are also more successful at attracting
foreign investment.[116] While one solution would be to find
instruments for these variables that are not correlated with growth, such
instruments are difficult to find for almost all of the variables used in the
study, including: investment, population growth, and political stability.[117]
Kharwar specifically states that “any results…obtain[ed] must be
treated with restraint and cannot be used to make sweeping statements about how
foreign investment affects growth.”[118] Nevertheless, his analysis seems to do more
than simply suggest the existence of a positive relationship between GDP growth
and FDI.
One possible study to further prove the significant relationship
between FDI and GDP is to conduct several comparative case studies of two
countries - one being the recipient of foreign investment and the other having
a ‘closed door' policy.’[119]
Kharwar states that “such an intensive
analysis may also shine some light onto the channels through which FDI works to
affect economic growth and that is the path towards subsequent research should
be directed.”[120]
Factors Causing Economic
Growth in Developing Countries: The Role of Institutions & Promotion of FDI
Most economists now agree that institutional quality holds the key to prosperity.[121] Rich countries are places where investors feel secure in their property rights, the rule of law prevails, private incentives are aligned with social objectives, monetary and fiscal policies are solidly grounded, risks are mediated through social insurance, and citizens have recourse to civil liberties and political representation.[122] Poor countries tend to be where these arrangements are absent or ill-formed.[123]
The World Bank,
and more largely the “
However,
significant evidence suggests that large-scale institutional transformation is
hardly ever a prerequisite for jump-starting growth.[128] In practice, growth spurts are associated
with a narrow range of policy reforms. One of the
most encouraging aspects of the comparative evidence on economic growth is that
it often takes very little to get growth started.[129]
In fact, the large number of countries
that have managed to engineer at least one instance of transition to high
growth may appear as surprising.[130]
Even though most of these growth spurts
eventually collapsed, an increase of 2 percent in growth over the better part
of a decade is “nothing to sneer at.”[131]
In the
vast majority of the analyzed cases of growth, the policy reasons or other
factors that led to the growth spurts were apparently quite mild.[132] Historically, relatively small changes in
background environment can yield significant increase in economic activity.[133]
Even in
well-known cases of successful policy reform that had been aimed at spurring a
developing country’s economy, policy changes at the outset have been typically modest.[134]
The hallmark reforms associated with the
Korean miracle, the devaluation of the currency and the rise in interest rates,
fell far short of full liberalization of currency and financial markets.[135]
As these instances illustrate, an
attitudinal change on the part of the top political leadership towards a more market-oriented,
private-sector-friendly policy framework often plays as large a role as the
scope of policy reform itself.[136]
Unsurprising
from a growth theory standpoint, this suggests countries do not need an
extensive set of institutional reforms in order to start growing. When a country is so far below its potential
steady-state level of income, even moderate movements in the right direction
can produce a big growth payoff.[137]
Nothing could be more encouraging to
policy makers, who are often overwhelmed and paralyzed by the apparent need to
undertake policy reforms on a wide and ever-expanding front.
Sustained economic convergence eventually likely requires quality institutions or institutional mechanisms, but the initial spurt in growth can be achieved with minimal changes in institutional arrangements.[138] Thus, stimulating economic growth must be distinguished from sustained economic growth. Solid institutions are much more important for the latter than for the former.[139] Once growth is set into motion, it becomes easier to maintain a virtuous cycle with rapid growth and institutional transformation driving each other.[140]
But one
should think of institutions along a much wider spectrum. In its broadest definition, institutions are
the prevailing rules of the game in society.[141]
High quality institutions are those that
induce socially desirable behavior on the part of economic agents.[142]
Such institutions can be both informal
(e.g., moral codes, self-enforcing agreements) and formal (legal rules enforced
through third parties).[143]
It is widely recognized that the
relative importance of formal institutions increases as the scope of market
exchange broadens and deepens.[144]
One reason is that setting up formal
institutions requires high fixed costs but low marginal costs, whereas informal
institutions have high marginal costs.[145]
The
starting point is the “recognition that markets need not be self-creating, self-regulating,
self-stabilizing, and self-legitimizing.”[146]
Hence, the very existence of market
exchange presupposes property rights and some form of contract enforcement.[147]
This is the aspect of institutions that has received the most scrutiny in
empirical work.[148]
The central dilemma here is that a political entity that is strong enough to
establish property rights and enforce contracts is also strong enough, by definition,
to violate these same rules for its own purpose.[149]
The relevant institutions must strike
the right balance between disorder and dictatorship.[150]
Institutions not only to serve as facilitators of order, but also provide predictability and protection to both its citizenry and interested foreign parties or outside investors. The growth of institutions and regimes protecting natural persons, on the one hand, and those protecting investments and corporations, on the other hand, are mutually reinforcing.[151]
It is important
that any institutional framework put in place should be one that minimizes
transaction costs. Transaction costs are broadly defined as “any
costs that are not conceivable in a ‘Robinson Crusoe economy’ -- in other
words, any costs that arise due to the existence of institutions.”[152] This term, if not so popular in economics
literature, would more correctly be called “institutional costs.”[153] Nevertheless, many economists seem to
restrict the definition to exclude costs internal to an organization.[154]
This definition parallels Coase's early
analysis of "costs of the price mechanism" and the origins of the
term as a market trading fee.[155]
Institutions include both the formal and informal constraints that shape human interaction.[156] The enforcement is an important factor in calculating transaction costs.[157] These costs are often associated with corruption within institutions, especially in developing countries where sparse resources hinder an institution’s ability to oversee actions by its employees.[158] Corruption is rampant throughout the world and perceived especially bad in developing countries.[159] More than $1 trillion dollars is paid in bribes each year across the globe.[160] Countries that tackle corruption and improve their rule of law can increase their national incomes by as much as four times in the long term.[161]
Starting with the broad definition, many economists then ask what kind of institutions (firms, markets, franchises, etc.) minimize the transaction costs of producing and distributing a particular good or service.[162] The answer is not easy. Some have pondered that “highly selective meritocratic recruitment and long-term career rewards create commitment and a sense of corporate coherence.”[163] “What is required is a competent, honest, and efficient bureaucracy to administer the interventions, and a clear-sighted political leadership that consistently placed high priority on economic performance.”[164]
Institutions,
whether tied down by cronyism or not, still tends to support FDI by it sets
forth predictability in the market system which can be used by investors in
crafting a business plan.[165] Furthermore, comprehensive studies have
identified and examined more than 80 episodes of growth acceleration - in which
a country increased its growth rate by 2 percent or more for at least seven
years - in the period since 1950.[166] Interestingly, the vast majority seemed
unrelated to conventional economic reforms, such as liberalization of trade and
prices.[167] To the extent that growth triggers can be
identified, they seem to be related to relaxing constraints that held back
private economic activity.[168]
What Leads Investors From Developed Countries to Invest?
A preliminary consideration for an multi-national enterprise (“MNE”) is whether the host nation has in place a basic logistics system that will allow for the delivery of products to market and travel and communication by the MNE’s employees.[169]
Another consideration is the desire to exercise greater management and control over the foreign market.[170] A local distributor, sales agent, or licensee may not have the capability, resources, or desire to manage an aggressive penetration of the foreign market.[171]
Not only can the capital expenditures be significant, but successful FDI projects usually involve a significant commitment of senior management time and require long-term overseas assignments for the company’s key personnel.[172] The costs of extended assignments abroad for employees and their families and the collateral labor issues of managing foreign local employees are often significant.[173]
In addition, while the termination of a distributorship or licensing agreement due to business failure may involve costs, the legal issues tend to be relatively straightforward.[174] Unwinding a foreign business establishment and repatriating all employees can present complex legal issues that will take years to resolve.[175]
As a company expands into foreign markets through FDI, the character of the company will also change.[176] If a company’s foreign expansion provides growth as a result a result of FDI, then the company will need to establish independent management headquarters in its overseas markets.[177] The more successful the company’s foreign expansion becomes, the more likely its identity will be transformed.[178] The national market, originally the most important market for the company, may become only one of several important markets, and the national headquarters, once the center of the entire company, may become a regional office on par with similar offices in other regions.[179]
A business concern may decide that the non-establishment forms of doing business abroad do not result in a sufficient degree of market penetration for a number of reasons.[180] Direct sales to a foreign market are often limited by a seller’s lack of knowledge of the foreign market and a lack of a local distribution network.[181]
Many agents, distributors, and licensees will have other products, including their own, that they are seeking to promote and may not wish to devote the bulk of their time and resources to the one product sold under the authority of the business entity.[182] Thus, the business entity may wish to develop a market strategy and long-term business plan for the foreign market and surrounding countries.[183]
Another
consideration a business may have that leads it to FDI rather than a
non-establishment foreign business, is the protection of its intellectual
property rights.[184] For many
But licensing only
secondary technology also presents limitations for the
Side
Effects of FDI
It is increasingly recognized that FDI
is an important component of an effective strategy to develop solutions to the
global economic crisis, in part because it creates a flow of non-debt equity
into developing countries and promotes sustained growth and employment.[193] However, developing countries are wary of
several “side effects” of FDI.
“The Race to
the Bottom”
It is a
widely accepted practice by governments to grant tax incentives to entice and
retain FDI.[194] Since many countries seek to attract FDI, an
"incentive competition" or "bidding war" between countries
takes place, whereby some countries attempt to offer foreign investors the most
favorable inducements.[195] A race to the bottom is a
theoretical phenomenon which occurs when competition between nations or states
(over investment capital, for example) leads to the progressive dismantling of
regulatory standards.[196] In a world in which MNEs compare
states, a government may look to other states' taxing policies in order to
adjust its own tax policy and comply with MNEs' preferences.[197] The provision of tax incentives by one state
pressures other states to adopt similar incentive measures in order to remain
competitive.[198] This prisoner's dilemma may lead to a “race
to the bottom,” benefiting some countries but leading to global disaster.[199]
The “Race to the Bottom” theory purports that the
reduction of regulation, welfare, taxes, and trade barriers countries move
towards to accommodate foreign investment, will increase poverty, and drive the
poor to the few remaining areas that retain protections.[200] In the end this theory argues that this will
force the last remaining states to drop their protections in order to survive.
Some scholars
insist that global corporations have become the world's most powerful economic
actors, yet there are no international equivalents to the anti-trust, consumer
protection, and other laws that provide a degree of corporate accountability at
the national level.[201] International capital mobility eliminates the
long-term stake corporations once had in the well-being of their home nations.[202] The loss of national economic control has
been accompanied by a growing concentration of power without accountability in
international institutions like the IMF, the World Bank, and GATT.[203] For poor countries, foreign control has been
formalized in structural adjustment programs, but IMF decisions and GATT rules
affect all countries.[204] The decisions of these institutions also have
an enormous impact on the global ecology.[205] Yet these institutions (implying the
Because of concerns such as these, some scholars argue that there is a need for a viable and robust global regime to constrain FDI competition.[207] For instance, some scholars demand global governance of FDI competition to serve as a tool to constrain the decision-making discretion of national governments and make them less vulnerable to lobbying by special interest groups.[208]
However, currently available data does suggest
that jobs and capital flow more frequently to states with lower protections,
but does not support the notion that these states suffer increased poverty or
income inequality.[209] Data also supports the notion that states
retaining high protections sustain or increase their poverty in comparison to
states reducing the regulatory framework and trade barriers but does not
support the argument that this increase in poverty is due to mass immigration
of poor.[210] In fact, the data suggests that the mass poor
migrate more frequently to the more open states where jobs are more readily
available.[211]
“The Brain Drain”
A collateral consequence of a countries “race to the bottom,” is the loss through emigration of its own human and intellectual capital. Specifically, “brain drain” is an emigration of trained and talented individuals to other nations or jurisdictions.[212]
Brain drain occurs whenever a trained individual leaves a country and does not return.[213] Any investment that a country has placed in an individual via higher education or job training is lost at the individual’s departure.[214] Normal instances where brain drain occurs include where individuals study abroad and complete their education but do not return to their home country, or when individuals educated in their home country emigrate for higher wages or better opportunities.[215]
FDI is often criticized by developing countries for
encouraging the second instance of brain drain as new businesses facilitated
through foreign capital promotes a change in the marketplace emphasizing increased
on-the-job skill development. It is
theorized that a developing countries citizens with increased levels of
training become more valuable to businesses operating out of state than
untrained citizens. Additionally, the
employees of a firm that operates internationally may receive greater exposure
to the opportunities that exist in other parts of the world in which the firm
operates and seek to move elsewhere.[216]
Individuals who emigrate almost always make more money when they emigrate than they would if they stayed in their home countries.[217] As a consequence, when individuals from a developing country emigrate, there are almost always financial benefits, both for the individuals and for their families, further increasing the desirability of emigration of an educated workforce away from a developing country.[218]
However, “brain
drain” has been observed to have a counterbalancing effect on FDI.”[219]
Conversely, FDI
has also been observed have a counterbalancing effect on brain drain. The
idea of a brain gain runs counter to the traditional view that such
international labor movements will induce a loss to the sending country in the
form of a brain drain.[220] While the outflow of educated workers can
cause skill shortages, the loss of ‘human capital’ can be offset by changes in
incentives generated by migration opportunities: First, the
prospect of migration increases the rate of return on investments in schooling. As there is a constraint on the migration
rate due to barriers to immigration, if a sufficiently large share of educated
workers remain in their country of origin, average human capital will rise.[221]
Second, migrants can send remittances back to their country of origin. Individuals that depart their native country for better opportunities elsewhere have been observed to not only make a higher income and raise their standard of living, but also send money back to their families.[222] The World Bank estimated that this “remittance flow”[223] has doubled in the last decade to an estimated $232 billion in 2005.[224] Of that, an estimated $167 billion went to developing countries.[225] Thus, the amount that emigrants send home is more than developed countries spend in foreign aid and, in dozens of countries, remittances are the largest source of foreign capital.[226]
Regardless of the type of migrant - educated or
not - the money the migrants send back home does help alleviate poverty in
their former home.[227] The World Bank's Chief Economist and Senior
Vice President for Development Economics, François Bourguignon, reports that
the household survey evidence presented in the volume demonstrates a direct
link between migration and poverty reduction. [228] Such financial inflows have become an important source of international
capital in many countries. Hence, migration can be associated with capital
inflows and higher investment in both human and physical capital.[229]
Since educated workers earn more, higher
remittances may be associated with brain drain.[230]
Third, skilled migrants may incorporate into
international business networks.[231]
By providing information to
multinational corporations about workforce quality and profit-making
opportunities in their country of origin, educated migrants can be catalysts to
inflows of FDI.[232]
“If the FDI inflows induced by
emigration of the educated workforce are concentrated in projects intensive in
skills, the incentives for human capital accumulation in the sending country
may be enhanced.”[233]
While the brain drain both helps and hurts
developing countries, it almost always benefits developed countries.[234] While skilled immigrants make up only a small fraction of
the workforce in the
The last of these findings demonstrates that the
presence of foreign graduate students benefits not only the individual and the
university but also the
Capital flight refers to “the movement of money by an investor from one investment to another in search of greater stability or increased returns.”[239] Sometimes capital flight specifically refers to the movement of money from investments in one country to investments elsewhere in search of higher returns.[240] Alternatively (an more commonly) capital flight refers to the rapid flow of assets and/or money from investments in one country to another in order to avoid country-specific risk (such as high inflation or political turmoil) or an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength..[241] Capital flight is seen most commonly in massive foreign capital outflows from a specific country, often at times of currency instability.[242] Often, the outflows are large enough to affect a country's entire financial system.[243]
Because of the withdrawal of money or assets
located in or contributing towards a country’s economy, capital flight is
equivalent to a complete disappearance of wealth and is usually accompanied by
a sharp drop in the exchange rate of the affected country.[244] This fall is particularly damaging when the
capital belongs to the people of the affected country, because not only are the
citizens now burdened by the loss of faith in the economy and devaluation of
their currency, but probably also their assets have lost much of their nominal
value.[245] This leads to dramatic decreases in the purchasing
power of the country's assets and makes it increasingly expensive to import
goods.[246]
In 1995, the International Monetary Fund (IMF)
estimated that capital flight amounted to roughly half of the outstanding
foreign debt of the most heavily indebted countries of the world.[247] Instances such as the Mexican and Asian
financial crises in the mid-1990’s and the Argentine economic crisis of 2001
were in part the result of massive capital flight induced by fears that these
countries would default on their external debt.[248]
The speed and totality with which invested capital was and could be withdrawn from a country’s economy has resulted in many developing nations approaching FDI and market deregulation with a skeptical eye.[249]
Fifteen years
after regaining independence following the collapse of the Soviet Union,
Foreign investment
has been a significant element of
Cumulative FDI increased by 17.4 billion litas ($6.4bn) in the past decade, and at the beginning of 2006 amounted to 18.8 billion litas.[259] This comes within the framework of an economy that has grown 6-10 percent yearly since 1998.[260]
Studies have shown
that this growth, a result of institutionalized measures focusing on the
deregulation and the facilitation of more transparent market strategies, reveal that Lithuania’s economic growth is
sustainable, and that the further economic development of the country can be
expected to continue in this fashion.[261] This is important, because
Joining regional
governmental organizations such as the European Union and the North Atlantic
Treaty Organization has secured
While foreign investors can be seen as a threat to domestic industries, they are also credited with raising the bar for Lithuanian business.[265] The entry of foreign investors into the Lithuanian market has been embraced as a challenge to local businessmen and proclaimed a natural phenomenon in a global economy.[266]
What could
arguably be seen as
Deregulation of
the marketplace and expedient moves to privatize business have resulted in
While private organizations such as Investors Forum give a voice to businesses already in the country, the LDA, which is part of the ministry of economy, aids foreign companies that are moving in.[274] The agency helps incoming firms in their relations with Lithuanian government organs and domestic businesses.[275]
Further
institutional promotion for FDI is seen through the targeting of several
clusters of industries by the Lithuanian ministry of the economy.[276] The ministry is primarily targeting the
sectors of
Co-operation between education and research institutions and business is envisioned as being centered at several science and technology parks spread throughout the country.[279] However, one potentially negative consequence of economic liberalization has been what was earlier described as “brain drain.”[280] However, in spite of regular mass-media reports of a workforce drain, skilled labor is still available.[281]
Industries
attracting FDI vary across the country, and the prospective investor will find
relatively mature patterns.[282] However, FDI is not the only means
Medium-term real GDP
growth is expected to remain at more than 5% through 2009 as rises in fuel and
energy costs are offset by tax reductions.[286] Foreign investment remains a key to
The
However, despite
the speed of modernization, seen elsewhere in the world,
The economy is
closely aligned with
Each economic program takes into account the government's desire to protect the country's environment and cultural traditions.[303] For example, the government, in its cautious expansion of the tourist sector, encourages visits by upscale, environmentally conscientious tourists.[304]
In the late
1980’s, King Jigme Singye Wangchuck, developed the concept of the maximization
of “Gross National Happiness (“GNH”) to serve as an indicator of the countries
development.[305] GNH does not consider economic growth as an
important first step.[306]
FDI is a useful resource that works into the development schemes for many developing countries. It certainly seems to be highly related to growth of real GDP and countries that operate successful FDI promotional policies tend to see greater development success across their economy. However, legitimate concerns of developing countries surround FDI, and it is not the best choice for every developing nation.
Many policy programs that developing countries implement to jump start growth are policies that fit together very well with FDI. These programs are often institutional in nature and facilitated with a plan and purpose to further deregulation and privatization of a market or restore greater rights to the citizenry of a country. These types of programs or institutions may not necessarily incorporate investments by foreigners into their plans. Nevertheless, establishing market structures that facilitate greater predictability, trade and access seem to offer the most sustainable economic growth situations.
Consequently, these structures are the same structures that foreign investors would likely find the most intriguing. While FDI in and of itself is not necessary to facilitate growth in terms of GDP in a developing country, those factors that underlie FDI promotion, namely predictability, transparency, and understood consumption policies are required.
As shown by the
country comparisons,
On the other hand,
[1] See Jonathan Zasloff, Law and the Shaping of American Foreign
Policy: From the Gilded Age to the
[2] See id.
[3] See Daniil E. Fedorchuk, Acceding to the
[4] See id., at 2; see also Peter T.
Muchlinski, The Rise and Fall of the Multilateral Agreement on Investment: Where Now?, 34 INT'L LAW. 1033 (2000) (stating
"the increasing integration of global business through both international
trade and foreign direct investment" has raised many social issues, such
as "protection of the environment, observance of
minimum labour and human rights standards, and development of the least
developed countries and regions"); Eric M. Burt, Developing Countries and the Framework for Negotiations on Foreign
Direct Investment in the World Trade Organization, 12 AM. U. J. INT'L L.
& POL'Y 1015, 1015-28 (1997) (discussing the dispute between the developed
and developing nations over the regulation of international investment).
[5] See World Bank's WORLD
DEVELOPMENT REPORT 2000/2001: ATTACKING POVERTY, at 275, 310 (2001). Rich countries are becoming wealthier than
ever, while poor underdeveloped countries are living in misery. The world's wealthiest country in 1999,
[6] See Fedorchuck, supra note 3; David Schneiderman, Investment Rules and the New Constitutionalism, 25 LAW & SOC. INQUIRY 757, 767 (2000).
[7] See Mark B. Baker, Integration of the
[8] See generally World Bank, WORLD DEVELOPMENT REPORT 2005: A BETTER INVESTMENT CLIMATE FOR EVERYONE, Research (Dec. 18,
2006), http://web.worldbank.org/WBSITE/ EXTERNAL/EXTDEC/EXTRESEARCH/EXTWDRS/EXTWDR2005/0,,menuPK:477681~pagePK:64167702~piPK:64167676~theSitePK:477665,00.html>
(the
World Bank’s annual World Development Report for 2005 focuses on “what governments can
do to improve the investment climates of their societies to increase growth and
reduce poverty”).
[9] See id.
[10] See generally Fidelis Ezeala-Harrison, Theory and Policy of International
Competitiveness, 1999.
[11] See id.
[12] See Kenneth J. Vandevelde, The Political Economy of a
[13] See id; see also Ezeala-Harrison, supra note 10.
[14] See id.
[15] See id.
[16] See Fedorchuk, supra note 3, at 4.
[17] See id.
[18] See Harold D. Skipper, Jr., AEI Studies on Services Trade Negotiations: Insurance in the General Agreement on Trade in Services, 27 (2001).
[19] See Davide Hess & Thomas
[20] See Federal Reserve Bank of
[21] See id.
[22] See id.
[23] See id.
[24] See id; see also
[25] See
[26] See id.
[27] See id; see also Federal Reserve Bank of
[28] See id.
[29] See id.
[30] See Federal Reserve Bank of
[31] See id.
[32] See id.
[33] See id.
[34] See id.
[35] See id.
[36] See Heledd
Straker, Understanding the Global Firm,
Research (Nov. 12, 2006) <http://hel.org.uk/business/essay.doc>; Caves.
Multinational
[37] See Yamin, A Critical Re-Evaluation of Hymer’s Contribution to the Theory of the Transnational Coporation, in Pitelis & Sungden, The Nature of the Transnational Firm, (2000).
[38] See Cantwell, in Pitelis & Sugden (2000) The Nature of the Transnational Firm pg 13
[39] See id. at pg 13.
[40] International Monetary Fund, Balance of Payments Manual, para. 408 (1980).
[41] Daniel
C.K. Chow & Thomas J. Schoenbaum, International
Business Transactions: Problems, Cases, and Materials, 394,
[42] See id.
[43] See id.
[44] See Straker, supra note 36.
[45] See id.
[46] See id.
[47] See Pearce, R. (2005), Understanding the Global Firm, course notes pg3.
[48] See Straker, supra note 36.
[49] See id.
[50] See Pearce, supra note 43.
[51] See Yamin, supra note 37.
[52] See Straker, supra note 36.
[53] See id.
[54] See Dunning, Multinational Enterprises and the Global Economy, pg. 76 (1993).
[55] See Straker, supra note 36.
[56] See Straker, supra note 36.
[57] See id.
[58] See id.
[59] See id.
[60] See Dunning, supra note 54, at 76.
[61] See id.
[62] See Cantwell, supra note 38, at 21.
[63] See Straker, supra note 36.
[64] See id.
[65] See id.
[66] See id.
[67] See Chow, supra note 41, at 395.
[68] See Straker, supra note 36.
[69] See id.
[70] See Cantwell, supra note 38, at 23.
[71] See Investor Words, Economic Growth: Definition, Research (Nov. 22, 2006), <http://www.investorwords.com/5540/economic_ growth.html>.
[72] See id.
[73] See id.
[74] See Investor Words, Economic Growth Rate: Definition, Research (Nov. 22, 2006), <http://www.investorwords.com/1642/economic_growth_rate.html>.
[75] See id.
[76] Measuring the Economy I, Gross Domestic Product (GDP): Computing GDP, Research (Dec. 4, 2006), <http://www.sparknotes.com/economics/macro/measuring1/section1.html>.
[77] See Investor Words, supra note 74.
[78] See Measuring the Economy I, supra note 76.
[79] See id.
[80] See id.
[81] See id.
[82] See id.
[83] See id.
[84] See id.
[85] See id.
[86] See id.
[87] This
only purports to be an average figure and does not reflect any discrepancy
between the wealthy and the impoverished in a society (genie coefficient). See
e.g.
[88] Measuring the Economy I, supra note 76.
[89] See Roger A. McCain, Rates of Growth, Research (Nov. 22,
2006), < http://william-king.www.drexel.edu/top/Prin/txt/gro/gro1a.html
>. Dr. Roger A. McCain is a professor
of economics at the LeBow College of Business at
[90] See Measuring the Economy I, supra note 76.
[91] See id.
[92] See id.
[93] See id.
[94] See id.
[95] See id.
[96] See id.
[97] See id.
[98] See id.
[99] See McCain, supra note 89.
[100] See id.
[101] See id.
[102] Per unit of population; per person. Per Capita. The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Research (Dec. 20, 2006), <Dictionary.com http://dictionary.reference.com/browse/Per Capita>.
[103] See McCain, supra note 87.
[104] See id.
[105] See id. at Fig. 2.
[106] A curve depicting all maximum output possibilities of two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently. Definitions, Production Possibility Frontier-PPF, Research (Dec. 2, 2006), <http://financial-dictionary.thefreedictionary.com/ Production+Possibility+Frontier+-+PPF>.
[107] See McCain, supra note 87.
[108] See Mariam Khawar, Foreign Direct Investment and Economic Growth: A Cross-Country Analysis,
5 Global Econ. J.
Art. 8, 1 (2005) Research (Nov. 27, 2006)
<http://www.bepress.com/gej/vol5/iss1/8>.
[109] See id.
[110] See id.; see also R. Levine
& D. Renelt, D. A Sensitivity
Analysis of Cross-Country Growth
Regression, 82
Am. Econ. Rev. 82 942-63 (1992); E.
Borensztein,, de Gregorio, & Lee, How Does Foreign Direct Investment Affect
Economic Growth?, 45 J. Int’l Econ. 115
(1998) (Eduardo Borensztein’s compilations of
analyses provided a framework for which Kharwar worked from. It was Borensztein, who at the time was at
the International Monetary Fund, provided Kharwar with OECD data on foreign
direct investment inflows needed for his study); L.R. De Mello, Foreign Direct Investment in Developing Countries and
Growth: A Selective Survey, 34 J. Dev. Studies 1-34 (1997).
[111] See Kharwar, supra note 108, at 8. The regressions and statistical analysis performed in this study revealed that the magnitude of the effects FDI had on growth of GDP per capita were large and an increase in foreign investment is correlated with a relatively large increase in GDP growth, especially when compared to other variables like domestic investment.
[112] See id., at 6, 7.
[113] See id., at 7.
[114] See id.
[115] See id., at 8.
[116] See id.
[117] See id., at 7.
[118] See id, at 8.
[119] See id.
[120] See id.
[121] See Dani Rodrik, Growth Strategies, 3, Research (Nov. 2, 2006), <http://ksghome.harvard.edu/~drodrik/ growthstrat10.pdf>.
[122] See id.
[123] See id, at 4.
[124] See id, at 42.
[125] See id, at 27.
[126] See id, at 42.
[127] See Fedorchuk, supra note 3, at 1; citing World Bank, World Development Report 2000/2001: Attacking Poverty, at 8 (2001) (stating that “expanding into international markets promotes economic growth in the developing countries”); see Bartram S. Brown, Developing Countries in the International Trade Order, 14 N. ILL. U. L. REV. 347, 396 (1994) (“since massive additional transfers of foreign aid are unlikely” in the future foreign investment will be “indispensable”).
[128] See Rodrik, supra note 71 at 4.
[129] See id, at 15 (The definition of a growth acceleration is: an increase in an economy’s per-capita GDP growth of 2 percentage points or more (relative to the previous 5 years) that is sustained over at least 8 years. Cases of significant growth accelerations since the mid-1950s that can be identified statistically).
[130] See id.
Countries such as
[131] See id.
[132] See id, at 16.
[133] See id.
Very little noticeable policy reform took place in
[134] See id.
[135] See id.; see also Panicos O. Demetriades & Kul B. Luintel, Financial Reastraints in the South Korean
Miracle, 64 J. DEV. ECON. 459 (2000); Ellen J. Shin, The International Monetary Fund: Is it the Right or Wrong Prescription
for
[136] See id.
[137] See id.
[138] See id.
[139] See id, at 6.
[140] See id, at 27.
[141] See id.
[142] See id.
[143] See id.
[144] See id.; see also Dani Rodrik
(1996)“Understanding Economic Policy Reform,” Journal of Economic
Literature, XXXIV: (March) 9-41.
[145] See id.
[146]
[147] See id.
[148] See id.
[149] See id.
[150] See id.
[151] See
[152] Steven N.S. Cheung, On the New Institutional Economics, CONTRACT ECONOMICS, L. Werin and H. Wijkander (eds.), Basil Blackwell, 1992, 48-65.
[153] See generally id.
[154] H. Demsetz, Ownership and the Externality Problem, PROPERTY RIGHTS:
COOPERATION, CONFLICT, AND LAW, T. L. Anderson and F. S. McChesney (eds.)
[155] See Dorian Selz, Value Webs: Emerging Forms of Fluid and Flexible Organizations – Thinking, Organizing, Communicating, and Delivering Value on the Internet, (1999), Research (Dec. 3, 2006), <http://www.businessmedia.org/modules/pub/download.php?id=businessmedia-11&user=&pass=>. Coase’s 1937 analysis of the nature of the firm focused on the issue how the costs of the price mechanism allows firms to come into existence.
[156] See Michael Trebilcock & Jing Leng, The Role of Formal Contract Law and
Enforcement in
[157] See id.
[158] See David C. Kang, Transaction Costs and Cronyism in East Asia, (2003) Research (Nov. 4, 2006), <http://www.yale.edu/leitner/pdf/PEW-Kang.doc>.
[159] See Corruption Costs $1tn (2004), Research (Dec. 2, 2006), < http://www.cuts-international.org/ pdf/Eq29.pdf>.
[160] See id. citing Daniel Kaufmann, director of World Ban Institute’s (WBI’s) Governance Programme. “He noted that a calculation of total amounts of corrupt transactions is only part of the overall costs of corruption, which constitutes a major obstacle to reducing poverty, inequality and infant mortality in emerging economies.”
[161] See id. Also noting that child mortality can fall as much as 75 percent. Also noting that according to report prepared by the U.S. Senate’s Foreign Relations Committee, corrupt use of World Bank funds may exceed $100 billion and while the institution has moved to combat the problem, more must be done.
[162] See Kang,
supra note 156 at 14. If there is a situation of “mutual
hostages” among a small and stable number of government and business actors, cronyism can actually reduce
transaction costs and minimize deadweight losses, while either too few or too
many actors increases deadweight losses from corruption.
[163] See id., citing Peter Evans, Embedded Autonomy (Princeton: Princeton University Press, 1995) p. 12.
[164] Dani Rodrik, "Getting Interventions right: How South Korea and Taiwan Grew Rich," EconomicPolicy 20 (1995): p. 91.
[165] See Kang, supra note 156 at 8.
[166] See Ricardo Hausmann, Jason Hwang, & Dani Rodrik, National Bureau of Economic Research Working Paper No. 11905, (Dec. 2005), Research (Dec. 3, 2006), < http://nber15.nber.org/papers/w11905.pdf>.
[167] See id.
[168] See id. In other words, factors that encourage FDI seem to trigger growth.
[169] See Chow supra note 41 at 395.
[170] See id.
[171] See id.
[172] See id., at 394.
[173] See id.
[174] See id.
[175] See id.
[176] See id.
[177] See id., at 396.
[178] See id., at 394.
[179] See id.
[180] See id.
[181] See id., at 396.
[182] See id.
[183] See id., at 396.
[184] See id.
[185] See id.
[186] See id., at 397.
[187] See id., at 396.
[188] See id.
[189] See id.
[190] See id.
[191] See id.
[192] See id.
[193] See Fedorchuk, supra note 3 at 6; see also Ibrahim F. I. Shihata, Factors Influencing the Flow of Foreign
Direct Investment and the Relevance of a
[194] See Avi Nov, The “Bidding War” to
[195] See id.
[196] See id., at 845.
[197] See id.; see also James
R. Markusen, Multilateral Rules on
Foreign Direct Investment: The Developing Countries' Stake,
[198] See id.
[199] See id., at 846.
[200] See Fran
Ansley, Standing Rusty and Rolling Empty:
Law, Poverty, and
[202] See id.
[203] See id.
[204] See id.
[205] See id. (noting many “environmentally
destructive mega-projects” in the
[206] See id.
[207] See Nov, supra note 194 at 846.
[208] See id.
[209]
Edward L. Hudgins, The Myth of the Race
to the Bottom, Research (Dec. 2, 2006), <http://www.freetrade.org/pubs/freetotrade/chap3.html>;
see also Bhagwati, Jagdish, and Dehejia,
Vivek H. Free Trade and Wages of the Unskilled
-- Is Marx Striking Again?, In
Bhagwati and Marvin H. Kosters, eds. Trade and Wages: Leveling Wages Down?
[210] See id.
[211] See id.
[212] See Mimi Samuel & Laurel Currie Oats,
From Oppression to Outsourcing: New
Opportunities for Uganda’s Growing Number of Attorneys in
[213] See id.; see also Suwit Wibulpolparsert, Joint-WTO-World Bank Symposium on Movement of Persons Mode 4) Under GATS, International Trade and Migration of Health Workforce: Experience from Thailand, (April 2002) viewed Dec. 1, 2006, <http://www.wto.org/English/tratop_e/ serv_e/symp_apr_02_suwit_e.doc>.
[214] See id. (noting although only 4 percent of the workers in the Sub-Saharan workforce are skilled, 40 percent of those who emigrate are skilled. Put differently, almost half of high-level managers and professionals have deserted their native African countries to seek opportunities around the globe).
[215] See id. Arguing for global governance in this field functions as a "Political Constraint Tool" similar to World Trade Organization (WTO) tariff constraints to help avoid excessive responsiveness to lobbying by interest groups. Also that the global regime should follow a "hard law," rather than a "soft law," approach, and that in general there should be no distinction between developed and developing countries.
[216] See Maurice
Kugler, Brain Drain or Brain Gain?
Effects of the Emigration of Educated Workers, Research (Nov. 28, 2006),
<
http://www.nottingham.ac.uk/economics/res/media/kugler-braindrain%20special.pdf>. ‘The New Economics of the Brain Drain: View and
Counterview’
was a special session organized by Maurice Kugler at
the Royal Economic Society’s Annual Conference at the
[217] See Samuel, supra note 212, at 852.
[218] See id.
[219] See id.
[220] See Kugler, supra note 216.
[221] See id. (showing research supports this effect and shows that it persists even if the destination country’s migratory policy is set solely to maximize the welfare of its native population).
[222] See id., at 853.
[223] Cash sent by emigrants to family members in their home country.
[224] See id., citing Ozden, supra note 155 at 1.
[225] See id. (for example, the World Bank
estimates that
[226] See id.
[227] See World
Bank, International migration,
remittances, and the brain drain ; a study of 24 labor exporting countries,
Volume 1, Research (Dec. 3, 2006) <
http://www-wds.worldbank.org/external/default/main?pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000094946_03062104301450>. Close to 200 million people are living outside of their
home countries, with remittances estimated to reach about US$225 billion in
2005, according to a forthcoming Bank publication, Global Economic Prospects
2006. A survey of Filipino households
shows the remittances they receive mean less child labor, greater child schooling,
more hours worked in self employment and a higher rate of people starting
capital intensive enterprises. In the
[228] See id.
[229] See Kugler, supra note 216.
[230] See id., (critiquing Riccardo Faini’s research exploring the extent to which skilled emigration yields higher remittances given that educated workers may be less likely to remit as they tend to remain in the destination country much longer and bring their families along).
[231] See id.
[232] See id.
[233]
[234] See Samuels, supra note 212 at 853.
[235] See id.; see generally A.B.K. Kasozi, UNIVERSITY EDUCATION IN UGANDA:
CHALLENGES AND OPPORTUNITIES FOR REFORM (2003).
Of the 420,000 graduate students who were in science and engineering
programs in the
[236] See id., citing Gnanaraj Chellaraj et. al., Skilled Immigrants, Higher Education, and
[237] See id.
[238] See id.
One-half of all foreign students who earn Ph.D's in the
[239] Investorwords, Capital Flight: Definition, Research (Dec. 2, 2006), <http://www.investorwords.com/ 704/capital_flight.html>.
[240] See id.
[241] See id.
[242] See id.
[243] See id.
[244] See Enrique R. Carrasco, Encouraging Relational Investment and
Controlling Portfolio Investment in
[245] See Marc Minikes & John Foyt,
[246] See id.
[247] See United Nations, Technical Report of the High-Level Panel on Financing for Development, Research (Nov. 13, 2006), < http://www.un.org/reports/financing/report_full.htm>.
[248] See Minikes, supra note 245 at 455; Carrasco, supra note 244 at 552; see also Kang, supra note 158.
[249] See id.
[250] See James Hydzik, Foreign Direct Investment: Flying High, (Aug. 2006) Research (Oct. 21, 2006) <http://www.fdimagazine.com/news/categoryfront.php/id/311/LITHUANIA.html>.
[251] See id.
[252] See id.
[253] See id.
[254] See id.
[255] See World Bank, Trade, FDI and Transit Highlights, Research (Nov. 2, 2006), <http://lnweb18.worldbank.org/ECA/eca.nsf/Attachments/baltic6/$File/6tradefdi.pdf>.
[256] See id.
[257] See id.
[258] See id.
[259] See Hydzik, supra note 250.
[260] See id.
[261] See id. (noting research carried out by
Nordea Bank and
[262] See id., citing Renata Dromantaite, director-general of the Lithuanian Development Agency.
[263] See id.
[264] See id.
[265]
[266] See id.
[267] See id.
[268] See id.
While
[269] See id.
[270] See id.
[271] See id.
[272] See id.
[273] See id.
[274] See id.
[275] See id.
[276] See id.
[277] See id.
[278] See id.
[279] See id.
[280] See id.
[281] See id. (acknowledging people are
returning, especially in knowledge-intensive industries, such as biotechnology,
and
[282] See id.
[283] See id. As a consequence, the development of this
infrastructure also serves as an incentive for FDI.
[284] See id.
[285] See id.
[286] See id.
[287] See id.
[288] See id.
[289] See CIA – The World
[290] See id.; see also World Bank Group, Bhutan – Data Profile, Research (Nov. 22, 2006), <http://devdata.worldbank.org/external/CPProfile.asp?PTYPE=CP&CCODE=BTN>.
[291] See id.
[292] See id. Only 24 km of paved highways crisscross the country.
[293] See id.; see also World Bank Group, supra note 290.
[294] See World Bank Group, supra note
290. The most recent figures reported on
the World Bank’s website as of Dec. 18, 2006, was for 2005.
[295] See id.
[296] See
[297] See id.
[298] See id.
[299] See id.
[300] See id.
[301] See CIA World Factbook, supra note 289.
[302] See
[303] See id. Technological advancements are currently major concerns for the Bhutanese government. Almost two thousand people now have access to the internet (doubled from 2003).
[304] See id.
[305] See Saugata Bandyopadhyay, Gross National Happiness and Foreign Direct
Investment in
[306] See id.
[307] See id.
[308] See id.
[309] See id.