Seminar Essay by Bradley E. Faber

‘Law of Nationbuilding’

Submitted: December 21, 2006






Economic Growth of Developing Countries: Is Foreign Direct Investment Really Necessary?














            For centuries, the world’s wealthiest nations have developed their economies, built their armies and plundered their neighbors seeking to expand their empires, obtain more resources and increase their general wealth.  Since the end of World War II, the world’s wealthiest nations, particularly western countries, have attempted to remain reserved from colonizing other lands and instead have attempted to work with developing countries through diplomacy, treating them as partners rather than subordinates.[1]  Through the establishments of world governmental organizations relying heavily on international law and legal institutions, present day powers (namely western countries) have attempted to respect the sovereignty of smaller, less wealthy states, particularly those in the developing world.[2]  Through the use of trade and investment treaties, western countries allegedly are able to respect the independence of less developed states while still finding ways to expand their own markets.[3]

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”).


An Economic Framework


The Classical School of economic theory began with the publication in 1776 of Adam Smith's monumental work, The Wealth of Nations.[20]  The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.  Under this theory, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace.[21]  Smith described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole.[22]

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


            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 “Washington consensus” argues that for countries to develop, they must take steps towards development.[124]  These statements are drawn from empirical research on national institutions, primarily focused on the protection of property rights and the rule of law.[125]  The steps suggested by the World Bank include: tightening down on fiscal discipline; re-orientating public expenditures; providing tax reform; liberalizing interest rates; providing competitive exchange rates; liberalizing trade; securing property rights for individuals and more generally privatization; and opening up to FDI.[126]  The World Bank further states that opportunities for developing countries require encouraging effective foreign investment and that "[i]nvestment and technological innovation are the main drivers of growth in jobs and labor incomes."[127]  

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 U.S. companies, the commercial value of their bands and the goodwill associated with their brands constitute the most valuable part of their business.[185]  This is increasingly true in a global marketplace where consumer demand for well known brands and leading edge technology continues to be on the rise.[186]  The U.S. business concern may not wish to cede such control over its intellectual property to a foreign business entity.  Providing access to one’s own proprietary technology to a third party creates some risks of breaches of security, improper use, infringement, and piracy.[187]  No matter how well drafted the licensing agreement, effective enforcement of these agreements can be difficult and time consuming.[188]  Some companies deal with these risks by licensing only their secondary technologies, causing many licensees in developing nations to complain that companies never license their most advanced and valuable intellectual property.[189]

But licensing only secondary technology also presents limitations for the U.S. business concern as it will not be able to market its leading-edge products.[190]  These considerations have led some U.S. business owners to take a total or partial ownership interest in the foreign business entity that is given access to its proprietary technology.[191]  By being the owner of the foreign business entity, the U.S. business concern is in a better position to exercise greater control and to protect its most valuable technology.[192]



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 Washington consensus) represent a sphere of decision-making largely beyond the influence of citizens and citizen movements in poor and rich countries alike.[206]

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 United States, their impact, particularly in the information technology fields, is substantial, especially on innovation.[235]  The presence of these foreign students also has a significant impact on innovation.[236]

The last of these findings demonstrates that the presence of foreign graduate students benefits not only the individual and the university but also the United States as a whole.[237]  The United States continues to benefit from the brain drain because many of these foreign students do not return to their home countries after they graduate.[238]



Capital Flight


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] 






Lithuania: Successful Development Utilizing FDI


Fifteen years after regaining independence following the collapse of the Soviet Union, Lithuania is tying itself tightly to European and multilateral frameworks.[250] Meanwhile, its economy is taking off and Lithuania’s economy continues to grow, in large part to its aggressive FDI strategies.[251]  Part of its success is due to its geographic assets of location on the eastern frontier of the EU, but also its balanced focus, recognition and development of its strengths (comparative advantages), ranging from education, especially in science and technology, to infrastructure.[252]  In striving to consistently improve its real GDP growth rate, Lithuania has focused on each of the factors of the GDP equation by spending on capital, by increasing its exports, and by utilizing investment, specifically by encouraging FDI.[253]

Foreign investment has been a significant element of Lithuania’s economic boom since the re-establishment of independence in 1991.[254]  Through growing FDI, Lithuania’s firms and industries usually receive new technological and management know-how which is difficult or impossible to gain in other ways.[255]  Furthermore, because FDI tends to accumulate into profitable industries, industries or firms with a high level of FDI tend to be more profitable than peer firms or industries with less FDI.[256]  The development of the FDI stock in Lithuania demonstrates vividly the economic potential within this country.[257]  Like the other Baltic states, Lithuania’s FDI stock in 1991 was extremely low, but growth over the past decade has been very rapid in all of the Baltic states especially in Lithuania.[258] 

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 Lithuania currently accounts for half of the gross domestic product of the Baltic states.”[262]

Joining regional governmental organizations such as the European Union and the North Atlantic Treaty Organization has secured Lithuania’s political position in Europe and has changed the economic landscape.[263]  As the country reintegrated with Europe, its focus changed.  In response to a job market where approximately 70% of the population has a university education, a cornerstone of the government’s development policy and the core of it’s FDI strategy has been to develop medium and high-tech industries in the country.[264]

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 Lithuania’s “race to the bottom” has instead been termed “fair play.”[267]   As a new member of the EU, and with the experience Lithuania has gained in creating modern legislation from scratch, making changes to domestic law in order to come into compliance with EU requirements is taken seriously.[268]  Three pieces of national legislation have been amended following complaints received from EU companies and citizens.[269]  Furthermore, Lithuania has only four open cases regarding infringement of EU law, the second best performance among the EU25.[270]

Deregulation of the marketplace and expedient moves to privatize business have resulted in Lithuania’s economy developing much faster that many other former Soviet states.[271]  Business organizations and trade groups are active in giving input relevant to the creation and amendment of laws and are another strategic piece of Lithuania’s institutional framework.[272]  Since forming in 1993, the agency “Investor Forum” has been able to give the government advice and a perspective from local and foreign businessmen.[273] 

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 Lithuania’s existing expertise, looking to further expand Lithuania’s areas of comparative advantage relative to its trade partners.[277]  The ministry promotes clustering, both in the form of networking and by working toward the creation of technology and industry parks in order to foster interaction between foreign companies and domestic firms that may be useful partners and suppliers.[278]

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 Lithuania is relying on to increase its GDP per capita.  Governmental expenditure on capital development in the form of infrastructure continues to be a priority as well.  Transport and logistics are a top national priority, with several centers already established around the country, taking advantage of a well-developed sea and road infrastructure.[283]  

Lithuania’s failed bid to join the eurozone this year paradoxically highlighted its ever improving economic strength.[284]  With the only failing indicator being an inflation rate 0.1 percent over the limit, the country will likely be invited to adopt the euro in the near future.[285]  Euro adoption is expected to bring advantages related to currency risk and, more important, is expected to reduce cross-border transaction costs, especially for smaller companies.

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 Lithuania’s development.[287]  Investments, in particular FDI, into the development of the production of medium and high technologies are required to maintain the national economy at its high pace of growth.[288]


The Kingdom of Bhutan: Growth without FDI - More Than Statistical Anomaly?


Bhutan is a small country both geographically and economically, with a population estimated just over two million people, situated high in the Himalaya Mountains bordering both China and India.[289]  Bhutan is one of the world’s smallest and least developed nations with an economy that ranks 175th in the world in total size and 199th in real GDP per capita.[290]  The economy of this landlocked country is based primarily on subsistence agriculture and forestry, which combine to provide the main livelihood for more than 90% of the population, and its only other key resource is hydroelectricity that is primarily sold to India.[291]  Rugged mountains dominate the terrain and make the construction of roads and other infrastructure difficult and cost prohibitive.[292]  Detailed controls and uncertain policies in areas like industrial licensing, trade, labor, and finance continue to hamper foreign investment.[293]  However, real GDP per capita has grown in this country at a rate of almost 6%.[294]  This ranks 71st in the world.[295] 

Bhutan's early history is steeped in Buddhist tradition and mythology.[296]  The kingdom's recent history begins with a hereditary monarchy that was founded in the 20th century and continued the country's policy of isolationism.[297]  It was under the leadership of the third king that Bhutan emerged from its medieval past of serfdom and reclusion.[298]

However, despite the speed of modernization, seen elsewhere in the world, Bhutan has maintained a policy of careful, controlled development in order to preserve its national identity.[299]  Tourism is a restricted activity, yet is very significant, being the country's largest source of foreign exchange.[300] 

The economy is closely aligned with India's through strong trade and monetary links and dependence on India's financial assistance.[301]  Due to cultural reasons, most development projects, such as road construction, rely on migrant labor from India.[302] 

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]  Bhutan does not recognize grant aid from India as FDI.[307]  Its sales of lumber and hydroelectricity are calculated in terms of trade – not FDI.[308]  Bhutan receives less than $3 per capita in FDI each year.[309]




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, Lithuania looks to have attained sustainable economic growth, focused around a balanced strategy that incorporates domestic as well as foreign investment into its economy. 

On the other hand, Bhutan has displayed remarkable growth rates over the past decade.  Bhutan has a replacement rate of population, and sells renewable resources, with cost of delivery on the purchaser (India).  Bhutan’s unique situation potentially means that it can maintain its level of GDP.  However, in order to maintain its pace of “GDP Growth,” and ensure this growth is sustainable, even Bhutan will likely have to develop some kind of market reform in the near future. 

[1] See Jonathan Zasloff, Law and the Shaping of American Foreign Policy: From the Gilded Age to the New Era, 78 N.Y.U. L. Rev. 239, 246 (2003).

[2] See id.

[3] See Daniil E. Fedorchuk, Acceding to the WTO: Advantages for Foreign Investors in the Ukranian Market, 18 N.Y. Int’l L. Rev. 1, (2002).

[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, Luxembourg, had a per capita GNP of $44,640 with 3.8% annual growth; at the same time, the poorest country, Sierra Leone, had a $130 per capita GNP with annual decline of 8.1%.

[7] See Mark B. Baker, Integration of the Americas: A Latin Renaissance or a Prescription for Disaster?, 11 Temp. Int’l & Comp. L.J. 309, 331 (1997) (promoting a greater emphasis on foreign investment to developing countries in the western hemisphere).

[8] See generally World Bank, WORLD DEVELOPMENT REPORT 2005: A BETTER INVESTMENT CLIMATE FOR EVERYONE, Research (Dec. 18, 2006), 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 Bilateral Investment Treaty, 92 Am. J. Int’l L. 621, 624 (1998).

[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 W. Dunfee, Fighting Corruption: A principled Approach; The C2 Principles, 33 Cornell Int’l L.J. 593 (2000).

[20] See Federal Reserve Bank of San Francisco, Major Schools of Economic Theory, Research (Oct. 22, 2007), <>.

[21] See id.

[22] See id.

[23] See id.

[24] See id; see also Heidi Li Feldman, The New Mexico Law Review Presents a Symposium on Civil Numbers: Examining the Spectrum of Noneconomic Harm, 36 N.M. L. Rev. 375, 380 (2005).

[25] See Amartya Sen, Fertility and Coercion, 63 U. Chi. L. Rev. 1035, 1036 (1996).

[26] See id.

[27] See id; see also Federal Reserve Bank of San Francisco, supra note 19.

[28] See id.

[29] See id.

[30] See Federal Reserve Bank of San Francisco, supra note 19.

[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) <>; Caves. Multinational Enterprise and Economic Analysis, Cambridge: Cambridge University Press, Pp3-11; 24-27 (1999).

[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, Aspen Pub. (2005).

[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), < growth.html>.

[72] See id.

[73] See id.

[74] See Investor Words, Economic Growth Rate: Definition, Research (Nov. 22, 2006), <>.

[75] See id.

[76] Measuring the Economy I, Gross Domestic Product (GDP): Computing GDP, Research (Dec. 4, 2006), <>.

[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. Dean Dorsey Ellis, Jr., John Bowen, & Clark Cunningham, Rethinking of Equality Global Conference, 75 Wash. U. L. Q. 1586, 1625 (Win. 1997).

[88] Measuring the Economy I, supra note 76.

[89] See Roger A. McCain, Rates of Growth, Research (Nov. 22, 2006), < >.  Dr. Roger A. McCain is a professor of economics at the LeBow College of Business at Drexel University.

[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), < 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), < 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) <>.

[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), < 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 Taiwan, Korea, Indonesia, Brazil, China, Chile and Argentina would be expected to appear in an analysis of countries that have experienced economic growth spurts, but an analysis also yields a large number of much less well-known cases, such as Egypt and Pakistan).

[131] See id.

[132] See id, at 16.

[133] See id.  Very little noticeable policy reform took place in Pakistan in 1976 or in Syria in 1969, yet significant economic results were seen in both cases.

[134] See id.  South Korea’s experience in the early 1960s is one example of this.  The military government that took power in 1961 did not have strong views on economic reform, except that it regarded economic development as its key priority.  It moved in a trial-and-error fashion, experimenting at first with various public investment projects.

[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 Korea?, 22 Hastings Int’l & Comp. L. Rev. 597 (1999). 

[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] Id.

[147] See id.

[148] See id.

[149] See id.

[150] See id.

[151] See Barcelona Traction in the 21st Century: Revisiting its Customary and Policy Underpinnings 35 Years Later, 42 Stan. J. Int’l L. 237, 260 (2006).

[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.) Princeton University Press, 2003.

[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),  <>.    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 Economic Development, 92 Va. L. Rev. 1517, 1524 (2006); Douglass C. North, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 54 (1990).

[157] See id.

[158] See David C. Kang, Transaction Costs and Cronyism in East Asia, (2003) Research (Nov. 4, 2006), <>.

[159] See Corruption Costs $1tn (2004), Research (Dec. 2, 2006), < 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), <>.

[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 Multilateral Investment Guarantee Scheme, 21 INT’L LAW. 671, 674 (1987).

[194] See Avi Nov, The “Bidding War” to Attract Foreign Direct Investment: The Need For a Global Solution, 25 Va. Tax Rev. 835 (2006).

[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, University of Colorado and Nat'l Bureau of Econ. Research (Oct. 7, 1998), < RefID=25345>.

[198] See id.

[199] See id., at 846.

[200] See Fran Ansley, Standing Rusty and Rolling Empty: Law, Poverty, and America's Eroding Industrial Base, 81 Geo. L.J. 1757, 1779-82 (1993).

[201] See Jeremy Brecher & Tim Costello, Global Village or Global Pillage: Economic Reconstruction From the Bottom Up, South End Press (1994) Research (Dec. 2, 2006), < Brecher/Race%20to%20Bottom_GVGP.html>.

[202] See id.

[203] See id.

[204] See id.

[205] See id. (noting many “environmentally destructive mega-projects” in the Third World are financed by the World Bank' and GATT rules have been used to challenge such environmental measures as US. laws protecting dolphins).

[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), <>; 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? Washington, D.C.: AEI Press, 1994.

[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 Today’s Flattening World, 4 Seattle J. for Soc. Just. 835, 852 (2006) citing CAGLAR OZDEN & MAURICE SCHIFF, Introduction, in INTERNATIONAL MIGRATION REMITTANCES & THE BRAIN DRAIN 11 (2006).

[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, < 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), <>.  ‘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 University of Nottingham on Tuesday, March 22, 2006.  Kugler is in the School of Social Sciences at the University of Southampton.

[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 India received $21.7 billion in remittances, while China received $21.2 billion, and Mexico received $18.1 billion).

[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) <>.  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 Guatemala case study, remittances reduced the level and severity of poverty. The biggest impact was on the severity of poverty, with remittances making up more than half the income of the poorest ten percent of families.  The report shows the money migrants sent back to Guatemala was spent more in investments - such as education, health and housing, rather than on food and other goods.

[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] Id.

[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 United States in 1995, almost one quarter were foreign students.  In that same year, 39 percent of natural science, 50 percent of mathematics and computer science, and 58 percent of engineering doctoral degrees awarded in the United States went to foreign students.

[236] See id., citing Gnanaraj Chellaraj et. al., Skilled Immigrants, Higher Education, and United States Innocation, in INTERNATIONAL MIGRATION, REMMITANCES & THE BRAIN DRAIN 247-49 (2006).  Research shows that a 10 percent increase in the number of foreign graduate students increased total U.S. patent applications by almost 5 percent, patent grants earned by universities by 6 percent, and patent grants by other commercial firms by almost 7 percent. 

[237] See id.

[238] See id.  One-half of all foreign students who earn Ph.D's in the United States remain in the United States.

[239] Investorwords, Capital Flight: Definition, Research (Dec. 2, 2006), < 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 Developing Countries in the Aftermath of the Mexican Financial Crisis, 34 Colum. J. Transnat’l L. 539, 551-552 (1996). 

[245] See Marc Minikes & John Foyt, Argentina: Austerity Measures  Capital Flows – Will the Peso Peg Be Held?, 1 UCLA J. Int’l L. 7 Foreign Aff. 431, 452-453 (Fall/Win. 1996-97).

[246] See id.

[247] See United Nations, Technical Report of the High-Level Panel on Financing for Development, Research (Nov. 13, 2006), <>.

[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) <>. 

[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), <$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 Estonia’s Turku School of Economics and Business Administration).

[262] See id., citing Renata Dromantaite, director-general of the Lithuanian Development Agency.

[263] See id.

[264] See id.

[265] Id., citing Lena Dromarkienne, under-secretary at the ministry of the economy.

[266] See id.

[267] See id.

[268] See id.  While Lithuania is not partaking of the race to the bottom as it is typically known, the state is legislating to quickly comply with EU requirements with less apparent willingness for sovereignty relative to its EU counterparts.

[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.  Lithuania has long been a world-recognized leader in high-powered laser research and production, and its molecular biotechnology segment features co-operation between the country’s Institute of Biotechnology and private firms.  Also, electronics was a priority development area in Soviet times, and the television manufacture segment has kept in step with changes in technology, leading to a Korean firm setting up a production facility in the country.

[278] See id.

[279] See id.  Vilnius’s Sunrise Valley park is intended to commercialize IT innovation from local universities, and the Kaunas High-Tech and IT Park is already one of the fastest-growing facilities of its type in Europe.  With five of the top ten IT companies in the Baltic states headquartered in Lithuania, increasingly specialized application development can be expected.

[280] See id.

[281] See id. (acknowledging people are returning, especially in knowledge-intensive industries, such as biotechnology, and Lithuania’s construction industry has started matching salaries found elsewhere).

[282] See id.  Vilnius is traditionally the country’s investment center into services and sciences and property development.  Kaunas is home to most of the metals processing and agricultural production.  Klaipeda’s FEZ hosts a concentration of plastics and packaging manufacturers, among others.

[283] See id.  As a consequence, the development of this infrastructure also serves as an incentive for FDI.  Klaipeda’s ice-free port handles the largest volume of containers in the Baltics.  The goods that land there can end up in Vilnius’s thriving retail stores or in Kaunas, which is at the intersection of two important European routes, for further movement along the eastern border of the EU or into other countries of the former Soviet Union.

[284] See id.

[285] See id.

[286] See id.

[287] See id.

[288] See id.

[289] See CIA – The World Factbook, Bhutan, Research (Nov. 16, 2006), <>.

[290] See id.; see also World Bank Group, Bhutan – Data Profile, Research (Nov. 22, 2006), <>.

[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.  Bhutan ranks 138th of 175 in the world for ease of doing business.

[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.  Bhutan displayed a 5.8 percent growth rate for 2005.

[295] See id.

[296] See Bhutan, History, Research (Dec. 1, 2006), <>.

[297] See id.

[298] See id.

[299] See id.

[300] See id.

[301] See CIA World Factbook, supra note 289.

[302] See Infoplease, Bhutan, Research (Dec. 13, 2006), <>. 

[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 Bhutan, Research (Dec. 12, 2006), <>.

[306] See id.

[307] See id.

[308] See id.

[309] See id.