FDI AND EXPORT COMPETITIVENESS: Bad News, Good News, Surprising News Policies Issues for Developed, Developing Countries, and Multilateral Lending Institutions Theodore H. Moran Marcus Wallenberg Professor of International Business and Finance School of Foreign Service Georgetown University

Foreign direct investment comes in three – perhaps four -- distinct forms:

FDI in manufacturing and assembly;

FDI in extractive industries (oil, gas, and mining);

FDI in infrastructure (power generation, electrical utilities, water and sewerage, toll roads, airports, telecommunications); and

FDI in services (usually included within the category of FDI in manufacturing and assembly)

Manufacturing FDI takes two distinct forms.

The major distinction is between FDI that is oriented toward domestic markets (often protected domestic markets), and

FDI that is oriented toward export markets (in particular destined to be an integral part of the parent MNCs global supply chain).

The Bad News As part of the disillusionment with efforts at import substitution, the evidence from FDI that was used by host authorities within protected host markets began to show quite dismal results in the 1980s and 1990s.

Performance Requirements A prominent feature of the import- substitution-via-FDI strategy was to impose what were called performance requirements on the foreign investors as a condition of their being granted access to the domestic economy –

the most frequent performance requirements were domestic content requirements, joint venture requirements, and other technology sharing requirements.

Cost-benefit analyzes of individual FDI projects oriented toward protected domestic markets – valuing all inputs and outputs at world prices – showed that the great majority subtracted from host economic welfare, and retarded the prospects for broader development.

The Good News The alternative strategy – using FDI in manufacturing and assembly – to bolster export-led growth held pleasant surprises.

The evidence of the 1990s and early 2000s showed a pattern that was much more intimate than a search for inexpensive parts.

The international parent exercises what has come to be characterized with the phrase parental supervision over all stages and supply relationships, with real-time upgrading of technology and management.

Multinational corporate investment in the developing world is conventionally pictured as flowing into least-skilled sweatshop- type jobs.

But the data show that the flow of foreign direct investment to medium-skilled industrial sectors in developing countries –

such as electrical equipment, electronics, semiconductors, autos and auto parts, industrial machinery, chemicals and chemical products –

is more than ten times larger each year than the flow to low-skill, labor-intensive operations, and speeding up over time.

Here multinational investors pay their workers two to three times as much for basic production jobs, two to three times as much for basic production jobs, and perhaps ten times as much for more technical and supervisor positions, and perhaps ten times as much for more technical and supervisor positions, in comparison to what is earned by employees in comparable positions in lower-skilled MNE operations. in comparison to what is earned by employees in comparable positions in lower-skilled MNE operations.

The Surprising News Many development strategists had feared the using-FDI-for-export-led- growth approach would leave the host countries taking part only in the most simple assembly operations, with little value added and no backward linkages.

But the data, over time, have indicated otherwise.

Evidence from the past two decades has shown

Contract Manufacturing that the most powerful mechanism for backward linkages from foreign multinationals to local firms has been the phenomenon of contract manufacturing of the latter for the former.

As part of this process, many local firms become certified as Original Equipment Manufacturers (OEM), qualifying them to supply the MNC parent anyplace in the world.

Well Constructed Econometric Studies Garrick Blalock and Paul J. Gertler. Welfare gains from foreign direct investment through technology transfer to local suppliers. Journal of International Economics. Forthcoming. Javorcik, Beata Smarzynska Does FDI increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review 94(3)

Latest generation of econometric studies show abundant externalities in the vertical direction.

financing and advance payment; training of employees; help with quality control; lending/leasing equipment; supplying production technology and organizing production lines; initiation to exporting.

Policy Implications for Developing Countries

In the Hong Kong Ministerial, developing countries have now been empowered to demand that foreign investors meet old and new kinds of performance requirements for no less than seven more years, and possibly until 2020.

Governments that actually pursue this strategy are sorely misguided about how foreign direct investment can best contribute to host country growth and welfare.

Policy Implications for Multilateral Lending Institutions

Information market failures and FDI promotion Genuine business climate reform with champions, policy advocacy.

Policy Implications for Developed Countries

Outward FDI and the Great Sucking Sound? Or, outward FDI as a win-win process for developed and developing countries?