Foreign Direct Investment and Development

A new Peterson Institute for International Economics monograph from Georgetown University’s Ted Moran takes a look at what the latest research tells us about the connections between Foreign direct investment (FDI) and development.   The report assess the latest academic research and finds that previous researchers had not effectively captured the local economic impacts of FDI.   Is FDI good for development?  Moran notes that the correct answer is:  “It Depends.”  In some cases, such as FDI for resource extraction purposes, FDI can serve to encourage corrpution (e.g. oil in Nigeria).  In countries with very low skill levels, FDI in manufacturing sectors can have major local benefits (e.g. textile production in Central America and Africa).

Perhaps the most interesting parts of this study examine issues related to US corporate outsourcing and the development of the Chinese economy.   Moran notes that this process of outward investment yields great benefits to the US economy.  US firms that engage in outward investment export more, are more innovative, more productive, and provide higher-paying jobs.   Most American multinationals still remain closely wedded to home, with 70% of operations, more than 50% of employees, and 87% of R&D still located within the US.

On the flip side, Moran finds that foreign investment in China is yielding fairly limited spillovers for the Chinese economy.  In recent testimony before the US-China Economic and Security Review Commission, Moran argues that “the impact of multinational corporate investment in China has been largely confined to building plants that incorporate capital, technology, and managerial expertise controlled by the foreigner.”  In his view, China remains a “workbench economy,” i.e. a low value assembler of more sophisticated parts imported from abroad.”

Moran’s view is that FDI has great benefits for the US economy, and that it downsides have been overstated.  However, at the same time, he does recognize that dislocations and plant closures do result from these processes.  However, he notes that the appropriate solution is more effective trade adjustment programs and strategies, as opposed to new limits on FDI.  The jury is still out on these important questions, but this new research suggests that some of the worst-case scenarios about the impacts of FDI may be overblown.

The study, Foreign Direct Investment and Development:  Launching a Second Generation of Policy Research, by Theodore H. Moran, can be purchased here.

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