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Published Date: Feb 1, 2001

Trends in Foreign Direct Investment & Trans National Corporate Behaviour (W-59)

Faisal Haq Shaheen
2001

Introduction

The acceleration of global economic integration has prompted many neo liberal economists to regard foreign direct investment as the elixir of economic revival for developing economies. However, while it can extend efficiency and productivity of a free market concept to developing countries, it brings a series of risks that expose marginalized domestic sectors and consumers to the ruthless and often volatile economic environment of the free market.

Liberalization of trade and opening of markets to foreign investor flows has exposed inefficiencies and limitations of the developing governments’ attempts to foster a productive, progressive and competitive domestic economic environment, capable of producing firms that are competitive in the global marketplace.

Though corrupt and nepotistic elements have been reduced in the domestic investment sector, new flows of capital need to be developed to fill the void. Limited availability of domestic capital and dwindling foreign exchange reserves have prompted many economists to hedge ‘economic revival’ on foreign direct investment (FDI). Unfortunately, investors in the global economic and financial markets are scared of political instability in Pakistan. The meager FDI flows that have trickled into the region since 1990s, are witness to this fact.

While the FDI is competed for, by developing nations, corporate entities (global stockholders of the FDI flows) are surpassing the GNPs of nation states with their global revenues. Of 100 largest economies, at least 51 are corporate. A valid developing economy concern surfaces from the high leveraging power that the corporate entities have over developing economies. Trans-National Corporation (TNCs) seem to be institutional mechanisms, which exploit and extend market failures in the name of shareholders’ wealth, rather than agents of global allocative efficiency. The TNC’s institutional superiority arises from its ability to extract rents from other significant stakeholders such as states and workers through structurally increasing bargaining power (driven by globalization) over these groups. Industries of weak developing countries are often ill prepared to compete with the TNCs and risk marginalized market share, take-over and bankruptcy.

While the FDI is sought to bring new investment and inflows to cash strapped economies, ‘sovereignty stripping’ of local industry may take place. The Canadian example of the 1990s measured that up to 90 per-cent of the FDI went towards takeover of existing corporations (Clarke and Barlow, 1997:65-6). Poor countries have correlated higher capital mobility with higher the TNC bargaining power in their dealings with both governments and workers.

The TNC growth and consolidation of power continues at an unprecedented pace. In 2000, there were over 64,000 TNCs whereas in 1996, they were 40,000, and 7,000 a decade before. Rapid growth has been experienced in services rather than manufacturing. Most of the FDIs, at least in Asia, have been in tertiary sector rather than primary or secondary sector. The TNCs vary in size and concentration of power in larger TNCs outweighs budgets of economies. In 1996, top 200 TNCs had combined annual sales bigger the combined economies of 182 of the world’s 191 economies. The FDI from the 1,000 largest corporations emanates from OECD members: the United States, Europe and Japan.

Some sectors of South Asia have benefited indirectly from the short term of the new shift. For example, some 100 American firms outsource software code cutting overnight via electronic networks to India where programmers are paid 25% less than the American rate. However, if such a trend continues, long term benefits of capturing profit shares locally and growing competitive domestic firms, may be reduced to dependant sub- contracting sector.

At macro level, however, a developing state increasingly loses control to capitalist economy in its ability to control, monitor or influence what its domestic economy produces; where the resulting remittances go and adjustment of macro economic controls such as tax and interest rates. The border-less, nonsubsidized, duty-free global economy leaves little room for government intervention. The government might be more effective in assisting indigenous industry and the most isolated constituents of its population.

This paper will examine positive and negative aspects of foreign firm involvement in developing economies with specific reference to Trans-National Corporations, the most common entry vehicle of the FDI. The discussions and debates on this topic during the past decade, having relevance to the recent developments, will be paraphrazed and summarized. Following analysis and a few case studies, we hope to have in place a framework on expectations from the TNCs, which is required by developing governments to deal with their coming and increasing undermining of the policy that they bring in (vis-a-vis the World Trade Organization (WTO) agreements and liberalization policies under the IMF and the WB).

We are concerned that in absence of strong domestic investment, sector leverage and local industrial power, the FDI will become more a tool of serving foreign economic interests at home rather than development of the nation.