Upgrading the Diamond of Developing Countries through Inward FDI: The Case of Four MNEs in the Information Service Industry of Barbados

Article excerpt

Abstract

* This study examines research questions relating to the attractiveness of the business environment of the Caribbean, notably Barbados, to the multinational enterprise.

* Specifically, the research assesses the proposition that the interaction between the ownership advantages of four information service MNEs and the locational advantages of Barbados has resulted in an upgrading of the country's attractiveness as a location for FDI.

Key Results

* The results indicate while the MNEs initially used the natural assets of the country, their activities resulted in the quality of the workforce being upgraded towards higher value-added, skill-intensive activities.

* The analysis also highlights that the mere presence of MNEs does not necessarily result in the upgrading of a country's locational advantages. The role of the government in fostering economic development is also critical.

Introduction

Multinational enterprises are increasingly locating operations in developing countries. Indeed, the mid 1980s witnessed a resurgence of foreign direct investment (FDI), directed by the multinational enterprise (MNE), into the economies of the developing world. Annual growth rates of FDI inflows into this region averaged 22 per cent during the 1985-1989 period (UNCTAD 1991, p. 9). This growth in FDI inflows continued unabatedly into the 1990s with total FDI flows soaring to a record level of US$ 129 billion in 1996 (UNCTAD 1997, p. 5).

In this context, one phenomenon that has gone relatively unnoticed is that several of the smaller and less industrialised developing countries, such as the Caribbean, which receive less flows of FDI, appear to be more dependent on these inflows. The Caribbean region (1) has become increasingly dependent on FDI for the financing of its domestic investment. This dependence is clearly seen among several of the larger economies of the region. During the five-year period, 1984 to 1989, FDI contributed a mere 3 per cent of Barbados' gross fixed capital formation. However, by 1994, this figure rose to 5 per cent. In Jamaica, the figure was 2 per cent for the 1984 to 1989 period, but increased dramatically to 11 per cent by 1994. In Trinidad-Tobago, this increase was even more striking, with the ratio of FDI to gross fixed capital formation climbing from 6 per cent in the 1984 to 1989 period, to an astonishing 79 per cent by 1994. (2)

Evidently, FDI, as directed by the Multinational Enterprise (MNE), is playing an increasingly important role in the economic development of the Caribbean region. This region is small. The entire English-speaking Caribbean comprises a mere 5.9 million people (United Nations 1997). Its economies are monocultural, specialising in activities that are especially vulnerable to the vagaries of the international economy (tourism) or ones that have lost their growth dynamics (sugar, bauxite). The region is in economic crisis as evidenced by its disappointing economic performance over the last decade (Caribbean Commonwealth Secretariat 1988). Clearly, the renewed inflows of FDI are vitally needed in this region. With the recent implementation of the North American Free Trade Agreement (NAFTA), the issue of renewed FDI flows into these countries has become even more critical. It has been indicated that NAFTA will likely result in a diversion of foreign investment away from low-cost economies, notably the Caribbean, into Mexico (UNCTAD 1992, p. 28, Gill 1993).

These issues thus suggest the following research questions: How attractive is the business environment of the Caribbean to the multinational enterprise? Do the activities of the investing MNEs result in improvements to this business environment? This study uses a framework drawn from the Dunning tradition to answer these questions. In addition, because of the diversity of the economic structure, growth rates and performance of the countries in the Caribbean region, it will focus only on one Caribbean country. …