Foreign Direct Investment in Russia: A Strategy for Industrial Recovery

By Paul Fischer | Go to book overview

10
Strategic State Guidance for FDI

10.1 Russia's difficult road to becoming a modern industrial nation

An advanced economy is characterized by rising productivity at home and relocation of specific production processes to countries with better factor conditions through FDI and global sourcing. Burdened by the total collapse of domestic production and the replacement of domestic products by imports, the Russian economy is still very far from this stage.

Compared with industrialized countries, which record a fairly balanced FDI situation after decades of intensive trade leading to high economic integration, Russia has apparently not progressed beyond the initial stages of the investment development path. 1 Overall inward FDI has remained negligible and most incoming projects have only targeted raw materials or low value-added industries. 2 Finished and high value-added products are mostly imported. Financial and managerial weaknesses prevent Russian enterprises from acquiring domestic market share, let alone acquiring stakes in foreign companies. Outward FDI flows, which would be an additional sign of economic progress, are lower than at the time of the Soviet Union.

Russia's overdependence on imports of essential finished products strains the country's balance of payments. More favourable conditions for TNCs would attract knowledge-intensive industries so that Russia could move beyond the purely factor-driven stage of economic development focus on raw materials sectors and labour-intensive industries typical of a developing rather than an advanced economy (Figure 10.1). To catch up with China, India, Mexico and other competing emerging economies, 3 Russia should proceed to the subsequent investment- and innovation-driven stages by better use of its scientific base and raw material resources.

With each passing year since the reform process started, Russia has experienced a deterioration of its economy (capital stock, plants and

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