Globalization and the Quality of Foreign Direct Investment

By Srivastava, Sadhana | Journal of Southeast Asian Economies, August 2003 | Go to article overview
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Globalization and the Quality of Foreign Direct Investment

Srivastava, Sadhana, Journal of Southeast Asian Economies

Globalization and the Quality of Foreign Direct Investment. By Nagesh Kumar. New Delhi: Oxford University Press, 2002. Pp. 257.

This book is a valuable addition to the large literature on foreign direct investment (FDI) policies in developing countries. Traditionally, the focus of these policies has been on the quantitative dimension, that is, the amount of FDI which is attracted by the host country. This book, however, also examines the qualitative dimension of the FDI as well.

It is the combination of the quantity and the quality of FDI which determines its impact on the developmental goals of the host country. It is against the above background that this book analyses the role of different structural and geopolitical characteristics and the policy regime of the host countries in explaining the patterns of quantity and quality of FDI inflows. This is to assist countries to assess their comparative advantage for specific types of inflows so as to differentiate and strategize between various forms of FDI to maximize the benefits from it. It further attempts to analyse the implications of the emerging World Trade Organization (WTO) regime and draws policy implications for international intervention in the context of developing countries.

The analysis is undertaken across various branches of industry, across countries, and over time using the available data set covering overseas production by U.S. and Japanese multinational enterprises (MNEs) in seventy-four sample countries and three points of time over the 1982-94 period. Four measures of the quality of FDI inflow have been employed to capture the positive externalities accruing to a typical developing host country. These include (a) the extent of localization of affiliate output reflecting the depth of involvement of a MNE in a host country; (b) participation in technology-intensive or modern industries that are likely to generate a greater amount of knowledge spillovers and hence facilitate the technological up-gradation of the host economy; (c) extent of export-orientation, especially the proportion of output going to third countries involving informational externalities on the export potential for domestic firms; and (d) R&D intensity that may have significant knowledge spillovers for local firms.

This book contains three main parts. Part A deals with MNEs and host country industrialization. Chapter 2 identifies factors that determine the extent of MNEs' involvement across host countries and then examines the role of locational factors in influencing the extent of MNEs' involvement. The finding suggests that country size, level of income or development, and extent of urbanization seem to favourably affect a country's ability to attract globalized production from MNEs. Also, country size and income levels are likely to have greater influence on the extent of localization of affiliate production and hence relatively smaller, poorer, and agrarian countries have their limitations on tapping the resources of MNEs for their industrialization. The author observes that between the two sources of FDI, U.S. investments and their depth are more sensitive to country size and income levels than the Japanese investments. It is observed that while a free trade regime in a host country would tend to attract more MNEs, the depth or extent of localization may be inversely related to openness.

The book argues that geographical proximity between home and host countries encourages intensive investment links. The analysis also brings out that the availability of better infrastructure, abundant low cost labour, and the host country policy environment as the factors that contribute to the attractiveness of a country to MNEs. Hence, resolving a trade-off between quality and quantity of FDI by the governments of developing countries in consonance with their development policy objectives is a clear challenge.

At the overall level, it is seen that the extent of localization of production of affiliates of U.

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