Employment and Foreign Investment: Policy Options for Developing Countries

By Lall, Sanjaya | International Labour Review, January 1, 1995 | Go to article overview

Employment and Foreign Investment: Policy Options for Developing Countries


Lall, Sanjaya, International Labour Review


Transnational corporations (TNCs) are growing rapidly in general, driven by technological change and the liberalization of policies on trade and investment, and their fastest expansion is in the developing world. It is estimated that in 1991 TNCs generated total sales of $4.8 trillion and intra-firm trade of $1.5 trillion. The latest estimate of foreign direct investment (FDI) inflows to developing countries for 1994 is $80 billion, or 39 per cent of total world FDI (UNCTAD, 1995). If present trends continue, in three to four years' time FDI in the Third World will exceed that in the developed world.

However, TNCs continue to concentrate on a few advanced developing countries. The ten largest recipients of FDI accounted for nearly 80 per cent of the Third World total in 1993. The least developed countries have been, and continue to be, marginal to FDI. Sub-Saharan Africa, in particular, receives very little FDI despite widespread moves to liberalize foreign investment regimes and offer attractive incentives.

The global shift to a market orientation and liberal economic policies has swept aside many of the conventions and suspicions that formerly governed inward FDI. Areas of economic activity previously closed to foreign enterprises are now being opened up and strong efforts are being made to woo TNCs. The attraction of developing countries is no longer the presence of large protected markets, cheap unskilled labour and exploitable natural resources. Increasingly, FDI flows into competitive and higher technology activities which require disciplined and productive labour, high skill levels, world-class infrastructure and a supportive network of suppliers (UNIDO, 1990; Dunning, 1993). The ability to adopt and deploy new technologies and organizational forms is increasingly important as a source of comparative advantage.

The policy options open to developing countries for enhancing employment and skill creation through FDI are the subject of this article. It considers the factors that attract FDI to developing countries and analyses the nature of its effects on employment in host economies. It goes on to consider ways of improving the effects, drawing on the experience of the east Asian newly industrializing economies (NIEs) and some recent work on industrial policy in developing countries.

Links between inward FDI and employment

The employment impact of TNCs is the theme of the World Investment Report 1994. To quote:

Overall, TNCs are estimated to account directly for a total of over 73 million jobs worldwide...However, TNC employment constitutes only a negligible proportion -- about 3 per cent -- of the world's labour force...At the same time, TNCs account for about one-fifth of paid employment in non-agricultural activities in developed countries and some developing countries, suggesting that their direct contribution to employment in manufacturing and services is far from negligible. In addition to direct employment, considerable employment opportunities are indirectly generated by TNCs through a variety of linkages with subcontractors, suppliers and other enterprises in home and host countries. Estimates for a number of developing countries suggest that at least one-to-two jobs are generated indirectly for each worker employed by foreign affiliates (UNCTAD, 1994, pp. 163-164).

Despite the evident significance of TNCs in creating employment in host countries, the exact links between FDI and employment are difficult to trace quantitatively (ILO, 1981a, 1981b and 1981c; ILO, 1984; Bailey et al., 1993; Campbell, 1994). Even a qualitative assessment is fraught with the conceptual problem of defining a counterfactual: what would have happened in the absence of that investment. Some direct and indirect effects can be identified, however, on the basis of the quantity and quality of employment created both within the TNC itself and within other firms and sectors of the host economy. …

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