The Economic Basis of Peace: Linkages between Economic Growth and International Conflict

By William H. Mott IV | Go to book overview

Appendix D: On Foreign Investment

For early liberals, foreign investment was primarily bonds issued by governments to foreign banks, other governments, and wealthy foreign citizens. They did not envisage the paradoxically growth-related sources of conflict in large flows of technology, capital, and production, carried by modern foreign direct investment as practiced by multinational enterprises.

Modern corporate forms of foreign direct investment involve direct relationships between host-nation governments and investor multinational enterprises, which may be either competitive or cooperative. Economic growth in the host nation increases the power of the host-nation government in its relationships with foreign investors. As relative bargaining power shifts to the host nation government ( Vernon "Obsolescing Bargain"1), in parallel investors' incentives increase to appeal to home-country governments for support, which can easily escalate into overt international conflict.

Intense competitive pressures force multinational enterprises to find the least costly, most efficient, production sites; the resulting migration of production capabilities carries much of the energy and capability that generate economic growth. Successful direct investment eventually brings some growth to the host nation, which increases host nation national power. Consequent changes in the international distribution of power activate the realist or structuralist mechanism for international conflict.

Investment and technology transfer, especially since World War II, have established many poor countries as cost-efficient, competitive producers for world markets. Such uneven "supply-side" growth of technology and capability, however, without complementary "demand-side" growth of domestic markets, creates a volatile source of international conflict. Persistent low levels of per capita income prevent many high-tech, industrializing, host countries from increasing consumption significantly. The only markets able to absorb their increasing production are those of already wealthy home countries. While these are increasingly flooded with inexpensive, high-quality

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