Direct Foreign Investment: Costs and Benefits

By Richard D. Robinson | Go to book overview

almost never available for working capital needs. Consequently, the more capital-intensive project is rewarded, even where the concessionary rates were offered to stimulate employment by encouraging expansion of productive capacity. The extreme case is where land and/or buildings are provided on a grant basis, or on a long-term concessionary lease-back basis where the buildings have been constructed specifically by the government for the investing firm. The cost of capital for the firm is, thereby, reduced, and a more capital-intensive project than might otherwise have been the case is encouraged.

A subsidy that has the effect of reducing the price of an input--be it electric power, water, certain raw materials, land, capital--has the result of stimulating greater use of the subsidized factor, but, by doing so, may cause a different technology to be employed. In the longer run, as subsidies are removed or reduced and the relevant inputs are priced closer to the market price, the technology (and associated skills) may prove to be uneconomic. The opportunity cost of the subsidies should be examined very carefully from the point of view of the costs they may induce by leading an enterprise to employ other than the least-cost mode of production.

Payment of a premium price for locally manufactured or processed products is another form of subsidy to the producing firm, but one so far removed from the original commitment to explore and develop a project that its cost-effectiveness may be limited. Moreover, to the extent that it is effective, such a subsidy has all the problems and costs associated with outright protection unless the subsidy is limited strictly in time so as to be associated only with the period of market development. Of a somewhat different nature is the guarantee of government purchase of a specified minimum amount of the product at a reasonable price (reasonable in relation to a truly competitive price for a period of time). Such procurement gets a firm past the difficult start-up period. So likewise does permission for a firm to import goods, and retain the ensuring sales revenues, for a period prior to--or during the early phases of--a project in order to test the market. We have found that this is a little used, but very effective, device to stimulate interest in foreign firms to become involved in local production.


NOTES
1.
Reference is to Richard D. Robinson et al., Performance Requirements for Foreign Business: U.S. Management Response ( New York: Praeger, 1983).
4.
Although I have no knowledge of any such subsidy in practice, theoretically a government might pay a firm to retire a product or entire venture so as to make it worth its while to do so (for example, a drug found to be injurious after the market had been developed). A government might do so in order to reduce investor perceptions of costs arising out of uncertainity in respect to government intervention, and thereby encourage subsequent investors.
5.
Robinson et al.

-13-

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