Direct Foreign Investment: Costs and Benefits

By Richard D. Robinson | Go to book overview

out export projects for a very simple, quick test. In the country we studied, a simple test of the ratio of energy used (underpriced to the investor) to labor employed (overpriced to the private firm) could be used. A ratio above a certain figure would separate out proposals for special attention. Since the vast majority of projects with lower ratios would be beneficial, they could be approved virtually automatically. Proposals for serving the local market might be divided into industries categorized according to priority and according to effective protection. Scarce analytical resources might be devoted first to high-priority sectors and special attention paid to industries with high rates of effective protection. Model terms might be prepared to improve predictability for would-be investors. Some poor projects might slip through such a screening process, but the increased speed of analysis is likely to generate more proposals for consideration. Proposals for low-priority sectors might have to wait for evaluation and negotiation until time is available. Some potential projects might, of course, be lost due to slow processing, but the losses are likely to be unimportant if the sectors are low-priority.

The second set of lessons derives from the difficulties posed by the organizational issues. If negotiations were decentralized, they were particularly likely to be ineffective and to discourage potential investment. On the other hand, centralization came at a high political cost. Only when the stakes seemed particularly high were governments willing to disenfranchise ministries in order to centralize the negotiating function. Coordination was, because of lack of political commitment at the top, often ineffective and, in some cases, deteriorated into decentralized negotiations soon after the initial attempts at coordination. Coordination can work only if government is actually willing to remove authority from departments with legitimate interests in the outcome of negotiations with potential investors.

The experiences of various countries indicate where the problems lie. Understanding the likely sources of problems in different structures is an important step in designing effective organizations.


NOTES
1.
A few examples include the impact of multinationals on technology [e.g., Robert Stobaugh and Louis T. Wells Jr., eds., Technology Crossing Borders ( Boston: Harvard Business School, 1984); for a summary of some of this literature, see Sanjaya Lall, "Transnationals, Domestic Enterprises, and Industrial Structure in Host LDCs: A Survey," Oxford Economic Papers 30 ( July 1978), 271-248], transfer pricing [e.g., Constantine Vaitsos, Intercountry Income Distribution and Transnational Enterprises ( Oxford: Clarendon, 1974)], and exports [e.g., G. K. Helleiner, "Manufactured Exports from Less Developed Countries and Multinational Firms," The Economic Journal 83 ( March 1973), 21-47].
2.
For a critical review of studies based on macro data, see C. Stoneman, "ForeignCapital and Economic Growth,"

-35-

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