Academic journal article Indian Journal of Economics and Business

NEPAD: Drawing Lessons from Theories of Foreign Direct Investment

Academic journal article Indian Journal of Economics and Business

NEPAD: Drawing Lessons from Theories of Foreign Direct Investment

Article excerpt

Abstract

The New Partnership for Africa's Development (NEPAD) contends that increased levels of foreign direct investment (FDI) inflows are crucial if Africa is to achieve sustainable development and poverty reduction. Consistent with this view, NEPAL) calls African countries to create and adopt enabling environments within which FDI can flourish. Although reliance on FDI as a source of growth may be a pragmatic one, drawing on a review of the theories of FDI, this paper argues that whilst FDI can indeed be a source of good, it can equally be a source of economic harm. Consequently, in embracing FDI, NEPAD must have a regulatory mechanism in place to ensure that only FDI that meets the developmental objectives of the hosts state is welcomed.

INTRODUCTION

In its base document, the New Partnership for Africa's Development (NEPAD) emphasizes the importance of Foreign Direct Investment (FDI) to Africa's long-term development. To fill its identified resource gap of 12 percent of its GDP (or US$64 billion), NEPAD contends that African economies must grow by at least seven percent annually. Although this growth is to be achieved through more international aid, debt cancellation, increased domestic savings, and improved public collection systems, FDI is deemed to be a more viable strategy. However, despite the centrality of FDI to NEPAD, there is no general agreement about the desirability or impact of FDI on host economies. In exploring and evaluating NEPAD's position in respect of this matter, this paper kicks the debate by giving a brief review of the different theories of FDI. It looks in particular at the classical, dependency and middle path theories of FDI and the lessons that NEPAD can draw from them.

THEORIES OF FOREIGN DIRECT INVESTMENT

The Classical Theory of FDI

Reduced to its basic form, the classical theory marks a shift from earlier doctrinal objections held by many developing countries on the role played by multinational corporations (MNCs) in their economies. MNCs were viewed as inimical to the economic development of the developing countries. Based on this assertion, MNCs were either discriminated against or their role in the host economy severely restricted or limited (Seid 2002:15; Markusen and Venables 1999:336; Lall 1996; Muchlinski 1995:8; Kennedy 1992:67, OECD 1990). This assertion also provided a justification for the expropriation of foreign companies or assets. As illustrated in Table 1.1 below, the 1950s, 1960s and 1970s represented a period of uncertainty for foreign investors. Many of their assets or investments were either expropriated or nationalized by host states.

The expropriation of MNCs by many developing countries particularly during the early days of their independence symbolized a rejection by these countries of being externally dependent upon "foreigners" (Kennnedy 1992:74). As Kobrin (1984) observes:

   The end of the colonial era and the rise of Third World
   assertiveness and independence during the late 1960s and early
   1970s influenced the preference for expropriation as opposed to
   regulatory control of behavior ... There was a tendency on the part
   of many countries to use foreign investment as a symbol of Western
   industrialization and Western colonialism; expropriation
   represented a rejection of the general context as well as of the
   specific enterprise (quoted in Kennedy 1992:74).

However, the hostility directed at MNCs in the 1950s and 1970s has largely waned. Rather than strangle the development of FDI on the basis that it is a source of foreign domination and control, many countries have now come to recognize that positive economic gains can be achieved from the presence of FDI (Kobrin 2005:3; Gao 2005:158; Markusen and Venables 1999:336; UNCTAD 1999:4; Lall 1996:44; Muchlinski 1995:9). This change in attitude can be attributed to, inter alia, the slowdown of growth in the world economy in the mid-1970s, change in political leadership and the scarcity of financial capital in the wake of the debt crisis of the early 1980s (UNCTAD 1999:29; Muchlinski 1995:10). …

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