Direct Foreign Investment: Costs and Benefits

By Richard D. Robinson | Go to book overview

Chapter Two
Evaluating Foreign Investment: With Special Reference to Southeast Asia

Louis T. Wells Jr.

When a potential host country examines its policies toward foreign investment, perhaps the most fundamental issue that it must face is whether foreign investment is helpful or harmful in the development process. For two decades or more this has remained a burning issue in the development literature. The multinational enterprise has been attacked by some as a hindrance to development, and it has been praised by others as one of the important motors to pull poor countries out of their poverty. Every country makes an implicit assumption about the effect of foreign investment when it establishes policies toward would-be investors. Unfortunately, the assumptions have to be based on a great deal of faith; the empirical evidence for determining the impact of foreign investment on the development process remains rather weak.

There have been many fine studies that have examined the impact of foreign investment on certain aspects of development. Researchers have gathered information on the choices of technology made by foreign investors, on the wages that they pay, on their propensity to use imported inputs, on their willingness to export, on their alliances with local elites, and so on. 1 However, relatively little work has been undertaken to determine the overall impact of foreign investment on economic development.

To be sure, a few studies have attempted to draw conclusions about the economic impact of foreign investment based on macro data. Although some analysts have enterpreted those studies to support foreign investment, the studies most favorable to foreign investment show only that countries that have high incomes have been hosts to a larger amount of foreign investment that those that have been less wealthy. As tempting as it is to conclude that foreign investment is a cause of the better performance, it is equally convincing to argue that those countries that perform well simply attract more foreign investment because of their better economic performance. 2 The case either for or against foreign investment based on studies of macro data is very unconvincing.

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