Direct Foreign Investment: Costs and Benefits

By Richard D. Robinson | Go to book overview

Chapter Six
A Survey of the Theory of Direct Investment in Developing Countries

Richard S. Eckaus


OBJECTIVE AND SCOPE

The objective of this chapter is to provide a survey and assessment of the economic theories of foreign investment in developing countries. For the most part the perspective of these theories is that of the economy receiving the investment, not the problems of the firm making the investment. In some analyses, however, both sets of issues are treated to assess the overall impact of the investment.

I will make a number of references to the possible relevance for China of the theories of foreign investment, but I will not concentrate on these implications. There are, in any case, relatively few immediate consequences of the theories for policy in China or in any other country. Rather, the theories suggest issues that require individual attention in each country receiving foreign investment. Moreover, my knowledge of the Chinese economy is quite limited. When I can draw some practical lessons, I will assume that the Chinese economy has many of the features of other developing economies, being distinguished by its unique history and institutions and its size.

This survey will focus on direct investment, that is, investment carried out directly by producing firms. However, most of the rigorous theory of foreign investment, as part of the real theory of international trade, does not make a clear distinction between the conditions and consequences of direct as compared to equity investment. Since that theory does provide useful insights, it will be surveyed briefly. 1

It is assumed that the focus of this volume is on investment in production units, so this chapter will not consider lending by international agencies or commercial banks to government authorities. The macroeconomic issues related to the latter type of investment will, therefore, also not be considered.

The perspective on China as a developing country has immediate implications in the assessment of direct foreign investment issues. Many developing countries, because of their poverty and small size, have limited markets for new products and new technologies. Their labor force, for the most part,

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