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SANPREET SINGH (15107027)

DOES FDI CAUSE DEVELOPMENT?


THE AMBIGUITY OF THE EVIDENCE AND WHY IT MATTERS
(Rajneesh Narula and Nigel Driffield)
European Journal of Developmental Research, Vol. 24, No. 1, 02.2012, p. 1-7

The article questions the widespread belief among policymakers that foreign direct investment (FDI)
generates positive productivity eects for host countries. Going to the very base of this, they question
the widely accepted notion, stating ambiguous evidence and its importance for developing countries,
especially. FDI is seen as an elixir; a pathway to unique management techniques, technologies and
capital. Nation states do not shy away from offering incentives to lure investors. But this was not
always so. As the authors rightly point out, Multinationals were initially seen as unpleasant edge of
capitalism and a threat to political and economic sovereignty. They draw attention towards the lack
of such evidence that supports FDI-assisted growth. The principle of FDI-assisted development builds
around the concept that MNEs possess firm-specific assets which provide them with an advantage over
domestic firms in the host location known in the literature as ownership-specific advantages (O
advantages) and include technology, capital, R&D, etc., apart from organizational skills and market
knowledge. It is based on the simple concept of backwardness that highlights the relative technology
gap between the home and host economy. They hold the view that literature has over-relied on the
technological advantage concept, and see it as the only beneficial effect of such an investment. Also, it
is simply assumed that such technology transfer is easy and ultimately, costless, which the authors
rebut. They argue that FDI can have different motivations, and each has significantly different
development potential. Apart from that, not all host locations have the capacity to exploit the O
advantages of inward FDI, because they simply do not have the absorptive capacity to do so. Such a
capacity is not only firm-dependent, but also associated with location and environment. They further
state the fact that there are not always net positive effects, which points to the lack of effective transfer
of O advantages. Not all affiliates of the parent MNE will have the access to leading technology, and
in-turn, will be incapable of supplying it forward to the host country. They also criticize the usage of
earlier obtained data instead of new figures and collections. Much of the early literature aims to
identify and quantify intra-industry effects. That is, whether inward FDI generates productivity
growth within the industry of the investment. This has since expanded to include inter-industry effects,
seeking to proxy supply chain linkages between MNEs and local suppliers. They believe that countries
that have taken a generic approach to FDI as a determinant of development per se have largely been
disappointed. FDI and development, no doubt related, their relationship is not as simple as it is made
out to be. A variety of other factors, such as the aforementioned, come into play and are usually
ignored.