Inappropriate foreign investment
Visualization of narrower problems
Name(s):
Disruptive foreign investment
National insecurity due to excessive foreign investment
Vulnerability of countries to destabilization from foreign investment
Background
The negative perceptions of the behaviour of foreign investors led some developing countries to nationalize foreign-owned companies operating in their countries. Where there was no outright expropriation, the foreign investors were required to accept minority government participation. Public enterprises and parastatal companies became the main instrument of economic development.
During the 1980s, there was growing disenchantment with both the performance of public enterprise and the heavy burden they imposed on government finances. The result was a reappraisal of the role of the private sector, both indigenous and foreign. Although some of the negative perceptions of transnational corporations may still persist, many governments came to terms with the fact that the potential benefits that can be bestowed by foreign investment (additional equity capital, transfer of technology, access to managerial skills, creation of new jobs, and access to overseas markets and marketing expertise) were crucial to their development.
Incidence
In the case of developing countries in early years following independence, foreign investors were, apart from being viewed as extensions of colonialism, accused of engaging in various practices which were said to diminish their contributions to the host economy and sometimes resulted in their costs exceeding their benefits. These practices were said to include evasion of controls on the repatriation of profits and the stifling of indigenous competition. Foreign investors were also seen as operating under terms of one-sided agreements negotiated with colonial masters.
Claim
1. Foreign investment has the net effect of draining considerable sums of capital out of developing countries and in the long run tends to slow economic growth down rather than to boost it. The reasons include: profits flow back to the rich countries, local firms and craftsmen lose their livelihood while the investment creates only few jobs, the transferred technology has little use outside the foreign subsidiary and it imports required inputs. Often corporations are allowed, for a certain period of time, to operate without paying any taxes and afterwards they can use the transfer pricing mechanism to avoid taxes.
2. Capital invested will be largely money wasted if it comes before the creation of a sound infrastructure. There is quite enough capital in developing countries to establish the appropriate industries and infrastructure necessary to enable the poor majority to produce for themselves the things that they need for a low but reasonable living standard. That capital is currently being absorbed in part by foreign investors to produce highly inappropriate goods. From 85 to 90% of the funds raised by foreign investors to invest in developing countries is raised within the Third World, usually as loans from Third World banks. Within developing countries the capital is usually held by a small privileged class which is uninterested in investing in ventures conducive to more appropriate forms of development of value to the poor majority. Such capital is rendered unavailable because it is lent to foreign investors, used in speculative ventures or to purchase more land or imported luxuries, or sent out of the country to secure foreign banks.
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Type
(D) Detailed problems