Economic, Political And Social Implications Of FDI For Host-Economies

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Economic, Political and Social Implications of FDI for Host-Economies

March 31, 2013

Christine Youyeoun An

Simon Fraser University

POL343-Global Political Economy

Examine the economic, political, and social implication(s) of FDI for host economies. Illustrate your answer with empirical examples.

While many consider the attraction of foreign direct investment (FDI) as a precondition for a successful development, others fear its negative effects on sustainability. The triumph of neoliberal economic ideology has produced many recent studies, which focus on the positive effects of FDI on host economies. However, economic growth is not an automatic consequence of FDI. The objective of this essay is to present and critically evaluate different theoretical and empirical approaches to FDI and the economic, political, and social implications for host-economies. This essay, then, concludes that FDI can have both positive and negative implications. The effects of FDI on development depend on the existing or subsequently developed internal conditions of the host-country. Thus, the state plays a key role in creating the right condition to absorb the benefits of FDI, and the effects will differ not only across countries but also within countries at different times as conditions change.

I. Introduction
The movement of capital and resources on a global scale is a prominent feature of the current globalized economic landscape. Significant increase in the movement of capital and resources has been brought about by rising levels of foreign direct investments (FDI) made by transnational corporations. FDI refers to “investment made outside the home country of the investing company in which control over the resources transferred remains with the investor” (O’ Brien and Williams, 2010, p.186). It consists of a package of assets and intermediate goods such as capital, technology, management skills, access to markets and entrepreneurship. Transnational corporations - most of which are based in Western countries - are one of the most important bodies in the global economy, acting as agents of the capital and resource movement. Occupying a more powerful position than ever before, TNCs operate across national boundaries and impose significant economic, political, and social impacts on host-countries.
There are competing perspectives concerning the impacts of FDI on host-countries. Since 1960s, controversial implications of FDI have been hotly debated between the neoliberal proponents and the radical opponents. In the 1970s when the Third World’s demand for a New International Economic Order was at its peak, the dependency analysis was more credible and the views of the critics were given greater prominence. However, with triumph of neoliberalism, adjustment policies were imposed on developing world and the views of the proponents of FDI have acquired greater credibility in the recent era (O’ Brien and Williams, 2010, p.204).
Reconciliation of these two contrasting perspectives is possible by using selective statistics and case studies to support their respective arguments. In fact, the political, economic and social implications of FDI depend on the existing or subsequently developed internal conditions of the host-economy; hence, overgeneralization appears dangerous. First, in light of the neoliberal economic perspective, countries that have been beneficiaries of FDI will be examined to see the positive effects FDI has imposed. Empirical evidences from East Asian countries - including China, South Korea, Singapore and Hong Kong – suggest that developing countries that have been open to FDI have industrialized at much greater rates than their restrictive counterparts (Lall, 1911, p.251). Then, in light of the radical perspective, countries on which FDI has had more negative impacts will be examined. The cases of African and Latin American countries strengthen the notion that excessive dependence on FDI can