CUTS Centre for Competition, Investment & Economic Regulation
Jaipur, India 

                 The Investment for Development Project
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EDITORIAL
The FDI-Growth Debate Continues

An intriguing part of the debate on the effectiveness and the use of foreign direct investment (FDI) is the relationship between FDI and economic growth. Does FDI lead to economic growth or is it the other way round?

It is important for developing countries to know this as many of them have liberalised their investment regimes to attract higher FDI in the last decade. Lately the focus has shifted from attracting FDI per se to maximising benefits from it. By extracting maximum benefits from FDI, countries hope to increase linkages of the foreign firms with the domestic ones and stimulate economic growth.

A study conducted by the Kiel Institute of World Economics, Germany looked at the issue of whether economic growth has followed FDI and concluded that there is no unambiguous relationship across countries. This is bad news for the countries that look at FDI as an engine of growth. The ambiguousness in the relationship between FDI and economic growth arises because both growth and FDI may be stimulated by other factors and growth could be a precondition for FDI rather than being a result.

In fact traditionally growth was regarded as a precondition for attracting FDI especially the type of FDI that is attracted by local market conditions. However the Kiel study says that the importance of growth as a precondition for FDI may have declined on account of globalisation, which has induced new forms of FDI such as world market-oriented FDI and efficiency seeking FDI. The study therefore could not establish a clear relationship between FDI and growth.

No clear link has been found between investment, foreign or domestic, and poverty reduction, either. In some cases poverty reduction was driven by capital accumulation and in other cases by effective institutions, or by a combination of both.

What then can countries expect from FDI? FDI can bring other benefits such as technology, management skills and access to markets, management styles and work culture, improved balance of payments, additional tax revenues and efficient resource allocation. It has some associated costs as well. As mentioned above, now the focus has changed to the maximisation of the benefits of FDI. The other issues that are said to be important are the quality of FDI and FDI absorptive capacities of countries.

Much discussion is going on to determine the measures to maximise FDI. More or less all are in agreement that the measures should depend on a country’s particular needs rather than being a one-size-fits-all approach. However, there is less agreement among scholars regarding the definition of quality FDI and absorptive capacity of countries.

To maximise benefits from FDI, countries need good institutions, stable macroeconomic conditions (e.g. interest rates and prices), and adequate basic infrastructure (both physical and social). Instead of entering the FDI-growth debate countries should ensure that these conditions are in place. The same conditions will promote domestic investment as well and will facilitate economic development in the long run. 

The IFD Project
About the Project

The ‘Investment for Development’ (IFD) project aims to create awareness and build capacity of the civil society on investment regimes and international investment issues of developing and transition economies. For more http://www.cuts-international.org/ifd-indx.htm 

Project Update 
Reports

The following reports of the project are available on our website. www.cuts-international.org/ifd-cr-lm.htm

1. Revised Investment, Performance and Perceptions Country Reports (Report B).

2. Report on Investment, Performance and Perceptions in Developing and Transition Countries   
   (Synthesis Report B)

3. Investment Policy, Performance and Perceptions Country Reports (Merged country reports A & B)

4. Draft Country Advocacy Documents (Report C)

National Reference Group (NRG) Meetings

The Third National Reference Group Meetings have been held in all the partner countries. The reports of the NRG meetings are available on our website http://www. cuts.org/ifd-cr-lm.htm

Events
OECD-CUTS Regional Roundtable on Foreign Direct Investment in Transition Economies

An OECD-CUTS Regional Roundtable was held in Istanbul, Turkey in collaboration with OECD, on 5-6 May 2003.  The main purpose of this regional roundtable was to bring together investment policy makers, practitioners, private sector, trade unions and other civil society partners in transition economies for an interactive discussion.

Investment for Development Review Meeting

The Investment for Development Review Meeting was held in Geneva, Switzerland on 9-10 May 2003. The aim of the seminar was to discuss investment policies and trends, civil society perceptions of FDI and challenges faced in attracting FDI in the project countries. Further, FDI experiences of the telecom sector and the mining sector in Africa was discussed. There were also presentations on regional FDI performance from the following regions: Latin America, S E Asia, C E Europe. Lastly there were debates on the relationship between FDI and development, and policy recommendations for governments, intergovernmental organisations, and civil society as presented in the draft CUTS advocacy document for the IFD project. 

News
Members Disagree on Negotiations

A meeting of the WTO Working Group on the relationship between Trade and Investment was held on 10-11 June 2003. In a joint submission Canada, Costa Rica and Korea, which is available at  HYPERLINK "http://docsonline.wto.org" \t "_new" http://docsonline.wto.org, argued that the Working Group had completed the preparatory work after seven years of talks and members should move to the next phase-negotiations on a WTO agreement on investment. However many developing countries including China, India, Malaysia, Indonesia and Kenya, disagreed with the assumptions made in the submission and called for further clarifications of the issues. For more , http://www.ictsd.org/weekly/03-06-12/story4.htm

Malaysia Vision 2020

The Malaysian government has a vision: It means to transform this developing nation of 22 million people into a first-world country within the next generation. At the heart of this plan, called "Vision 2020," is an aggressive high-technology promotion project that is expected to ignite Malaysia's domestic economy and attract foreign investment. For more information visit http://business.cisco.com/prod/tree.taf%3Fasset_id=65669&public_view=true&kbns=1.html 

Saudi Scrap Investment Plan

Having failed to clinch a deal with major international oil companies after more than four years of negotiations, the Saudis have begun terminating the three preliminary agreements for gargantuan gas-and-infrastructure deals they concluded with seven big oil companies in 2001.

The Saudis now hope to attract companies for smaller projects for gas, power, water and chemicals and plans are to open them for international bids. For more information http://news.morningstar.com/news/DJ/M06/D06/1054877460883.html  

Publications
Monograph

‘FDI as a Source of Finance for Development’ is the monograph no. 12 on Competition Policy and Investment published by CUTS. The monograph attempts to provide a balanced assessment of the role FDI can play as a source of finance for development in stimulating economic growth and reducing poverty in developing countries and transition economies.

Briefing Papers

CUTS has published the following briefing papers

a)      Briefing Paper No. 3/2003 entitled ‘Investment Policies that Really Attract FDI’ discusses    three generation of policies that are effective in attracting FDI and generating growth.

b)      Briefing Paper No. 1/2003 entitled ‘How Mining Companies Influence the Environment?’ intends to study the importance of the mining transnational corporations in the global FDI flows in the mining sector and the effects of operations of these companies on the environment.

c)      The Briefing Paper No. 2/2003 entitled ‘How is FDI related to Economic Development?’    examines the arguments in the debate on whether FDI stimulated economic development.

CUTS Centre for Competition, Investment & Economic Regulation (CUTS-C-CIER)
D-217, Bhaskar Marg, Bani Park, Jaipur 302016, India
Ph: 91.141.2282821
Fax: 91.141.2282823/220 3998
Email: ifd_cuts@rediffmail.com & ifd@cuts-international.org
Web: www.cuts-international.org