Foreign Direct Investment (FDI)
FDI is the purchase or construction of tangible assets (land, factories, machines, buildings and enterprises) in one country by firms from another country. This does not include investment in stock markets. Increased access to FDI is seen as one of the key benefits of globalization because it is thought to lead to capital formation, technology and knowledge transfer, higher wages and greater job opportunities. The UN Conference on Finance for Development argues that FDI, along with international financial stability, are vital components to national and international development efforts. Many other international policy documents stress the value of FDI but critics are concerned that its benefits are very unequally distributed, both globally and within societies.
FDI is an important source of private capital for some developing countries. The booming economies of Asia have become the largest recipients of FDI, with their share of total FDI rising from 28% in the 1980s to 60% in the 1990s; from 1985 to 1991, 55% of all FDI went to just six countries. The top 500 multinational corporations, 90% of which are based in the United States, Europe, and Japan, are responsible for 90% of FDI investment. The level of net private investment to middle-income and poor countries still far exceeds the flow of aid and official loans. However, such investment is not spread evenly: most sub-Saharan African countries receive far less private investment than aid.
Proponents of FDI argue that it generates a virtuous cycle (good economic performance leading to more investment), further reinforcing economic growth. However, others argue that the factors which encourage investment - particularly low wages and a lax regulatory environment - may be detrimental to development. For example, women make up 90% of those working in export processing zones (set up to encourage FDI). Many suffer poor working conditions and health risks, as well as low pay. In some countries, FDI investment employs only relatively skilled workers and thus benefits are unlikely to flow to the most vulnerable groups.
FDI is more likely to go to countries with the right “pull-factors”, for example:
- Cheaper costs - including wages, materials, and land
- A deregulated environment
- A sizeable domestic market and its growth - particularly important are privatization, service sector and import substitution activities
- Economic and political stability - in particular, absence of hyperinflation, existence of security for personnel
- Infrastructure - both transport and information
- Good macroeconomic management, education systems, legal frameworks, cooperation with trade unions
- Perceived security of foreign investment property rights.
It is argues that the first and second “pull factors” above, in particular, are likely to increase health risks for workers.