Special Debate Section Some Observations on Scholarly Research on FDI Impact on Development James Zhana and Hafiz Mirzab,* a

Division on Investment and Enterprise, UNCTAD, Geneva. Investment trends and Issues Branch, DIAE/UNCTAD, Geneva.

b

*E-mail: [email protected] European Journal of Development Research (2012) 24, 38–40. doi:10.1057/ejdr.2011.55 Keywords: FDI impact; development; linkages; competition and demonstration effects; technology transfer; externalities

Developing country policymakers are generally keen to encourage inward investment by multinational enterprises (MNEs). Implicit in their calculations is the view that that these investments will impact positively (overall) on the economy through a number of channels, although their complexity and interconnectedness may not be fully appreciated. Abridged, these channels of impact include: K

K

K

K

Forward and backward linkages. The impact on the economy/country is not just in the industry/value chain segment in which an investment is made, but ripples through the domestic industries it supplies (forward linkages) and from which it receives inputs (backward linkages). The ultimate impacts (as with other channels) are economic, social and environmental, although some are easier to measure than others; they can be negative, positive and ambivalent (for example, greater productivity in a particular industry or value chain segment might require a substitution of input away from a domestic supplier to a foreign one). Competitive and demonstration effects, which result in crowding-out or crowding-in of local firms in the industry in which the investment is made (and perhaps in other industries or other segments of an industry value chain). Crowding-out of local firms can be an issue, whether arising from business conditions such as MNEs possessing better technology or from unfair competition such as restrictive business practices. Multiplier effects represent another ripple or wave through the economy, essentially because of private and public consumption and investment arising from use of the first-order effects (for example, wages from net additional employment in the economy will result in additional expenditure in the economy). Transfers and externalities, for example technological, pecuniary and environmental spillovers which may have both beneficial and deleterious effects (for example, higher environmental standards versus discharge of pollutants).

Despite views to the contrary, policymakers are keen to tease out the specific routes, pathways and mechanisms through which MNEs impact on an economy. However, the lacunae of academic and research literature sometimes runs the risk of reminding them of Rowan Atkinson’s joke about ‘a blind man, looking for a black cat, in a dark room, which r 2012 European Association of Development Research and Training Institutes 0957-8811 European Journal of Development Research Vol. 24, 1, 38–40 www.palgrave-journals.com/ejdr/

Does FDI Cause Development? isn’t there’. In the case of externalities and other channels, however, the black cat is more akin to Schrodinger’s, that is, poised in a conflux of probability fields until the black box is truly opened. Why, after such a plethora of research, is our understanding of the impact of externalities and other channels so murky? A number of reasons can be proposed, which are not mutually exclusive and, undoubtedly, not complete. First, sadly, the road to hell is lined with good intentions – and heroic assumptions! The channels of impact mentioned earlier are not just complex, but also interwoven. Discerning the relevant routes through which impacts arise requires careful and detailed analysis. However, many studies take, for instance, ‘the production function approach’ (see Driffield and Jindra, this issue), which makes heroic assumptions essentially sacrificing finesse for ‘result’. Heroism is sometimes called for, and many such studies are excellent examples of scholarship that do indeed deliver valid and useful findings. At the same time, it is important to acknowledge that delivering a little knowledge to policymakers can be a very dangerous thing. FDI impacts do not occur in a vacuum; context matters (see contribution by Morrissey to this debate forum). To a greater degree than currently prevails, research design and analysis can – and ought to be – framed to be appropriate to the task, rather than based on convenience (for example, the easy availability of a database, which may not be fit for purpose). Second, at a prosaic level, it is important to stress that policymakers are keen on a greater commonality in approach when it comes to investigating FDI impacts. For example, although differences in the time-scale of impacts through various pathways are recognised (for example, effects through linkages begin to be felt from the short-term, through multipliers from the mid-term and they vary by type of spillover), this is seldom catered for in research design. An elephant looks different to our blind man (fresh from his cat adventures), depending on whether his assessment is made by feeling the trunk or a leg – or being crushed underneath. By the same token, assessing the impact of an investment will most likely look rather different depending on whether effects are analysed after 5, 10 or 15 years (and the indicators). What looks derisory after 5 years may look rather different after 15 (or vice versa). Policymakers would very much like to know the effectiveness of their policies in the short, medium and long run. But a significant concern in this respect is the lack of truly replicatory studies (at least in principle), and it is therefore not surprising that research findings on the impact of FDI are ambiguous. This is a methodological shortcoming that deserves the full attention of scholars and the research community in a wider sense. Having said this, in assessing policy implications at the level of both individual investments and treaties, there is a dilemma for researchers regarding the pre- versus post-policy impact analysis. For example, policy-makers (and stakeholders at large) would like to know the costs and benefits before negotiating and signing an international investment treaty or a regional integration agreement. But academia can only provide empirical evidence after the treaty has been in force, while pre-treaty analyses remain largely theoretical hypothesis. The results of research are thus regarded as less relevant to policy-makers once the treaty is in force. For researchers, the credibility of the analysis is at stake. The trick is to be able to effectively use widely based research on past investment to guide policymakers in future decisions, recognising that changing circumstances may render irrelevant specific empirical studies. This underlines the case for replicatory research, thereby building up a robust database of conclusions – under differing conditions and contingencies – that can be relied on. Such a process would also help resolve another bugbear from the policymaker perspective – the need for r 2012 European Association of Development Research and Training Institutes 0957-8811 European Journal of Development Research Vol. 24, 1, 38–40

39

Zhan and Mirza ‘operationalisable’ policy recommendations, which most academic studies do not directly cater for. Third, given the complexity of the relationships in the causal pathways leading from an investment to its eventual impacts, it is not unexpected that there will be disputes – conceptual, theoretical and methodological. However, when looking at the literature (and not just on investment impact), it is also quite apparent that at least some of these disputes can be traced to differences in vocabulary, from faux amis (concepts that sound similar, but are false friends or cousins) to alternative uses of words and concepts because they were introduced from different scholarly traditions. Are externalities and spillovers entirely the same? They are frequently treated as such, but do spillovers imply linkages, while externalities can be treated more widely? When is a technology transferred – when it is introduced to an economy, or passed from one company to another, or mastered by the receiving company, or diffused to other entities in the economy? In the hubbub of research in international business and development, many of these issues are treated ‘on the fly’, but as with other scientific endeavours, a case can certainly be made that it is time to establish an agreed glossary or lexicon of terms. Recently, United Nations Conference on Trade and Development (UNCTAD) proposed such a programme, in collaboration with Reading and other centres of international business and development globally (the proposal was made at the Reading Conference in April 2011). Finally, the case for a new glossary can be further amplified and augmented by recognising that while the world has changed dramatically (Lundan and Mirza, 2010), the language of debate has not. As with Kuhn’s notion of (lack of) paradigm shift, researchers are continuing to talk in a language that needs to be updated or, in some cases, completely overhauled. For example, this year’s World Investment Report looked at the issue of non-equity modes of international production (for example, outsourcing, management contracts and concessions), which though not new phenomena (and which sometimes have a ‘back to the future’ feel against the long arm of history) are not yet fully catered for in conceptual frameworks dealing with the development impact of MNE operations (UNCTAD, 2011). In a similar vein, and more widely, in a world where global value chains dominate and along which MNEs exercise vast power, investment and trade are nearly inseparable and intertwined, but this interaction has not yet been fully taken on board by the research community. How might this affect our conceptual framework on the development impact of MNEs? Such issues, among others, define UNCTAD’s future research trajectory (Zhan, 2010), on which it is keen to cooperate with the research community. It is time to storm the heavens.

References Lundan, S.M and Mirza, H. (2010) TNC evolution and the emerging investment-development paradigm. Transnational Corporations 19(2): 29–52. UNCTAD. (2011) World Investment Report 2011: Non-Equity Modes of International Production and Development. New York: United Nations. Zhan, J. (2010) Towards a forward-looking policy-orientated research agenda. Transnational Corporations 19(2): 53–62.

40

r 2012 European Association of Development Research and Training Institutes 0957-8811 European Journal of Development Research Vol. 24, 1, 38–40