Human Rights & International Legal Discourse vol:3 issue:2 pages:177-227
The liberalisation process in developing and transition countries in the 1980s and 1990s was accompanied by an exponential increase in Foreign Direct Investment (FDI) inflows. The interest of developing countries in attracting FDI is based on the belief that FDI contributes importantly to economic growth and to the overall development of the host country. Theoretical arguments state that FDI contributes to economic growth both directly – through the accumulation of capital and technological know-how – and indirectly – through technology and knowledge spillovers to domestic firms in the host economy. Empirical cross-country studies find a strong positive relationship between FDI and economic growth, but causality is likely to run in both directions. Micro-economic studies find evidence of positive vertical spillovers to suppliers to and buyers from Multinational Corporations (MNC). However, horizontal spillovers are not found and seem to be dominated by negative competition effects. The empirical results vary largely across countries, sectors and firms. This indicates that the impact of FDI is very heterogeneous and conditional on factors such as the type of FDI, the economic sector and the absorptive capacity of the host economy. It seems that – if the conditions are right – FDI can be an important engine of economic growth. Furthermore, FDI may contribute to poverty reduction in the long run through economic growth impact, employment creation, wage pressure and increased tax revenues - although also here the effect is heterogeneous. The impact of FDI on inequality between countries is unclear, with mixed empirical evidence. Within a country, it seems likely that FDI increases inequality in the short run. However, when directed towards less skill-intensive sectors and the poor groups of society – for example FDI in agribusiness in rural areas – FDI may reduce inequality. The evidence is also mixed on gender inequality. When looking at some non-economic indicators of human development, such as human rights, labour standards and the environment, FDI seems to create a ‘race to the top’ rather than a ‘race to the bottom’. FDI is thus not a simple solution for enhancing growth. But when the conditions are right, it can provide an important contribution to human development.