Foreign Direct Investment (FDI) has emerged as a very important source of external resource flows to developing countries over the 1990s. This significant change in the attitude of developing countries is epitomised in their liberalising policies with the aim of attracting FDI, on the expectation that it will raise employment and exports, or that some of the knowledge brought by the foreign companies may spill over to the host country's domestic firms. However, the controversies of the effect of FDI on developing economies have led to its scrutiny over the years.
This new book by Theodore Moran gives a very convincing insight to both sides of the argument and, by dividing FDI into investment in manufacturing and assembly and investment in natural resources and infrastructure, it goes against convention by calling attention to the argument 'that the Washington consensus is fundamentally flawed both as a starting point for analysis and as a guide for policy. For both categories of FDI, it is clear that foreign direct investment can be beneficial for development or detrimental to development' (p. 2). Divided into six chapters, the book succeeds in establishing an in-depth review and critical analysis of the effect of inward and outward foreign investment on host and home economies with some classic case studies that give a very convincing insight into how developing economies can attract and harness FDI for development.
Moran's clear discussion of the effect of policy design in capturing the benefits of FDI, shows that FDI aimed at protected developing country markets results in the construction of plants which are too small to capture economies of scale while plants built as a part of the parent corporation's strategy to compete in international markets invariably leads to full economies of scale. Theodore Moran reiterates the stance that governments that liberalise their trade and investment polices in order to stimulate the benefits of FDI by imposing domestic content requirements on protected foreign investors are 'solely misguided about how foreign direct investment can best contribute to host country growth and welfare' (p. 15). Using case studies, he expands on the literature by revealing that the impact of FDI both positively and negatively on the host economy, is larger than has been conventionally reported. Positively, the case of South Africa, Mexico and Costa Rica shows that FDI not just increases the host country's capital stock but also provides cheaper and higher quality products than previously available, invariably stimulating local competition. Negatively, FDI in protected domestic markets detracts from host countries welfare and reduces their competitiveness in international markets.
The book also highlights the argument that the liberalisation of the host economy to trade and FDI increases economic growth. This is consistent with the World Development Report (2005) that reports that with the improvement of the investment climate in China and India, per capita GDP rose and both countries experienced dramatic reductions in poverty, each on distinctive paths, but both sustaining efforts to improve the opportunities and incentives for firms to invest productively.
The book highlights some interesting discoveries that should be the basis for a restructuring and significant change to policies guiding the regulation of FDI. An intriguing discovery is that the International Labor Organization (ILO) does not provide a clear route to identifying and resolving labour standards violations especially in the case of freedom of association and the right to collective bargaining. There are three key issues that show this. Firstly, the lack of a consensus on a jurisprudence of the argument that labour legislation that permits employers to hire permanent