Foreign Direct Investment

FOREIGN DIRECT INVESTMENT (FDI) allows international corporations to invest directly in foreign countries by buying into local firms. In particular, FDI defines the process through which a firm located in a country, known as the home country, buys 10 percent or more of the stock of a firm in a foreign country (the host country, generally a developing country). Usually, corporations involved in FDI buy the necessary amount of stock to give them full or partial control over the firms in the host country, which thus become their affiliates or their branches.

This type of FDI is called acquisition. When a new legal entity is created by the inflow of foreign capital, the operation is described as a merger. In other cases, FDI takes the form of a Greenfield investment, whereby [Page 384]a completely new plant is set up. Foreign direct investment has acquired a global dimension, with FDI stocks representing 20 percent of global Gross Domestic Product (GDP). Economists, social activists, and historians have widely debated whether foreign direct investment brings considerable poverty relief in developing countries or whether it is just another way to exploit their resources and their less strict labor and environment legislations. The heart of the matter is whether foreign direct investment is able to generate spillovers for host economies and if it raises the productivity of domestic enterprises. In addition, do transnational corporations share their profits with the workers and the citizens of the host country? Or do all returns simply increase the gains of the multinational shareholders?

Indebted and poor countries are still dependent on foreign aid for their development strategies. Since the 1990s, foreign direct investment has become the largest source of foreign private capital reaching developing countries. Developing countries have established a series of economic bonuses to attract foreign investment. For example, as Gordon H. Hanson has shown, Brazil became the focus of the automobile industry in the late 1990s.

Both General Motors and Ford established new plants in the country. GM agreed to build a plant in the scarcely industrialized area of Rio Grande do Sul, receiving in exchange several subsidies that partially covered the costs of building roads, ports, and other infrastructures related to the plant; temporary exemption from VAT; and a reduction of import duties on material used to build the plant. The same package of subsidies was received by Ford for the construction of its plant in the poor northeastern state of Bahia.

Both in Rio Grande and Bahia, compensation for automobile workers is lower than in other regions of the country. Both GM and Ford mainly use foreign suppliers. These two examples should make it apparent why the growth of FDI has stimulated a debate on its complex nature and on its possible negative impacts on the economies of the least developed countries. The focus of this debate has been how to use foreign direct investment to fund more sustainable forms of development. The assumption that greater inflows of FDI will automatically act as a benefit for the host country's economy and its general level of wealth has proved inaccurate.

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