A Collection of Thoughts on FDI

We've been talking a lot about Foreign Direct Investment (FDI) lately. It seems there is at least something close to a consensus that FDI can be an extremely positive force for development in less developed nations. Stiglitz had some caveats to the benefits of FDI versus what they could be considering the sometimes negative externalities like environmental impact and questionable business practices like sweatshops and child labor (though he and Wolf could debate that one out). Meanwhile Wolf, in trying to defend FDI, gave its major potential impact on the developing world a bit of the short shift. In the midst of all this FDI talk I have had a few thoughts.

Is all FDI created equal?

It seems as if it isn't. FDI seems almost clearly better as a form of investment that hot speculative capital flow. Some (maybe most) FDI seems beneficial, but many of the negative examples discussed by both Wolf and Stiglitz centered around resource extraction based FDI, which seems to do little to impart technological or skill advances, instead leaving the sites of investment with fewer resources and environmental disasters.

There also seems to be certain plans for and types of government management of FDI that work better than others. China has seen major benefits from FDI and its government manages carefully which investments it will allow in- insisting on some measure of control over the project. Based on Kumar, India has also engaged in this type of limitation- it opened up it's retail sector to foreign investment but limits outsiders to a maximum 49% stake (pg.5). These manages FDI regimes seems anecdotally the most successful, but I wonder it is the result of government management and restriction or other factors?

FDI and Democracy

One of the criteria that gets mentioned over and over again as a key factor of attracting FDI is political stability. Companies don't like to invest where they are unsure of the state of rule of law, property rights, and access to a workforce in the immediate future. Since FDI is a more entrenched and long term form of investment it cannot simply be pulled out (without significant loss) at the first sign of turmoil.

This logic makes sense. However those in the west that push FDI and "development aims" tend to push them simultaneously with political liberalization. Political liberalization is a great ideal, however in practice it often does not look like stable political environment that attracts investors. In fact many of those most successful with FDI like South Korea and China have had regulated FDI systems controlled by strong, not exactly democratic regimes. Liberalization politically has sometimes followed economic development- but that development has been kicked off and nurtured by restrictive regimes. This reality conflicts with liberalism's ideal of political and economic openness moving together and the idea that freedoms advance together as discussed by Amarta Sen. However in practical situations- nations where (often pushed by the west) political liberalization has progressed we have seen that new democracies are highly volatile places- of exactly the sort that terrify investors. What does this say about where FDI is successful and should it change the way that we look at development strategy?