A Critique of Foreign Investment

Kevin P.Gallagher and Lyuba Zarsk, writing in Post-Autistic Economics Review, are skeptical of foreign investment policies. Their focus is on developing countries, but similar considerations could be made in the case of Canada given the intensity of investment in the resource sector and the federal government’s contention that Canada must maintain its share of global FDI because of its purported, but unproven, benefits to economic growth.

Their abstract:

In the 1990s, foreign direct investment (FDI) came to be seen as a “miracle drug”—a jumpstart to economic growth and sustainable industrial development, especially in developing countries. Policies to attract FDI became the centerpiece of both national development strategies and supra-national investment agreements.

This paper examines case study and statistical evidence about the impacts of FDI in developing countries on economic growth, technology spillovers and environmental performance. Mirroring the heterogeneity of developing countries, we find that there is no consistent relationship: the impact of FDI on each variable has been found to be positive, neutral, or even negative. Key variables are domestic policies, capacities and institutions.

We conclude that the purported benefits of FDI are exaggerated and its centrality in development strategies misplaced. Rather than attract FDI per se, development policies should aim to promote endogenous local capacities for sustainable production. With the right national and global policy framework, FDI could help in that process.