Ki Fukasaku Paris, 14 December 2001 FDI, Human Capital and Education in Developing Countries: Defining a Research Methodology Ki Fukasaku Paris, 14 December 2001

What type of FDI? Natural resource extraction Manufacturing Services (telecom, power, transport, etc) Green-field M&As Privatisation

Factors affecting FDI inflows Fundamentals Local thresholds skills, technological capability, capital markets etc. Host-government policies incentive-based measures, rules-based measures (e.g. RTAs) general vs. sector-specific policies

Share of Manufacturing in Total FDI Stock- the United States, 1986 and 2000

Net FDI Source and Recipient Countries ($Billion, three year average 1998-2000)

Net FDI Source and Recipient Countries ($Billion, three year average 1991-1993)

Benefits of FDI for Host Countries FDI brings financial resources for domestic capital formation. FDI increases production, employment and trade, quantitatively and qualitatively. FDI transfers technologies, hard and soft.

Technological Spillovers Intra-firm (from parents to foreign affiliates) Intra-industry (from FAs to local firms in the same industry) Inter-industry (vertical linkages) Labour turnover (“training ground”)

FDI and technology transfer (1) Intra-firm technology transfer: the host-country conditions matter (e.g. income level, past experience on industrialisation - Urata-Kawai 2000) Efficiency gains from technological spillovers to local firms would not occur automatically. Competition matters in local markets (Okamoto, 1999)

FDI and technology transfer (2) Blomström-Persson (1983, Mexico 1970) Haddad-Harrison (1993, Morocco 1985-89) Blomström-Sjöholm (1998, Indonesia 1991) Kokko et al. (1996/2001, Uruguay 1988) Aitken-Harrison (1999, Venezuela 1976-89) Djankov-Hoekman(1999, Czech, 1992-96) Haskel et al. (2001, UK 1973-92)

FDI and technology transfer (3) Both relative and absolute technological capabilities - Perez (1998, Italy 1989-91) Foreign presence affects positively the productivity growth of domestic firms in specialist and scale-intensive sectors (e.g. chemical, machinery, metal, automobile), but not in science-based sectors (e.g. pharmaceutical, IT/electronic).

Host-government policies (1) The importance of host-government policies for attracting FDI and reaping full benefits associated with FDI is clear. Motives of foreign investors and host-country “fundamentals’ Costs of investment incentives

Host-government policies (2) A comparative survey of FDI regimes in Asia and Latin America Legal and policy framework for FDI appears to be more open in Latin America than in Asia. Wide differences across countries in Asia in terms of control at the entry phase and negative lists as well as the approach to IPRs

Main conclusions (1) Host-government policies matter. More discussion is needed as to how policies work (or do not work). Traditional incentive-based measures are costly for developing countries facing severe resource constraints.

Main conclusions (2) The establishment of a multilateral framework of rules on FDI helps increase the collective welfare of host countries (prisoners’ dilemma). A regional approach to taking more constructive, rules-based policies to FDI: EU, NAFTA, MERCOSUR, FTAA, ASEAN Investment Area, APEC.