FDI in Emerging Markets: A Home-Country View

Abstract

In the 1950s and 60s, the American view of foreign direct investment(FDI) in emerging markets, then called less-developed or developing countries, was that it was desirable for three reasons: as a vehicle for economic development and a partial substitute for foreign aid; to promote economic stability and democracy; and as part of the strategy to contain Communism. In the 1990's, the relationship between such investment and economic development is regarded as more uncertain, the Cold War is over, and many of the developing countries have emerged as serious players in global competition, thus altering the context in which such FDI is viewed. Over the 40-50 intervening years, the U.S. economy has shrunk as a proportion of the global total and has become much more open to foreign trade, thus increasing the exposure of American firms to the global economy and reducing their market power. At the same time, both the nature and the scale of FDI have changed substantially, and the general stance of emerging market countries toward such investment has moved from widespread hostility and suspicion to widespread efforts to attract it. For all these reasons, U.S. policies regarding FDI in emerging-market countries are far more affected by fears regarding its impact on our own economy than they used to be. Among the concerns are the effects on American jobs, wages, income distribution, trade and payments balances, the pace of R&D and innovation, the size of the domestic stock of capital, and the possibility of a global "race for the bottom" in environmental and labor-rights policies. Although most of these concerns are misplaced, such investment does create both winners and losers and thus can give rise to political and public controversy. Therefore, U.S. government policies toward FDI in emerging markets today are ambivalent. While some, including a number of initiatives in the GATT negotiations and the World Trade Organization, are supportive, others, including export controls, the Foreign Corrupt Practices Act, and certain types of import restrictions are either hostile to such investment or seek to limit it in various ways.