FDI and the effects on society.

Herman, Michelle ; Chisholm, Darla ; Leavell, Hadley 等

ABSTRACT

The last decade has seen an explosion in Foreign Direct Investment (FDI) especially in developing countries, where the returns on investment can be higher than in developed countries. Both developing and developed countries have liberalized their policies and introduced new policies to attract FDI inflows. This increase in FDI has had major effects on the social welfare of the citizens of developing host-countries. The purpose of this paper is to examine both the positive and negative effects of FDI inflows to developing countries in areas of politics, society, technology, finance, environment and culture, to determine whether or not FDI contributes to the well-being of society. This paper also provides an overview of the current trends in FDI flows and the relationship between FDI, multinational corporations, and society.

INTRODUCTION

Foreign Direct Investment (FDI) is the single most important instrument for the globalization of the international economy. Defined, FDI is the investment of real assets in a foreign country; it is acquiring assets such as land and equipment in another, host country, but operating the facility from the home country. FDI is viewed by many as necessary to stimulate the economies of both developed and underdeveloped countries. It has even been suggested that FDI will eventually replace official development assistance to underdeveloped countries. Between 1986 and 2000, the average annual growth rate of FDI was 25 percent. More recently after the September 11th terrorist attacks in the U.S., the global economy experienced a decrease in foreign investment flows. Developing countries have been hit the hardest by the decline in FDI as foreign investment is being redirected to more developed countries. In spite of the decline, it is expected that FDI will continue to be the most significant tool for globalization.

It is widely accepted that FDI inflows provide economic benefits such as increased competition, technological spillovers and innovations, and increased employment. Yet the impact of foreign investment extends far beyond economic growth. At times FDI can be a catalyst for change to society as a whole, therefore one must think in terms of economic, political, social, technological, cultural, and environmental factors and examine all the effects of FDI in order to decipher the true long-term impact. As foreign investment and globalization continues to increase, developing countries desperately seeking to attract foreign investment can have undesirable outcomes. In this scenario FDI can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility, environmental degradation, and increased cultural tensions.

The results of FDI on the global economy are complex and unpredictable; they can vary from country to country. This is due in part to the practices that are in place prior to receiving FDI inflows, such as deep-rooted social customs, political practices, laws and regulations. In more developed countries, such as Singapore, China and Ireland, the increase in foreign investment resulted in rapid economic growth and social development. Yet in unstable, underdeveloped countries, the results can be quite different. For the positive effects of FDI to be realized by undeveloped countries, major reforms in domestic policies must also take place.

The purpose of this study is to examine the effects of FDI and to determine whether the benefits of FDI outweigh the costs. Arguments from both sides of the debate will be taken into account when assessing the true impact of FDI.

LITERATURE REVIEW

There is an abundance of literature regarding the impact of FDI on society. Most literature analyzes the relationships between FDI, multinational corporations, and governments. A majority of the literature analyzes one side or the other; however, in order to more accurately measure the situation, a more balanced assessment that examines both sides of the debate is necessary.

Both Kiss (2003) and Hippert (2002), examining FDI from a social standpoint, provide a negative perspective on the impact of FDI in developing countries. Kiss (2003) analyzes the situation in Hungary when the Hungarian government introduced elements of a parliamentary democracy and market economy that eventually led to the social and political exclusion of Hungarian women. The author argues that governments must address gender issues as well as implement official measures and institutional changes to facilitate women's inclusion into production and social systems. Hippert (2002), examines the effect of FDI on women's health. The author asserts that FDI and Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of the developing world and states that it is women who bear the brunt of human rights abuses because of their social positions in developing countries, especially in parts of Mexico and Asia. The author also discusses solutions to these problems that have failed because they have been primarily "top-down approaches," and proposes that the only plausible solutions are to hold corporations accountable for their employees.

Jones and McNally (1998) provide insight into the environmental degradation that is caused by FDI. The authors consider both sides of the debate on the existence of "pollution havens" and provide reasons why MNCs do not contribute to environmental pollution. The authors also state that in industries that are involved in resource extraction, some evidence suggests that MNCs will relocate to countries where environmental regulations are lax or non-existent. Again in 1998 McNalley, along with Mabey, authored a report on FDI and the environment for the World Wildlife Foundation. The report provides instances of environmental degradation that occurred mostly in extractive industries, along with proposals for reforms to current environmental standards.

In contrast to the negative view of FDI, Rondinelli (2002) explores the public role and economic power of MNCs and the positive ways in which MNCs can influence governments and provide for the social welfare of host-country citizens. By focusing on their roles as philanthropists and political activists, MNCs provide foreign aid to developing countries, expand international trade and investment, and influence public policy. The author provides several instances in which an MNC stepped in and provided foreign aid to developing countries in order to fill the gap that was created when Official Development Assistance was decreased.

Spar (1999), takes a neutral stance when discussing the complexity of the relationship between foreign direct investment and human rights and the ways in which FDI impacts society both negatively and positively. The author concludes that it is the interaction of governments and MNCs that will lead to economic growth and social prosperity through FDI.

CURRENT TRENDS IN FDI FLOWS

Although in 2001 the global economy experienced a decrease in FDI flows, the magnitude of FDI flows throughout the decade continues to set records. Most FDI flows originate in and are received by developed countries. In 2001, the world total of FDI inflows were $735 billion, while outflows were $620 billion. Of the total inflows and outflows, developed countries received $503 billion and $580 billion respectively, developing countries received $204 billion and $36 billion and the transition economies of Central Eastern Europe received $27 billion and $3 billion. All regions of the world shared in the decline in FDI between 2000 and 2001; however, the decline in FDI flows shrank by 59 percent in developed countries compared to the 14 percent decline in developing countries.

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Three main factors have contributed to the increase in FDI over the last decade. The first factor is the increase in global policy changes that are intended to make FDI more favorable. In 2001, 208 changes were made to FDI laws by 71 countries and over 90 percent of these laws are for the purpose of improving the investment climate for FDI. Also in 2001, 97 countries were involved in the establishment of 158 bilateral investment treaties. The second factor affecting the increase in FDI is the rapid increase in technological change. In today's environment, firms are experiencing rising costs and higher risks associated with the increase in technology. In order to remain competitive, it is crucial for firms to expand into international markets. A fall in transportation and communication costs has made it more economical than ever for firms to integrate foreign operations and to focus on increasing the efficiency of operations. The third factor is the ever-increasing global competition for firms, which is actually a result of the previous two factors. The increase in competition forces firms to search for not only more efficient operations and lower costs, but also new markets for consumers and new forms of business arrangements such as strategic alliances and joint ventures. In spite of the recent decline in FDI flows, FDI has proven to be resilient and it is likely that the world economy will continue to expand through globalization (World Investment Report, 2002).

REGIONAL DEVELOPMENTS

Developments in FDI can vary significantly by region and as stated previously, the decline in FDI in 2001 was concentrated in developed regions. The U.S. remained the largest recipient of FDI flows, despite the economic slowdown and the events of September 11th. However, FDI inflows of $124 billion were less than half of what they had been in 2001, while FDI outflows declined by 30 percent to $114 billion. Western Europe also experienced a decline in FDI flows of about 60 percent to $323 billion in inflows and $365 billion in outflows. The main destination for U.S. outward flows was the European Union, and the euro-area as a whole continues to outperform the U.S. in both inflows and outflows. As for other developed countries, Japan continues to suffer from a prolonged recession. Consequently, inflows fell to $6 billion; however, outflows increased to $38 billion. Canada appears have been the most affected by the developments in the US; inflows and outflows fell by 60 percent and 25 percent, respectively.

In developing countries declines in FDI inflows were not as pronounced; however, outflows decreased 14 percent. The economic slowdown in 2001 may have even contributed to the increase in FDI inflows to low-wage economies, as is demonstrated by the increase in FDI from Japan to China and the growth of flows to countries in Central and Eastern Europe, Central Asian, and West Asia. Africa, with its abundance of natural resources, still only receives a small percentage of FDI inflows. However, the sectional composition indicates that Africa as a whole is changing. Inflows are no longer concentrated in oil and petroleum, the services industry is also experiencing a significant increase FDI. In China, FDI inflows actually increased to $46 billion and the East-Asia region remains the largest recipient FDI inflows in the entire region. (World Investment Report, 2002).

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MULTINATIONAL CORPORATIONS

A multinational corporation is any firm which takes part in direct investment in foreign countries and controls and manages income generating assets in that country (Stephens, 2002). MNCs are the vehicles for FDI, and as MNCs continue to grow, their influence becomes more pronounced around the world. The debate concerning MNCs centers on their expanding public roles and their influence on both business and public policy. However, as their influence continues to grow, questions arise about their impact on developing countries.

In practice, many MNCs voluntarily adopt the environmental, social, and political practices of the host country; however, if there is an absence of rules and regulations that protect both the environment and the local population of the host country, then there exists great opportunity for profit maximization for the MNC at the expense of the indigenous population. For years, MNCs have been blamed for failing to protect the rights of local populations, for environmental destruction, and in many cases for directly and indirectly participating and collaborating with repressive governments to profit from exploitation (Busse, 2002). Yet MNCs alone cannot be blamed for failing to implement reforms. The extent to which FDI can assist developing countries depends on the interaction of governments and corporations. Because the global economy has seen an increase in FDI that is not extractive resource seeking, there is a larger variety of choices for location in other industries; therefore, countries must compete for FDI inflows. In some cases, where local governments of developing countries face heavy competition for FDI inflows, it is believed by local governments that the positive impact of FDI outweighs the negative impact, and in many cases the negative is a precursor to the positive. This creates a "race to the bottom" where governments seeking to attract foreign capital inflows will reduce barriers and eliminate regulations that were meant to protect the social welfare of its citizens and the environment. In cases such as these, it is believed that the local population employed by MNCs must endure vocational abuses in order for the spillover effects of FDI to be felt by the entire community. In contrast, studies have shown this is not usually the case. Typically the benefits of FDI are short-term with no real long-term sustainable positive impact on the host country. For example, if the FDI is export-oriented and the human base does not provide a natural market for the product, then there is little incentive for MNCs to improve conditions for the indigenous population. Most often the benefits of FDI happen in a trickle-down effect, or spillovers, such as an increase in employee skills, technology, information, and education or training. If the host country is unable to channel the benefits of FDI into domestic, locally owned operations and capital, then there will not be a wide variety of opportunities for entrepreneurship for its citizens (Spar, 1999).

In contrast to the view that MNCs intentionally and unintentionally contribute to human rights abuses, environmental destruction and social instability, many argue that MNCs also act as social philanthropists and political activists. In their expanding roles, many MNCs often work with international agencies and non-governmental organizations to define policy issues, implement codes of self-regulation and compliance, and intervene on social issues. In addition to their public roles, in some developing countries they also provide large amounts of private foreign aid in the form of direct corporate contributions, corporate foundations and personal and family contributions (Rondinelli, 2002).

Obviously MNCs can have substantial positive and negative impacts on host-countries. However, the relationships between MNCs, FDI and society are quite complex and require an in-depth examination of all the negative and positive effects that occur with the increase in FDI.

BENEFITS OF FDI

The benefits of FDI are numerous and in some cases offset the negative impact. FDI inflows can result in technology transfers, human capital formation, international trade integration, an increase in competitive business environments, enterprise development, economic growth, and improved environmental and social conditions (OECD, 2002). FDI appears to have the most significant impact on macroeconomic growth, which is why more and more countries are welcoming all FDI and are now competing for FDI inflows.

Macroeconomic growth is commonly considered as the most potent source of poverty relief, particularly in the poorest countries. Beyond the initial macroeconomic stimulus from the actual investment, FDI may influence growth by raising total factor productivity in the recipient economy. This works through two channels, namely (i) the spillovers and other externalities vis-a-vis the host country's business sector, and (ii) the direct impact on structural factors in the host economy. (www.cuts.org, p. 3)

To accurately assess the way in which FDI can affect society, one must consider situations in which FDI has transitioned underdeveloped regions into potential global economic competitors.

For example, due in part to their commitment to the World Trade Organization, China increased trade and investment liberalization, and in 2001 China was the largest recipient of FDI inflows. Foreign funds led to a rise in capital formation and consequently an increase in productive capabilities and improved technology. These improvements added three percentage points to its Gross Domestic Product (GDP). China has also become a major world exporter by establishing locally-owned assembly plants to take advantage of inexpensive labor. This has resulted in a boost in China's output base and increased employment. The increase in GDP has provided the government with much needed tax revenues. In many cases developing countries are unable to sustain long-term productivity because earnings are repatriated, although this has not been the result in China. The reinvestment of earnings by foreign firms, which was supplemented by China's high savings rate, has moved China away from being only a low-skilled labor provider, and instead has led to long-term economic gains for the entire region (Asia Monitor, 2002).

MNCs are expanding their roles as social and political activists as well. They are increasingly addressing issues such as corruption, human rights, social and environmental issues. MNCs collaborate with organizations such as the United Nations, the International Labor Organization (ILO), and the Organization for Economic and Community Development (OECD) to implement standards of self-regulation, compliance, and conduct. With regard to environmental standards, many MNCs voluntarily submit their environmental management systems for certification by external auditors. MNCs are also leveraging their influence into roles as international policy makers by lobbying governments to cooperate in multilateral and bilateral trade agreements and government regulations (Rondinelli, 2002). As official development assistance (ODA) to developing countries decreased, foreign investors stepped in to fill the gap in foreign aid. One of the most well-known examples of private foreign aid was Ted Turner's one-billion dollar gift to the United Nations for their social and health programs and his offer of a $35 million gift that would fill the gap in the reduction of financial support from the United States in 2000. Several other foundations and corporations such as Coca-Cola, Finnish Telecommunications, and the Bill and Melinda Gates Foundation have provided developing countries with aid to assist in increasing the social welfare of its citizens through education, health, and the environment (Rondinelli, 2002).

As a further benefit, FDI can lead to technological development in host countries. As long as MNCs incorporate and provide linkages to host country firms and workers, then technological advancement will result in long-term economic growth. Studies have shown that several newly industrialized countries acquired technology from abroad, rather than "re-inventing the wheel." Although FDI is a more expensive way to obtain technology when compared to direct purchasing and licensing, if technology is obtained through FDI, then in reality there is no cost to the host country and in many cases FDI is the only way for a host country to obtain technology. Furthermore, FDI brings with it the skills and knowledge necessary to make technology useful (www.southcentre.org). Through the transfer of technical knowledge, FDI enhances human capital. As MNCs employ local workers, their skills and education levels will increase through training and on the job learning. In addition, as MNCs set up operations in developing countries, local markets that were initially monopolistic will generally become more competitive (www.cuts.org).

NEGATIVE EFFECTS OF FDI

Human Rights Abuses, Discrimination, and Gender Inequality

In countries where the comparative advantage is cheap labor, there is the potential for MNCs, whether directly or indirectly, to commit human rights abuses. This is seen quite often in underdeveloped countries and in countries where there exists either inequalities between men and women or a large discrepancy between the income levels of the poor and the rich. Examples of human rights abuses are violent security measures, discrimination, gender inequality, the failure to provide safe and healthy work environments, the use of sweatshops in manufacturing, and child labor, although this is less typical.

When analyzing the effects of FDI on society, there is distinction between core labor standards and other labor standards. Core labor standards are 1) freedom from forced labor, 2) equal opportunity for employment, 3) the abolition of exploitive forms of labor, and 4) the right to collectively bargain and freedom of association. Other labor standards relate to the conditions in the working environment and the labor market, such as health and safety standards, annual leave with pay, and minimum wages; these standards are usually referred to as "acceptable working conditions." While core labor standards are commonly, but not always, accepted, other labor standards are at the forefront of the debate regarding fundamental workers' rights. The controversy concerning these labor standards, centers on the lack of them in many developing countries (Busse, 2002).

In the age of information technology, the increase in information and access to information has dramatically changed the way businesses operate. This increase in information reveals those corporations that commit human rights abuses. As a result, MNCs whose strategy is reliant on quality and prestige of brand name, have increased their compliance with regulations that are in place to protect core human rights. This does not, however, obligate MNCs to provide the same benefits and protections that are provided to U.S citizens and citizens of more developed countries (Spar, 1999).

Regarding the way that FDI contributes to gender inequality, discrimination and human rights abuses, the case of Hungary provides an example. Hungary emerged into the global economy during the 1980's as "the happiest barrack" of the Soviet Block. The Hungarian economic and social structure during this period was characterized by "relative flexibility and a higher standard of living." (Kiss, 2003, p. 3) After a series of political regime changes during the 1990's, the economic and social situation took a turn for the worse and Hungary suffered a period of recession that peaked in 1994 when the government deficit grew to 7.5 percent of GDP and public-sector debt ratios grew to 85 percent of GDP. Following the decline in economic growth, the socialist-liberal governing coalition introduced a "comprehensive financial adjustment package" (Kiss, 2003, p. 3) aimed at reforming government finances by reducing personnel in the public sector, freezing revenue increases, and cutting back social welfare provisions and publicly subsidized services. During this period of "Hungarian transformation", economic growth was facilitated by dramatic increases in FDI, exports, and privatization that helped reduce foreign debt and the balance of payments. The economic turnaround was deemed one of the most successful in Europe (Kiss, 2003).

The Hungarian government worked hard to attract FDI and foreign investors benefited greatly from the inexpensive labor and investment incentives. By the late 1990's, foreign-owned companies dominated the Hungarian economy; Hungary had the highest ratio of cumulative FDI inflows to nominal GDP in Eastern Europe at 17.8 percent. Yet, this economic growth spurred a drastic decline in social welfare marked by increases in poverty, inequality, and social exclusion. The increase in FDI also caused a major loss in employment as most of the growth was classified as "jobless growth." As FDI by foreign firms began to dominate the economic environment in Hungary, it became difficult for smaller, less efficient, domestic firms to gain strategic advantages, and many were eventually driven out of production and manufacturing industries. The economic recovery of the period did not have trickle-down effects, and at the same time the government deconstructed the social welfare system. Even after FDI inflows increased, the government did little to restore social welfare programs (Kiss, 2003).

Instead of higher incomes and greater consumption for its citizens, which is what theoretically should have followed the increase in FDI, the economic recovery was accompanied by increased unemployment and inactivity for women. Females in many industries were crowded out of the work force by males seeking employment. The losses in employment opportunities forced many women to drop out of the labor force, and they are now finding it difficult to re-enter the labor market. Now considered a "secondary workforce," women often suffer discrimination at the workplace. Those that are unemployed face poverty, a loss of social benefits, and a decline in political representation (Kiss, 2003).

A major concern for many has been the effect of FDI on women's health. In the border region between Mexico and the US, there has been an increase in production facilities for textiles, electronics and garments; these facilities are called Maquiladoras. In these factories, women are typically hired for low-paying, labor intensive positions and are often exploited because they are easier to control and because working in Maquiladoras is their only option for earning wages. In most regions of Mexico, women are viewed as second-class citizens and are denied many of the basic human rights afforded to women in more developed cultures, it is women who bear the burden of poverty and human rights abuses. Many MNCs that have set up these production facilities, have been accused of exploiting these inequalities by failing to implement rules and regulations concerning basic human rights and for failing to provide the local population the same benefits that are provided to employees in the US. MNCs do not provide safe working environments, and these women are often exposed to dangerous chemicals and forced to work long hours with no breaks. They are also harassed by supervisors and are forced to submit to medical examinations prior to being hired to ensure that they are not pregnant. (Hippert, 2002)

Environmental degradation

Historically, FDI has had a strong relationship with natural resources use and extraction (agriculture, mineral, fuel production). Currently, the debate over environmental pollution has centered on MNCs that have been involved in the exploitation of "pollution havens," which refer to countries with lax environmental regulations that seek to attract FDI by undervaluing their environment. This type of exploitation can lead to high levels of pollution and environmental degradation of the host country (Mabey & McNalley, 1998)

 Environmental degradation reduces the ability of an economy to
 produce goods and services over time due to the reduction in natural
 resource inputs such as soil fertility, and ecosystem productivity
 more generally. About 20 percent of land is suffering from soil
 degradation, significantly reducing future productivity. The erosion
 of natural capital in the short term can have long-run impacts,
 affecting human trends, social and environmental capital shocks
 that are essential for the balanced sustainable development for
 any country" (Mabey & McNalley, p. 27).

The mere existence of pollution havens has been thoroughly debated. Currently, there is very little empirical evidence to support the theory that MNCs will relocate to developing countries with less-stringent environmental regulations and many argue that idea of pollution havens is simply just a "popular myth that does not hold in reality." (Stephens, 2002) Supporters of FDI, typically argue that because environmental costs make up a small proportion of total costs, these costs do not influence location decisions. Furthermore, in many cases environmental regulations have little impact on locational decisions when taking into account future increases in environmental regulations and the possibility of the demand by industrialized countries to meet environmental product standards. Although, to date, empirical research cannot measure the impact of FDI on the environment, criticism of the concepts and methods used in these studies suggest that the research investigating the existence of pollution havens is incomplete. The majority of studies examined the effects on an aggregate level and may have possibly left out important variables. Some studies have shown support for the "pollution havens" hypothesis with most evidence relating to the participation in international treaties as a measure for the host-country's environmental standards. In this case, FDI inflows were smaller for countries with higher environmental standards. Although, there is some support for the hypothesis, the support is unsubstantial (Dean, Lovely, & Wang, 2002). Most research suggests that overall MNCs do not invest in developing countries to access lower environmental costs. The reasons for not investing in these countries are threefold. First, many companies cannot afford a tarnished reputation in the global marketplace from environmental and social exploitation. Second, it may be less expensive to apply uniform environmental standards to operations in all foreign countries than to modify standards for specific operations. Last, firms may be obligated to comply with environmental standards used in home-countries (Jones & McNally, 1998).

The debate surrounding the existence of pollutions havens does not trivialize the argument that FDI increases pollution in host-countries. Although, there is little empirical evidence to support the pollution havens theory, there is ample evidence to support the argument that MNCs, once they have established operations in a host-country, do actually contribute to the degradation of the environment. This is especially true for MNCs involved in resource extraction and processing sectors, such as chemicals, minerals, metallurgy, logging, and paper. Over the last 25 years environmental degradation on a global scale has accelerated. In their 1998 report on FDI and the environment, Mabey and McNalley, estimated that global freshwater eco-systems have declined by 50 percent, marine eco-systems deteriorated by 30 percent, forest cover reduced by 10 percent, and global energy has increased by 70 percent causing an increase in greenhouse gas emissions. Although, the evidence of global environmental destruction is undisputable, the relationship between the environment and FDI is less obvious and requires a closer examination on a country by country basis (Mabey & McNally, 1998).

In lower-income developing regions such as Africa, Asia-Pacific and Latin America, which are rich in environmental resources, the impact of FDI on the environment can be devastating. For instance, in Indonesia forest and rivers have been severely polluted and destroyed by mining corporations. Palm oil plantations in Sumatra forced the indigenous community to be driven from parts of their lands. In the Philippines, fourteen rivers become so polluted by copper waste that fish yields were reduced by 50 percent (Jones & McNally, 1998).

The most widely held belief by proponents of FDI flows was that of the "Environmental Kuznets Curve" which asserted that environmental degradation increases up to a certain level of income, at which point it then begins to improve. Yet, there has been little empirical evidence to support this theory and in many cases, it would take years for the average income of a developing country to reach the level at which environmental degradation decreases. If a developing country reaches this point, the effects of degradation will most likely be catastrophic and irreversible (Mabey and McNalley, 1998). Although the benefits of FDI in developing countries can be potentially numerous, in extractive and natural resource based industries the benefits are not as obvious. Most economic theories of sustainability show that unless there are laws and regulations in place to protect and preserve vital ecosystems, FDI and economic growth in general will intensify the present levels of degradation. Furthermore, in the absence of strong regulatory systems, the rents from resource use, that is, payment for the exploitation of their resources, are most often redistributed to less beneficial uses such as funding imports for consumption or investing abroad. In order for the benefits of FDI to be realized in the long-run, rents must be reinvested in efficient enterprises and in long-term productive capital (Mabey & McNalley, 1998).

Financial Volatility

When financial markets are imperfect and underdeveloped, the result is a scarcity of financial resources that prevents MNCs and domestic corporations from undertaking profitable business opportunities. In the wake of the recent debt crisis, ODA flows to developing countries have declined, and banks are providing less credit making it difficult for developing countries to obtain financing. Furthermore, because high investment returns obtained through FDI are based more on interest rate differentials rather than on rudimentary economic variables, investors are finding the problems associated with FDI, which are more difficult to measure, are not always compensated by the high returns (www.cuts.org ).

During the 1990's, some economists prescribed to the theory that in a world of free capital movements, the balance of payments of a country are irrelevant because over time the balance of payments will be self-corrected through the savings and investment decisions of individuals and businesses. Based on this theory, all economic agents will attempt to maximize profits and minimize costs; therefore, any government intervention will only lead to distortions that cause adverse affects on the economy and the welfare of its citizens. In reality though, this has not been the case for several developing countries, namely Mexico during the Mexican financial crisis in 1994 and the East Asian crisis that occurred more recently. During the Mexican crisis, foreign investments were being used to finance imported goods for consumers rather than being reinvested in longer-term capital. This caused a massive current account deficit, the eventual devaluation of the Mexican peso, and a financial crisis of enormous proportions. As a result, most economists accept that the balance of payments, at least for developing countries, is a significant factor. In addition to the effects of the balance of payments are the repercussions of financial markets where derivatives have become important financial tools for investors. In the past, investments in longer-term capital, which are relatively immobile, resulted in economic gains. However, with the increase in derivatives and hedging, the distinction between portfolio investment and long-term capital investments has become less clear. As financial markets evolve, investors can now offset the increased volatility associated with FDI with the use of currency hedging or derivatives, which can result in volatility as the buying and selling of currencies by investors puts pressure on spot rates (www.southcentre.org).

Cultural, Political, and Technological Implications

FDI has the potential to cause cultural tension between the home country and the host country. For example, in Asia, where Japan is slowly replacing theU.S.as the leading provider of foreign direct investment in East Asia, cultural tensions that were already in place before the economic boom in East Asia began, have now been aggravated by the Japanese saturation of the East Asian market (Economist, 1993) Although cultural tensions can be fairly benign in more developed countries, in countries with unstable political environments, cultural tensions can have destructive consequences. The most recognized cultural clash has been the rejection of "Americanization" by several middle-eastern societies that occurred before and after the Sept. 11 attacks on the WTC.

Research has shown that FDI can impact the political environment of the host country. Although underdeveloped countries do not receive the majority of FDI flows, in the absence of a stable political environment, which is more typical of an underdeveloped country, the effects on the political structure can be greater than those of more developed countries. Political unrest occurs in several ways. In countries with newly instituted political structures, some people may view foreign investment as an extension of imperialism. In other countries where there exists a considerable discrepancy between the incomes of the poor and the elite, FDI will be viewed as favoring the elite. Local entrepreneurs of underdeveloped countries might view foreign investors as seizing valuable resources that belong to the indigenous population. For MNCs involved in the removal of natural resources, the locals may view the MNC as taking the host country's resources without adequate compensation to the local population. In more traditional cultures, rapid urbanization is seen as a threat to the local culture. In any of these situations, an increase in FDI can lead to political conflict in the host country (Rothgeb, 2002). While FDI can provide much needed technological spillovers, if MNCs fail to create linkages in the local production systems, then FDI will hinder the development of technical skills by local firms and institutions.

PROPOSALS FOR REFORM

When considering the successes of FDI, it appears that with reforms and regulations in place to protect against the negative effects of FDI, the long-term benefits to society can far outweigh the short-term costs. Studies have shown that in absence of favorable conditions in the host country economy, developing countries are less likely to attract foreign investment. In addition, even with increased FDI in a developing country, without an overhaul of a country's legislative, institutional, political, social, and educational framework the spillover effects of FDI are not likely to result in any long-term benefits to the host country. Many proposals for reforms to foreign investment have been recommended. Examples of such include multilateral agreements for corporate conduct, policy frameworks for social and environmental standards, programs for education and workforce training, and improvement of the internal political climate by the host government.

 With most FDI flows originating from OECD countries, developed
 countries can contribute to advancing this agenda. They can
 facilitate developing countries access to international markets
 and technology, and ensure policy coherence for development more
 generally: use overseas development assistance (ODA) to leverage
 public/private investment projects and encourage non-OECD countries
 to integrate further into rules-based international frameworks for
 investment. (OECD, 2002 p.1)

SUMMARY AND CONCLUSION

A majority of research highlights the negative effects of FDI yet provides researchers with minimal amounts of data concerning FDI's positive contributions to the global economy. Most research has been precautionary at best and generally is necessary to alert governments and business leaders to refrain from accepting any and all flows of FDI, which could potentially beget trouble for future development prospects. When all factors are considered though, it is commonly accepted by researchers and economists that the benefits of FDI far exceed the costs. With the exception of the impact on the environments of developing countries and on financial markets, much of the evidence concerning the effects on workers, the political environment, and cultural relationships is hypothetical and anecdotal at best with only a few instances to validate arguments. Moreover, many of the negative effects are short-term and the standard of living for many developing countries would be worse off without FDI flows. In the age of information technology, it would be a logical assumption and it has even been proven that exploitation of workers and the environment can result in losses of credibility and consumer confidence. For example, companies such as Nike, Toys "R" Us, Avon, and Royal Dutch-Shell have increased their compliance with codes of conduct and have even begun developing preemptive policies (Spar, 1999).

With regard to environmental effects, there is sufficient evidence to conclude that FDI does contribute to environmental degradation. However, environmental degradation is a trend that began with the earliest forms of industrialization and is not partial to developing countries. Pollution will result regardless of location. Many developed countries experience pollution to a degree that has not even reached developing countries. The reasons environmental protectionists have focused their attentions on the impact of FDI on the environments of developing countries is because these countries currently lack the same policies and regulations seen in more developed countries which might protect the environment. Ultimately these regulations are meant to slow the effects of continual resource use and to provide the citizens of host-countries with the same rights afforded more developed countries.

An examination of the current trends in FDI shows that the developing countries receive a disproportionate share of inflows when compared to outflows. The recurring theme throughout this paper concerning the negative effects of FDI is the lack of laws, regulations and policies in developing countries that if in place would otherwise allow countries to channel the spillover effects of FDI in to positive outcomes. In some developing countries that have not reached a certain level of education and infrastructure development and where the markets are also underdeveloped and imperfect, they will be unable to benefit from a foreign presence and the effects of FDI on economic growth will be less benign, yet even in these instances an increase in FDI flows is more beneficial than none at all (cuts.org). The experience of countries in East-Asia shows that developing countries that use FDI purposefully by formulating and implementing national and technological development policies, will be successful in their efforts. MNCs alone cannot solve the problems of poverty, political instability and underdevelopment; these problems stretch far beyond the limited capacity of corporations. Because of this, even a strong combination of FDI and public pressure cannot achieve dramatic results in the reduction of human rights abuses, environmental degradation, political unrest, cultural tensions, and financial volatility. The challenge for governments, business leaders, and advocates is to manage the complex relationships between themselves and to forge an agenda that does not focus only on battling exploitation or limiting the scope of FDI. In the end it remains the responsibility of MNCs and governments of more developed countries, specifically, members of OECD, to assist developing countries in building the infrastructure necessary to reap the benefits of FDI, to continually provide financial assistance in the form of long-term productive capital, and to reinvest profits inward rather than repatriate them.

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Michelle Herman, Sam Houston State University

Darla Chisholm, Sam Houston State University

Hadley Leavell, Sam Houston State University

FDI Outflow

Transition 0.6%
Economies of CEE
0.6%

Developing 5.9%
Countries 5.9%

Developed Countries 93.5%
93.5%

Note: Table made from pie chart.

FDI Inflow

Transition 3.7%
Economies of CEE
3.7%

Developing 27.9%
Countries 27.9%

Developed Countries 68.4%
68.4%

Note: Table made from pie chart.