Globalisation: The costs and benefits of foreign investment
Guyana and the wider world
Attitudes to FDI The posture of the Government, and indeed that of most Guyanese today, is very supportive of private foreign direct investment (FDI). It is believed that, without this, Guyana will be unable to develop and become prosperous. It is true that, for a variety of reasons, reservations have been expressed from time to time about particular investments. These range from the economic, as for example when the foreign investor acquires Guyanese owned assets, or rights to Guyanese resources, at fire sale prices, to the environmental, i.e., when the private FDI seems to pose threats to the natural environment. Those who have been around would realize that this posture contrasts sharply with that held by the Government and, for that matter, most Guyanese in the mid 1970s. In that period, when the "feed, clothe and house ourselves" strategy of development was the dominant paradigm, private FDI was seen as having contributed in the past to the underdevelopment of Guyana. It was not therefore, welcomed with open arms. At best, it was grudgingly accepted. Private FDI, economic colonization, and Transnational Corporation (TNC) exploitation were treated as synonymous. In both periods, now and then, what I have described about Guyana typified the received knowledge of the times. Today, the overwhelmingly dominant world view is that private foreign investment is the engine of growth for all countries. Despite, however, the certitude behind present claims about FDI, among economists who have specialized in the empirical and statistical measurement of the costs and benefits of FDI, the jury is still out. In this literature rarely do you find categorical statements. No one pronounces indisputably, that the benefits of private FDI outweigh the costs. The debates Recent debates on the benefits and costs of FDI flows have intensified because of what we observed in previous articles in this series. We are now in a situation where mergers and acquisitions (M&As), that is the buying and selling of firms by TNCs, dominate private FDI flows. Unlike greenfield investments, these initially add no new production capacity to the country where a firm has been acquired. This concern is partly resolved if we distinguish between the short-term and long-term effects of an M&A. In the long-term an M&A can become indistinguishable from a greenfield investment. But this will be so, if, and only if, new capacity is added after the M&A. Of course this may not occur. There have been several M&As where the long-term strategic concern of the TNC is to stifle the growth of the acquired firm, and expanding its productive capacity never enters the picture. There have also been cases where the motive of the TNC is simply to acquire cheap assets, for later re-sale. In this instance also, expanding the capacity of the firm is never really on. Suppression of competition This observation leads directly to one of the most negative features of M&As. That is, their potential for suppression of competition, by contracting, and not expanding, the growth of the acquired firm. The basic rationale for this is that expansion does not serve the global strategic interest of the TNC. In instances of this sort, the TNC's drive to become a monopoly is its major preoccupation. Crowding out This point can be expanded further. A potentially strong adverse effect of foreign investment through the route of an M&A is the dampening and containment of domestic enterprise and initiative and, even at times, local research and development (R&D). It should be remembered that the TNC which does the acquiring, gets ownership of the enterprise. It then brings in its own management and integrates whatever (R&D) is taking place in the acquired firm, into its worldwide network. The net result can be, in some circumstances, the deliberate "crowding-out", as economists term it, of important domestic (R&D) initiatives and developmental potential. This situation is compounded by the almost certain eventuality, that the acquired firm will be re-structured and new overseas management put in place. This results not only in the loss of management jobs and positions for locals, but equally likely also in a reduction of the level of the workforce. You would realize how likely this is, if you considered what would happen if our sugar or bauxite industry was acquired by a TNC! Do you expect that existing management and employment levels will be preserved? The answer is no. Down-sizing, right-sizing, re-structuring, or whatever it is termed, will almost certainly occur. The bottom line The bottom line is that when a TNC acquires a firm in another country, it expects to get more benefits than its costs for the investment. It is almost certain therefore, that more has to flow out from the country in which the newly acquired firm is located, than goes in. That is the logic of profit making in the market place. This logic is therefore the basis for the reverse flows of capital and foreign exchange out of countries to the headquarters of the TNCs. Such reverse flows can also, in some instances, include technology and skills. This consideration played a prominent part in attitudes toward foreign investment in the mid 1970s. Then it was widely acknowledged that, whatever a TNC might initially bring in through a greenfield investment (where it installs new production capacity), more has to eventually leave the country. Studies of particular firms in the CARICOM region in the sugar, bauxite, and financial sectors, showed that after the initial inflow of funds to construct the new enterprises, the bulk of the later expansion of these firms was financed with domestic, not foreign funds. This was made up mainly of ploughed-back profits or government support (local taxpayers). Worldwide concerns Such concerns about private FDI flows are expressed worldwide. This is not remarkable, given that the bulk of these flows are among the already developed economies. In these countries concerns about FDI flows hit the headlines when a major part of their social and cultural landscape is bought out "by foreigners". We all remember the headlines when Japanese firms acquired the Rockefeller Centre in New York and a number of film studios in Hollywood. The acquisition of these cultural icons of the USA by the Japanese whom they had fought against a few decades earlier in WWII, seemed too much to stomach. But such is the power and force of the TNC monolith in pushing globalisation, that those concerns were swept aside, and are now, all but forgotten. There are of course the benefits claimed from FDI flows. In the case of M&As it is necessary to reiterate that these will occur, if they do, in the long term. In the short-run, foreign control of domestic assets is established with none of the benefits that come from greenfield investments where new facilities, equipment, and capacity are established at the outset. Next week we take a closer look at the benefits claimed for these FDI flows.
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