Political Ideology and Foreign Direct Investment DA NANG UNIVERSITY OF ECONOMICS Table of contents The radical view The free market view Pragmatic Nationalism 01 02 03 Extract profits from the host MNE is an instrument of imperialist domination Exploit host countries to the exclusive benefit of their capitalist– imperialist home countries Extract profits from the host country and take them to their home country Give nothing of value to the host country in exchange Tightly control key technology.
DA NANG UNIVERSITY OF ECONOMICS Political Ideology and Foreign Direct Investment Table of contents Pragmatic Nationalism The radical view 01 02 The free market view 03 The radical view MNE is an instrument of imperialist domination Exploit host countries to the exclusive benefit of their capitalist– imperialist home countries Extract profits from the host country and take them to their home country Tightly control key technology Keep the less developed countries backward and dependent on advanced capitalist nations Give nothing of value to the host country in exchange The radical view Host-government policy implications No country should ever permit foreign corporations to undertake FDI Where MNEs already exist in a country, they should be immediately nationalized FDI can never be instruments of economic development, only of economic domination The radical view • • • • From 1945 until the 1980s, the radical view was very influential in the world economy The countries of Eastern Europe and communist countries were opposed to FDI Many socialist countries nationalize foreign-owned enterprises—also embraced the radical position Countries whose political ideology was more nationalistic than socialistic further embraced the radical position The radical view China: From the 1950s to 1970s: • Promoted the view that it could only advance if it “delinked” itself from the international economy, which was dominated by Western industrialized nations • Opposed to trade, FDI and loans from international banks • Pursued a centrally planned economy and import substitution industrialization The radical view lacked support by the end of the 1980s 01 The collapse of communism in Eastern Europe 02 The strong economic performance of developing countries that embraced capitalism 03 The poor economic performance of those countries that embraced the radical view 04 Belief: FDI can be an important source of technology and jobs and can stimulate economic growth Free Market View Origin Comparative advantage Classical economics and The international trade theories of Adam Smith and David Ricardo Countries specialize in the production of those goods and services that they can produce most efficiently The role of MNE An instrument for dispersing the production of goods and services to the most efficient locations FDI increases the overall efficiency of the world economy Free Market View Apple devices were mainly manufactured in China In 2020, China accounted for over 42% of annual production China’s leading position in Apple’s supply chain is attributable to several factors 03 The ability of Chinese manufacturers to automate production lines 01 The country’s massive industrial infrastructure 42% 02 The availability of a large, affordable, and skilled labour force; 04 China’s affluent consumer base is a critical driver for Apple’s revenue and brand growth Free Market View By moving the production line from the United States to China, Apple frees U.S resources for use in activities in which the United States has a comparative advantage Consumers benefit because the prices for Apple devices decrease China gains from the technology, skills, and capital that the Apple transfers with its FDI Pragmatic nationalism Pragmatic nationalism is national-interest driven FDI has both benefits and costs Benefits Costs Inflows of capital, technology, Repatriation of profits to the home country A negative balance of payments effect skills and jobs FDI should be allowed so long as the benefits outweigh the costs Pragmatic nationalism JAPAN • Until the 1980s, Japan still believed that direct entry of foreign (especially U.S.) firms hampered the development and growth of their own industry and technology => Japan blocked the majority of applications to invest in Japan • Firms that had important technology were often permitted to undertake FDI if they neither license their technology to a Japanese firm nor enter into a joint venture with a Japanese enterprise • The benefits of FDI in such cases-the stimulus that these firms might impart to the Japanese economy-outweighed the perceived costs Pragmatic nationalism Aggressively court FDI Offer subsidies to foreign MNEs in the form of tax breaks or grants The countries of the EU compete with each other to attract U.S and Japanese FDI by offering large tax breaks and subsidies Britain has been the most successful at attracting Japanese investment in the automobile industry Political Ideology towards FDI IDEOLOGY RADICAL VIEW FREE MARKET VIEW PRAGMATIC NATIONALISM CHARACTERISTICS Marxist roots MNE is an instrument of imperialist domination Classical economics roots View MNEs as an instrument for allocating the production to the most efficient locations View FDI as having both benefits and costs HOST GOVERNMENT POLICY IMPLICATIONS Prohibit FDI Nationalize subsidiaries of foreign-owned MNEs No restrictions on FDI Restrict FDI where cost outweigh benefits Bargain for greater benefits and fewer costs Court beneficial FDI by offering incentives THANK YOU FOR LISTENING ... source of technology and jobs and can stimulate economic growth Free Market View Origin Comparative advantage Classical economics and The international trade theories of Adam Smith and David Ricardo... from the international economy, which was dominated by Western industrialized nations • Opposed to trade, FDI and loans from international banks • Pursued a centrally planned economy and import... Eastern Europe and communist countries were opposed to FDI Many socialist countries nationalize foreign- owned enterprises—also embraced the radical position Countries whose political ideology was