eview of the 1
Although the theoretical work on FDI points to advantages, conceivably, spillovers could nevertheless be small.4 On the other hand it could be that we are looking in the wrong places. For example, the macro empirical work that has analyzed the effects of aggregate FDI inflows-stocks on host economies does not, mostly due to data limitations, control for the sector in which FDI is involved. Although it might seem natural to argue that FDI can convey great advantages to host countries, such gains might differ across primary, manufacturing, and services sectors. UNCTAD World Investment Report (2001:138), for instance, argues, “in the primary sector, the scope for linkages between foreign affiliates and local suppliers is often limited…. The manufacturing sector has a broad variation of linkage intensive activities. [In] the tertiary sector the scope for dividing production into discrete stages and subcontracting out large parts to independent domestic firms is also limited.”
This paper revisits the FDI and economic growth relationship by examining the role FDI inflows play in promoting growth in the main economic sectors, namely primary, manufacturing, and services. Often-mentioned benefits, such as transfers of technology and management know-how, introduction of new processes, and employee training tend to relate to the manufacturing sector rather than the agriculture or mining sectors. For example, the theoretical work of Findlay (1978) and Wang and Bloomstrom (1992) that models the importance of FDI as a conduit for transferring technology, relates to the foreign investment inflows to manufacturing or service
literature that spillovers are not automatic, and local conditions influence firms’ adoption of foreign technologies and skills.
4 Krugman (1998) calls into doubt benefits associated with foreign acquisition of domestic firms, arguing that in financial crises foreigners can take advantage of liquidity constrained domestic investors’ fire sales of assets. In this context, foreigners are less efficient than domestic investors, since foreigners acquire local firms because of their superior cash position as opposed to a special know-how or technology advantage. Razin, Sadka and Yuen (1999) argue that foreign investors’ asymmetric information advantage might lead them to over-invest; Hausmann and Fernandez-Arias (2000) also cast doubts on the special merits of FDI. 2
sectors rather than to the primary sector.5 In addition, FDI’s potential to create linkages to domestic firms, as Albert Hirschman (1958) described in his seminal book on economic development, might also vary across sectors. Hirschman (1958:109) emphasized that not all sectors have the same potential to absorb foreign technology or to create linkages with the rest of the economy. He noted, for example, “linkages are weak in agriculture and mining.”6 He warned that in the absence of linkages, foreign investments could have limited effect in spurring growth in an economy. “The grudge against what has become known as the ‘enclave’ type of development,” he wrote, “is due to this ability of primary products from mines, wells, and plantations to slip out of a country without leaving much of a trace in the rest of the economy.” About the consequences in potential linkages effects differences in manufacturing and agriculture, Hirschman (1958:110) wrote, “the absence of direct linkage effects of primary production lends these views (enclaves) a plausibi
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