MILE 14

INVESTMENT LAW

STEPHEN GELB

STUDENT ID: 14010

Assessment:

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LEAST DEVELOPED COUNTRIES (LDCs) IN GLOBAL APPAREL VALUE

CHAINS: MAXIMIZING BENEFITS

Introduction
There is no perfect formula for LDCs to replicate, that will guarantee their development.
Development means different things, for different countries, based on their individual
contexts. The first step, therefore, is to define the elements of short- and medium-run growth,
that are desirable goals for LDCs. Apart from the three indicia of poverty, human resource
weakness and economic vulnerability,1 Global Value Chains (GVCs) pose unique risks that
must be addressed.
The most obvious indicator of development is a countrys growth rate. Foreign Direct
Investment (FDI) is an important transmission vehicle for technological progress,2 and human
resource capabilities. It triggers an increase in international trade, and possibly, economic
freedom as well. While evaluating these indicia, the determinants and consequences of FDI
must be distinguished.
Participation in GVCs may render DgCs dependent on international trade. 3 LDCs in
particular, might wish to examine the implications of such dependencies, and consider (1)
economic vulnerabilities, and solutions such as export market diversification; 4 (2) location on
the GVC; (3) prospects for movement along the GVC; and (4) exchange rate volatilities and
debt burdens before offering concessions for foreign investors.
There are no clear correlations between long-term development and FDI, especially for LDCs.
However, isolation from a global world can be costly for LDCs. Therefore, on balance,

DESA, Updated August 2013, LDC information: The criteria for identifying least developed

countries,

www.un.org,

<http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_criteria.shtml#identifying>,
7 May 2014.
2

Borensztein, E., De Gregorio, J., Lee, J.W., 1998, How does foreign direct investment

affect economic growth?, Journal of International Economics, Vol.45.

3
4

p.126, UNCTAD, 2013, World Investment Report, Geneva and New York: United Nations.
p.135, Haddad, Mona and Shepherd, Ben, ed., 2011, Managing Openness, Washington

D.C.: The World Bank.

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participation in apparel GVCs might be beneficial, but any concessions granted to encourage
such footloose investment must be carefully assessed.
Benefits of FDI: reassessment of evidence
Neo-classical development models hold that FDI has a level effect, increasing growth rate
of developing countries (DgC)5 because total investment in the DgC has increased. FDI can
also affect the rate of DgC growth, in part because of technological growth, but it is unclear if
LDCs can fully benefit from either.6 Studies on technological progress and host State
innovation capabilities clearly show two benefits from FDI: learning by watching, and by
triggering domestic investment in research and development. 7 Again, in countries that lack
domestic capital and labour resources, both, neither benefit will accrue.
FDI will undoubtedly help the continuously falling export share of Africa. 8 However, location
and role played in the GVC influence development for example, 96% of revenues in the IT
industry accrue to American companies.9 GVC growth has been explained to include
components such as: process upgrading, product upgrading, functional upgrading and interchain upgrading.10 Apparel GVCs are especially devoid of technological complexity, which

Unless otherwise mentioned, DgC refers to both LDCs and developing countries.

pp.530-531, Bengoa, Marta and Sanchez-Robles, Blanca, 2003, Foreign direct investment,

economic freedom and growth: new evidence from Latin America, European Journal of
Political Economy, Vol. 19.
7

Maskus, Keith (2012): Private Rights and Public Problems: The Global Economics of

Intellectual Property in the 21st Century, PIIE, p. 64 p. 81 Intellectual Property Rights and
Technology Transfer
8

p.7, Broadman, Harry G., 2007, Africa's Silk Road: China and India's New Economic

Frontier, Washington D.C.: The World Bank.

9

p.103, Kenny, Charles, 2003, The Internet and Economic Growth in Less-developed

Countries: A Case of Managing Expectations?, Oxford Development Studies, Vol. 31, No. 1,
Oxford: International Development Centre.
10

Pietrobelli, Carlo and Rabellotti, Roberta, 2011, Global Value Chains Meet Innovation

Systems:

Are

There

Development, Elsevier.

Learning

Opportunities

for

Developing

Countries?,

World

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also means that LDCs exert minimal governance or coordination functions in GVCs, 11 and has
a lower catalytic effect domestically.12
Economic dependency could mean that a country is precluded from adopting protectionist
policies, which would backfire on its domestic economy. It can also mean exposure to market
vulnerabilities, in case of economic crisis.13
Apparel clothing chains do not impose heavy sunk costs on investors. So, FDI may no longer
be an incentive for clothing producers, once quota-hopping and preferential access incentives
are gradually eroded.14
Costs and Benefits
GVCs dominate international trade today, with between 30 to 70% of a countrys trade being
situated within Transnational Corporations (TNCs).15 Participation in the GVC may represent
entry into the TNC network, a stepping stone to moving up the value chain. Apparel GVCs
can also provide LDCs with access to new consumer markets, especially as countries like
China, which are themselves ceasing production of apparels.16
Offering incentives to participate in GVCs is costly, such as the Export Processing Zones or
similar schemes in African LDCs.17 Despite over a decade of FDI in the apparel sector, some
small countries have been unable to trigger local skill development, or initiative. 18 In this
scenario, FDI can primarily be helpful in maintaining existing markets. Hopefully, FDI will
allow LDCs to adjust to the increasing entry barriers to existing markets.

11

Farfan, Oscar H., October 2005, Understanding and Escaping Commodity-Dependency: A

Global
Value
Chain
Perspective,
World
Bank
Group,
<
http://www.cggc.duke.edu/pdfs/093005_Farfan_Commodity_Dependency_Uma_WB.pdf >,
7 May 2014.
12
Farfan 2005.
13
See, for example, p.56-57, Staritz, Cornelia, 2010, Making the Cut?: Low-Income Countries
and the Global Clothing Value Chain in a Post-Quota and Post-Crisis World, Washington D.C.:
The World Bank.
14
pp.66-67, Staritz 2010
15
p.136, UNCTAD 2013
16
Staritz 2010
17
Staritz 2010
18
p.68, Staritz 2010

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If incentives, etc. are offered in the form of binding treaty obligations, LDCs do gain some
visibility to prospective investors, and some external accountability.19 Host States, however,
incur potentially unquantifiable liabilities in the process.20
Conclusion: Maximizing Benefits From Investment Incentives
FDI inflows are largely independent of incentives offered. Cheap labour resources, political
conditions and other factors are bigger firm-level factors for investment than concessions
granted by the host state. Similarly, Investment Treaties which protect against expropriation,
or which offer Investor-State Dispute resolution mechanisms also have doubtful impact on
FDI.21 Thus, the national economic benefits from FDI, particularly for LDCs, is frequently
over-estimated.22
A rational approach to offering incentives will, obviously, carefully consider each concession
and the benefits likely therefrom. Specifically the following policies should be considered:
1. Incentives accompanied by lock-in requirements, which could reduce volatility and
build longer-term firm-level relationships.
2. Incentives conditional on use of local services or labour, which can increase the
learning-by-watching effect.
3. Policies to encourage technology transfer, accompanied with a nuanced Intellectual
Property regime.
4. Monitoring and encouraging investment in technologically intensive sectors, and
encouraging diversity in investments.
5. Encouraging domestic entrepreneurship, that would facilitate backward linkages.
6. Beginning with upgradation of natural resource exports, 23 but fostering inter-sectoral
upgrading.
7. Protection of labour from exploitative conditions. Regulatory race to the bottom must
be avoided, if possible.24

19

p.4, Poulsen, Lauge N. Skovgaard, 2013, Bounded Rationality and the Diffusion of
Modern Investment Treaties, International Studies Quarterly, International Studies
Association.
20
p.11, Poulsen 2013.
21
Yackee, Jason Webb, 2011, Do Bilateral Investment Treaties Promote Foreign Direct
Investment? Some Hints from Alternative Evidence, Virginia Journal Of International Law,
Vol. 51.
22
p.6, Poulsen 2013.
23
p.18, Farfan 2005
24
p.30, UNCTAD, 2012, Investment Policy Framework for Sustainable Development, Geneva
and New York: United Nations.

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LIST OF REFERENCES
DESA, Updated August 2013, LDC information: The criteria for identifying least developed
countries,

www.un.org,

<http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_criteria.shtml#identifying>,

May 2014.
Borensztein, E., De Gregorio, J., Lee, J.W., 1998, How does foreign direct investment affect
economic growth?, Journal of International Economics, Vol.45.
UNCTAD, 2013, World Investment Report, Geneva and New York: United Nations.
Haddad, Mona and Shepherd, Ben, ed., 2011, Managing Openness, Washington D.C.: The
World Bank.
Bengoa, Marta and Sanchez-Robles, Blanca, 2003, Foreign direct investment, economic
freedom and growth: new evidence from Latin America, European Journal of Political
Economy, Vol. 19.
Maskus, Keith (2012): Private Rights and Public Problems: The Global Economics of
Intellectual Property in the 21st Century, PIIE, p. 64 p. 81 Intellectual Property Rights and
Technology Transfer
Broadman, Harry G., 2007, Africa's Silk Road: China and India's New Economic Frontier,
Washington D.C.: The World Bank.
Kenny, Charles, 2003, The Internet and Economic Growth in Less-developed Countries: A
Case of Managing Expectations?, Oxford Development Studies, Vol. 31, No. 1, Oxford:
International Development Centre.
Pietrobelli, Carlo and Rabellotti, Roberta, 2011, Global Value Chains Meet Innovation
Systems: Are There 3 Learning Opportunities for Developing Countries?, World
Development, Elsevier.

Student ID 14010

Page 7 of 7

Farfan, Oscar H., October 2005, Understanding and Escaping Commodity-Dependency: A

Global

Value

Chain

Perspective,

World

Bank

Group,

http://www.cggc.duke.edu/pdfs/093005_Farfan_Commodity_Dependency_Uma_WB.pdf

<
>,

7 May 2014.
Staritz, Cornelia, 2010, Making the Cut?: Low-Income Countries and the Global Clothing
Value Chain in a Post-Quota and Post-Crisis World, Washington D.C.: The World Bank.
Poulsen, Lauge N. Skovgaard, 2013, Bounded Rationality and the Diffusion of Modern
Investment Treaties, International Studies Quarterly, International Studies Association.
Yackee, Jason Webb, 2011, Do Bilateral Investment Treaties Promote Foreign Direct
Investment? Some Hints from Alternative Evidence, Virginia Journal Of International Law,
Vol. 51.
UNCTAD, 2012, Investment Policy Framework for Sustainable Development, Geneva and
New York: United Nations.