FOREIGN DIRECT INVESTMENT

In the 1970s about 150 developing countries joined together in an effort to develop a
corporate policy on investment. However, they did not establish a multilateral treaty and
so the developed world embarked on a path of divide and rule. They entered into several
bilateral treaties with the developing world which allow developed countries to invest in
developing countries in a wide range of activities, for example, telecommunications, the
hotel industry, multinational corporations, the education sector etc. These bilateral
investment treaties are agreements establishing the terms and conditions governing
private investment by individuals or companies of a developed country (capital
exporting) in a developing country (capital importing). The country from which the
investor comes is called the home country while the country in which he invests is called
the host country. A typical bilateral investment treaty contains the following provisions:

1. Treatment standards- Foreign investors are entitled to the same treatment and
benefits as national companies. This is called national treatment. Each investor is
also entitled to the same treatment as investors from other countries. This is called
most favoured nation treatment. Generally, all investors are entitled to fair and
equitable treatment.

2. Expropriation- The host state shall not expropriate or nationalize foreign

investments either directly or indirectly, except for a public purpose and in a non-
discriminatory manner (i.e. if the host country nationalizes one investors
investment it must nationalize all others).

3. Compensation- Where expropriation or nationalization is undertaken the host state

must pay prompt (pay immediately), adequate (pay at the market value) and
effective (pay in an appropriate currency) compensation and must act in
accordance with due process of law.

4. Free currency transfer- The host state shall permit all transfers relating to foreign
investment to be made freely and without delay into and out of its territory in a
freely usable currency.

5. No performance requirements- There shall be no performance requirements in

respect of foreign investments imposed by the host state eg, the host state cannot
force investors to employ local people or use local products.

6. Third party dispute settlement- Disputes between the foreign investor and the host
state must be resolved by third party arbitration and not by the courts of the host
state.

Note that these provisions all reflect the perspective of developed countries.

Foreign investments may take the following forms:

 1) Efficiency seeking FDI- In this situation capitalists seek to have a low cost of
production through cheap labour sourced for example in the Caribbean,
Mexico, Asia, Latin America. Examples of these are the free-zone factories.

2) Market seeking FDI- These seek to access new and emerging markets so as to
provide particular goods and services. Examples include Digicel, KFC, Bank
of Nova Scotia, Barclays Bank, Burger King

3) Resource seeking FDI- These seek to utilize particular resources of a country

such as oil (Trinidad) or bauxite (bauxite mining companies in Jamaica).

4) Strategies seeking FDI- These are usually found in developing countries but
there are many examples in the telecommunications industry, for example,
Digicel.

Advantages of Foreign Direct Investment

Foreign investment helps to develop the host country in the following ways:

- These investors help to develop resources which as a country we might not have
been otherwise able to develop

- Creation of jobs

- Transfer of skills

- Development of infrastructure

- Economic diversification

- Provides a wider variety of goods and services from which to choose

- The competition forces local industries to offer better products and services

- Helps to strengthen primary industries and linkage industries

- Aid community development and participate in social programmes.

Disadvantages of Foreign Direct Investment

There are also disadvantages:

- Environmental pollution and destruction

- Cultural erosion
 - Repatriation of profits (profits sent back to the home countries0

- Employment created in low paying jobs and the technology transferred is often
outdated

- Competition sometimes cripples local industries

- Creation of raw materials for foreign markets

- Use of the host countrys resources to facilitate the home countrys development

Don Wehby1 notes that in 2007 FDI across the globe rose by 30 %. About a quarter of
this went to Latin America and the Caribbean. For the Caribbean Trinidad and Tobago
enjoyed the highest inflows bringing in just over US$1 billion. Jamaica on the other hand
attracted US$866 million, concentrated in mining (US$217m), tourism (US$179m) and
IT (US$164m). These investments inevitably generate employment. Telecommunications
has positively impacted FDI flows. Flow for example has already invested US$200
million in Jamaica. Claro and Digicel have also made significant investments. Investing
in telecommunications is very important since it opens up Jamaica to the world, gives
Jamaica a competitive advantage and is the backbone in expanding into other industries.

Of 134 countries Jamaica is ranked 60th for the quality of its roads, 32nd for the quality of
its ports, 41st for its airport infrastructure, 11th in the world for ease of starting a business
and 32nd for hiring workers. These developments give us a huge regional advantage along
with our sophisticated telecommunications sector and vibrant financial offerings. Jamaica
should receive additional FDI flows in finance with the establishment of the country as an
international financial services centre and the implementation of the Economic
Partnership Agreement (EPA) giving Jamaica access to a market of 490 million people.
However, to foster growth and capitalize on the benefits of FDI the governments
responsibility has to be to ensure the following:

i. A sound, predictable macroeconomic policy framework that maintains low

inflation, a stable exchange rate and competitive interest rates;
ii. A tax system that is simple and competitive;
iii. A modernized labour market geared towards high levels of productivity
iv. A simplified business friendly bureaucracy
v. Effective measures to prevent corruption and fight crime
vi. A supportive infrastructure

Bearing all of this in mind you need to be able to assess the advantages and
disadvantages of relying on foreign direct investment as a tool of economic
development. Make sure that you are able to use examples when you make your
points.

1
FDI: A Key Driver for Jamaicas Future Growth
The Daily Observer, Friday October 24, 2008 p.3