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ISBN 978-0-333-71708-0 hardcover ISBN 978-0-333-71110-1 paperback

Foreign Direct Investment in Three Regions of the South at the End of the Twentieth Century

Susan M. McMillan Senior Researcher Educational Data Systems Morgan Hill California

First published in Great Britain 1999 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world

A catalogue record for this book is available from the British Library.

First published in the United States of America 1999 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010

Library of Congress Cataloging-in-Publication Data McMillan, Susan M., 1964-Foreign direct investment in three regions of the South at the end of the twentieth century I Susan M. McMillan. p. cm. - (International political economy series) Includes bibliographical references and index.

1. Investments, Foreign-Developing countries. I. Title. II. Series. HG5993.M384 1998 332.67'3'091724--dc21 98-35610

CIP

© Susan M. McMillan 1999

Softcover reprint of the hardcover 1st edition 1999 978-0-333-73488-9

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This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources.

10987654321 08 07 06 05 04 03 02 01 00 99

ISBN 978-1-349-27220-4 ISBN 978-1-349-27218-1 (eBook) DOI 10.1007/978-1-349-27218-1

ISBN 978-0-312-21725-9

ISBN 978-0-312-21725-9 (cloth)

Contents

List of Tables

List of Abbreviations

Preface

vi

viii

X

1 Theoretical Background and Framework for Analysis 1

2 The Bargaining Context and FDI in Thailand and the Philippines 23

3 The Bargaining Context and FDI in Ghana and Cote d'Ivoire 54

4 The Bargaining Context and FDI in Costa Rica and Guatemala 86

5 The Question of Causality: Vector Autoregression Analysis 116

6 Conclusions 142

References

Bibliography

Index

v

150

164

175

List of Tables

1.1 Average Inflows of Foreign Direct Investment to Developing Countries by Region 2

1.2 Summary of Variables Expected to Contribute to Host-Country Bargaining Power 16

2.1 Status on Factors Contributing to Bargaining Power in the Philippines and Thailand 24

2.2 Domestic Political Violence, Philippines and Thailand, 1950-93 30

2.3 Economic Growth, Philippines and Thailand (selected years) 37

2.4 Indicators of Development in the Philippines and Thailand (selected years) 40

2.5 Net FDI to the Philippines and Thailand, 1960-93 47 2.6 Year-end Stock of FDI, the Philippines and Thailand

(selected years) 48 3.1 Status on Factors Contributing to Bargaining Power

in Ghana and Cote d'Ivoire 55 3.2 Domestic Political Violence, Ghana and Cote d'lvoire,

Independence to 1993 60 3.3 Economic Growth in Ghana and Cote d'Ivoire

(selected years) 69 3.4 Indicators of Economic Development in Ghana

and Cote d'Ivoire (selected years) 73 3.5 Net FDI to Ghana and Cote d'Ivoire, 1960-92 82 3.6 Stock of FDI in Ghana and Cote d'Ivoire (selected

years) 83 4.1 Status on Factors Contributing to Bargaining Power

in Costa Rica and Guatemala 87 4.2 Indicators of Political Instability in Costa Rica and

Guatemala, 1950-93 91 4.3 Economic Growth in Costa Rica and Guatemala,

1921-93 99 4.4 Central Government Expenditure in Costa Rica and

Guatemala, 1970-90 100 4.5 Indicators of Economic Development in Costa Rica

and Guatemala (selected years) 102

vi

List of Tables vii

4.6 Private Gross Fixed Investment as a Percentage of GDP in Costa Rica and Guatemala, 1975-89 105

4.7 US Direct Investment in Costa Rica and Guatemala, 1897-1955 110

4.8 Net FDI Flows to Costa Rica and Guatemala, 1960-90 112 5.1 Multivariate Granger Causality Results: Thailand,

1960-92 127 5.2 Multivariate Granger Causality Results: Philippines,

1960-92 129 5.3 Multivariate Granger Causality Results: Cote d'Ivoire,

1968-90 130 5.4 Multivariate Granger Causality Results: Ghana,

1960-92 132 5.5 Multivariate Granger Causality Results: Costa Rica,

1960-92 133 5.6 Multivariate Granger Causality Results: Guatemala,

1960-92 135 5.7 Net FDI Flows as a Percentage of Gross Domestic

Product, 1960-92, by country 138

List of Abbreviations

AFRC ASEAN BOI CACM CMB CODESA CSPPA

CPP EOI ERP FDI GDP GNP Huk IMF IMR lSI MNC MNE MNLF NLC NRC NEDA

NIC(s) OECD

PDCI PLN PNP pp PNDC SOEs TNC UGCC

Armed Forces Revolutionary Council (Ghana) Association of South East Asian Nations Board of Investments (Philippines) Central American Common Market Cocoa Marketing Board (Ghana) Coporacion Costarricense de Desarrollo SA (Costa Rica) Caisse de Stabilisation et de Soutien des Prix des Produits (Cote d'Ivoire) Convention People's Party (Ghana) Export Oriented Industrialization Economic Recovery Program (IMF/World Bank) Foreign Direct Investment Gross Domestic Product Gross National Product Hukbalahap (Philippines) International Monetary Fund Infant Mortality Rate Import-Substitution Industrialization Multinational Corporation Multinational Enterprises Mindanao National Liberation Front (Philippines) National Liberation Council (Ghana) National Redemption Council (Ghana) National Economic and Development Authority (Philip­pines) Newly Industrializing Country(ies) Organization for Economic Cooperation and Develop­ment Parti Democratique de Cote d'Ivoire National Liberation Party (Costa Rica) People's National Party (Ghana) Progress Party (Ghana) Provisional National Defense Council (Ghana) State-Owned Enterprises Trans-National Corporation United Gold Coast Convention (Ghana)

viii

UMOA UNCTAD UNCTC UNCTC USAID VAR

List of Abbreviations

Monetary Union of West Africa United Nations Council on Trade and Development United Nations Centre for Transnational Corporations United Nations Council on Transnational Corporations United States Agency for International Development Vector Autoregression

ix

Preface

The role of international economic forces in domestic political and economic development has been the focus of several waves of social science research since the end of World War II. The number of poor nation-states grew rapidly in the 1960s, and scholars produced sets of competing theories to provide explanations and policy prescriptions for the development of those countries. The theoretical debate eased in the late 1980s and the 1990s, as scholars and policymakers began to converge on a set of policies that were based in part on neoclassical economic theory, and in part on the practical experience of the East Asian newly industrializing countries (NICs). Typical development policies came to be a mixture of state-centred strategies with market­based policies and this included efforts to use international economic ties as tools for development.

Critical questions about the role of international capital flows such as foreign direct investment have become particularly salient again with the end of the cold war and the increasing globalization of the world economy. The currency crisis in Southeast Asia that began in mid-1997 also highlights the effects of global capital flows on devel­oping countries and the development role played by foreign actors. The long-run political and economic consequences of international economic ties between developed and developing countries seem to be mixed; positive in some cases, for some time periods, and negative for other countries or time periods.

The theoretical mix between neoclassical economic thought and state-centred theories of development makes it difficult to predict how foreign capital and domestic context factors interact to produce different patterns of growth, development and political stability. Divergence from expected patterns of development is frequently explained in terms of country-specific policies or constraints. The difficulty is that these country-specific conditions, and how they inter­act with the international economy, are not spelled out in a systematic fashion. We are now in a position to use at least 40 years' worth of theoretical and empirical developments to re-think the relationship between domestic factors in development, and international capital flows such as foreign direct investment.

The goal of this project is to develop a framework for analysis that specifies the conditions under which one type of foreign economic

X

Preface xi

interaction, foreign direct investment (FDI), produces different pat­terns of development outcomes in poor countries. The specific out­come variables of interest are economic growth, economic development and political stability. The first chapter begins with a discussion of why FDI is the featured part of the international eco­nomy, and then summarizes the previously dominant theoretical explanations for the consequences of FDI. FDI was initially expected to have positive consequences in the 'modernization' studies, neg­ative consequences according to dependency theory, and potentially mixed results according to dependent-development and bargaining analyses of state strength. The rapid growth of the Newly Industrializ­ing Countries (NICs) seemed to support a mix of neoclassical econo­mic theory with arguments related to state strength.

Although the NICs did rely on many market-based policies, the type of state involvement in their economies was not entirely consistent with the modernization approach to development, so theoretical explanations for why some states did relatively well became less clear. Economists have been able to make some head-way in incorpor­ating indicators of economic policy and human capital development as determinants of economic growth (Barra, 1991; Barra and Lee, 1994; Dollar, 1992). But, the difficulty of operationalizing the concept of state strength has made large-scale empirical investigations problem­atic. Analysis of state bargaining power and the outcomes of FDI continues to be based on case studies without systematic comparison that might yield more general conclusions about how bargaining power and FDI might be associated with clear patterns of domestic development outcomes.

The theoretical framework for analysis developed in this book is based on the bargaining approach to understanding the consequences of FDI in developing host countries. The inductive analysis yields a set of domestic political and economic context conditions that can be compared in order to determine what domestic conditions are likely to interact with FDI to produce different types of development out­comes. There are several analytic advantages to be gained from this strategy. One is that this framework directs attention to why firms would want to invest in some countries versus others, thus providing clues about the most important aspects of bargaining power. It also makes apparent the need to examine the consequences of FDI in conjunction with the motivations firms might have for investing in foreign countries. Finally, the bargaining approach highlights the fact that earlier development outcomes are the context for current and

XII Preface

future efforts, so patterns tend to be self-reinforcing. Whether and how FDI fits into those development patterns is investigated in the case-comparisons of Chapters 2 through to 4.

The six countries included in the paired comparative case studies are Thailand and the Philippines in Asia, Ghana and Cote d'Ivoire in West Africa, and Guatemala and Costa Rica in Central America. These country pairs were chosen for several reasons. First, regional representation is important since many development trends follow roughly regional lines (Callaghy, 1993). Second, all of these countries began the post-World War II time period as small political and eco­nomic entities that were marginal to the core political, economic and cultural systems (Kirk, 1990:16). Although they have exhibited strong growth at times they were not part of the initial set of NICs. Third, although the countries in each pair are similar in some respects, they present variation in domestic context conditions, their experiences with FDI and development processes.

The principal result of the comparisons is that the domestic context of FDI generates identifiable patterns of development outcomes. FDI, as the indicator of international economic transactions, does interact with the domestic context and so contributes to development patterns, but it is not the primary causal agent in development outcomes. In addition, there is some qualitative evidence for a temporal sequence in which political stability precedes economic growth, and both political stability and economic growth are necessary for further development.

Chapter 5 uses quantitative data to test the temporal patterns of relationships implied by the country comparisons. I use vector auto­regression (VAR) techniques to test for temporal precedence, or Granger causality, among a set of four variables: FDI, economic growth, economic development, and political instability. The results support the contention that FDI is drawn in by a strong bargaining context, but that it is not itself a particularly strong determinant of domestic economic and political outcomes.

The concluding chapter reiterates the findings and discusses the implications for policymakers in developing countries. Among the large set of factors that can produce economic and political change, FDI is one factor over which host country policy-makers may have significant regulatory control. In the context of increasing competition in the global capital market, understanding the complex ways FDI interacts with domestic determinants of development is important for those in the developing countries, as well as actors in the interna­tional economy. Despite the focus on FDI, the analysis has broader

Preface xiii

implications for how other ties to the international economy affect domestic development.

Any project such as this involves assistance and support from many individuals and organizations, and this book is no exception. I would like to gratefully acknowledge the help and encouragement of the faculty members I worked with at the University of Colorado, in particular Steve Chan, Mike Ward, Jim Scarritt, Leslie Anderson and John O'Loughlin. Lonna Atkeson, Kelley Daniel, David Davis, Sean Kelly, Will H. Moore III, Mohan Penubarti, Sheen Rajmaira and Josephine Squires also deserve many thanks for their continuing sup­port of my research efforts.

In addition, J. David Singer and the members of the Correlates of War Seminar at the University of Michigan provided excellent advice for me at critical moments, as did the faculty members of the Penn State Department of Political Science. The Research and Graduate Studies Office and the Department of Political Science at the Penn­sylvania State University provided much appreciated financial support for this project. The chapter on Costa Rica and Guatemala was initially a conference paper for the American Political Science Asso­ciation Annual Meetings in 1994, and the chapter here is dramatically revised. I had excellent research assistance from Jill Blumburg, Jonathan Erikson, Andrew Essig, Brian Grimm, Wendy Holthaus, Timothy Nordstrom and Albert Stemp. Having mentioned all of these people, I must acknowledge that any errors of fact or interpreta­tion are mine alone. Finally, I thank my entire family for their support, especially my long-suffering husband, Doug Cross.

Susan McMillan