Davos: Foreign direct investment is the sacred cow of the globalising economy. Does it deserve this status?
 
 
 

by Philip Bowring

Davos: What is wrong with globalization? It is a question even
hinted at in the theme of this year's annual meeting of the
World Economic Forum. Normally a globalization cheerleader, it
is now looking at the problems of "Managing the impact of
Globalization".

But are most people looking in the wrong place for the
downside of globalization on today's global economy? It is
easy to point the finger at huge short term capital flows, the
destruction wrought by free movement of capital on poorly
policed banking systems, the extreme volatility of financial
markets driven by greed and fear on global scale. All have
played a role in today's problems.

However, there is one investment stream which has remained
above the fray, is regarded almost universally as a "good
thing", indeed as something of a sacred cow: foreign direct
investment (FDI). It creates real businesses, not asset
bubbles, is long term, relatively stable, brings technology
transfer, involves no foreign debt burden. All of that is
true. Over the past fifty years FDI has generally played a
very positive role. But one can have too much of a good
things. An uncritical outlook by the suppliers of FDI is the
main cause of the capacity gluts now facing so many global
industries.

Those gluts are as big a danger to the global economy and
trading systems as the financial sector mayhem. Arguably they
were as much at the root of the Asian crisis as bad banking
systems and are now showing up in trade tensions between the
US and all its major trade partners. They are also have a
dangeroulsy negative impact on manufacturing profits in the US
and Europe.
 
They arose because of multinational corporate response to
investment liberalisation of the past decade which swept
China, Latin America, eastern Europe, even India. The search
for new markets in developing countries was essential but was
often pursued with no sense of proportion. Cars are an obvious
example where new opportunties led multinational and local
industries alike into new projects with scant regard for
market size and growth potential. China as ever leads the
excess capacity league but supply now exceeds demand by
massive margin almost everywhere in Asia. Much the same
applies to consumer durables and an array of other industries
from beer and cement.

The very companies which talk "shareholder value" at home are
often driven by other considerations when they go offshore,
investing in huge projects with scant regard for profit.
Sometimes this may simply be naivety, the assumption that a
billion Chinese will soon have middle class lifestyles. But at
work too is something akin Joseph Schumpeter's theory of 19th
century European imperialism. He argued, contra Marx, that it
was driven not so much by a desire for markets and profits but
simply to deny space to rivals. Fear more than greed was the
motivator. Fast forward a century and so often one finds
corporations driven to invest as much by fear of rivals,
missing out on a big new market as by a realistic business
plan. "Long term strategy" covers up lack of any strategy.
So much for market economics and the profit motive.

A related problem is that in many cases investments have taken
inadequate account of local buying power. Globalisation brings
brand names which means quality but also cost. Products
created for the US and Europe are too good, too sophisticated,
too expensive for many developing markets. The result:
oversupply of expensive products and lack of supply of what
consumers both want and can afford. At the macro level,
efforts at economic stimulus make little dent in the
oversupply of products for the upper income groups.

Globalisation is a danger if pursued as an end in itself. It
leads to excesses which will lead to new trade barriers in
rich and poor countries alike. Shareholders should remind
multinationals that they are there to make profits not build
empires. FDI is neutral, but bad investment is always worse
than no investment.

ends
 
 

 
 

TOP OF THE PAGE